Mr Market is in an unforgiving mood lately

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.

About mcturra2000

Computer programmer living in Scotland.
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s