The market seems to be ruthless the last few weeks, and quick to deliver a smackdown where things have gone wrong.
I was shocked to find that MCRO (Micro Focus Int’l) was down 53% to 881p today. It has a niche is in COBOL. I had mostly considered it to be a high-quality company. However, Stockopedia gives it a quality score of 70, which is not especially high. The ROCE for the last three years has been about 7%, so it seems that my ongoing perceptions were off the mark. Net debt in relation to pre-tax profits also seems to be high; although Stockopedia does put the bankruptcy risk in the “safe” zone.
I think, as investors, we need to be very careful about the debt levels of the companies we invest in. The market is being being unkind to those that look somewhat over-leveraged.
Here’s what’s in the trading update:
Since the interim results on 8 January 2018, the rate of year-on-year revenue decline has been greater than anticipated
Ouch.
The recent revenue performance is primarily due to lower than expected licence income and is a result of a number of factors, which management believe to be largely one-off transitional effects of the combination with HPE software, rather than underlying issues with the end market or the product portfolios.
Stockopedia currently shows that MCRO has a PE of 11. So it must have stood at about 22 as of yesterday. So it is perhaps understandable that the share price was vulnerable to any setbacks. I find the 53% drop surprising, though. It is not a minnow of a share: it has a market cap of £8.2b.
I see that MCRO reported its interims on 8 Jan. It showed an 80% increase in revenue, but with basic EPS down 9.5%. As if by magic, though, the “adjusted” EPS is up 16%. Debt has ballooned from $1.6b to $4.2b.
It seems that ROCE is deteriorating and debt is declining. Maybe MCRO are paying over-the-odds for acquisitions.
The shares took a caning on the issuance of the Jan RNS, and was basically everyone’s cue to get out.
There’s no real insights on the boards, as far as I can see, although I did spot mentions of the debt levels a few times.
I would have thought that there’s an opportunity to catch a bounce in the shares. I don’t see any immediate danger to the company.
I won’t be considering this share for my portfolio, though, as I don’t like the debt levels.
Let’s see, what else …
CPR (Carpetright) is down 11% to 49.2p. There doesn’t seem to be any news out. I see from the boards that there’s talk of PCR going into CVA (Company Voluntary Arrangement). Stockopedia gives it a Quality score of 30, a value score of 92, and a momentum of 2, and classifies it as a value trap. This one looks like it could credibly go kaput.
MTC (Mothercare) is down 10% to 15.28p. This thing seems to be getting sicker and sicker. No RNS seems to be out today. The All-Share is down 1% today, so perhaps the markets are in no mood to tolerate weakness. I should have thought that MTC’s days are numbered, although it has managed to crawl its way along for a surprisingly long time.
MCLS (McColls Retail Group) is another company in the doghouse, being down 9% to 236.5p. No RNS, either. It’s another company that has far more debt that I am currently willing to invest in.
Interest rates are benign at the moment. I dread to think what happen if they were raised substantially. I think we could see a massive clear-out of companies, with a much greater focus on balance sheets.
What a day! I’m down 0.7% so far; more than the midcaps, less than the Footsie. Drats! Oh well, at least I’m not having the snot kicked out of me.
Stay safe out there.
Mark Carter's blog 