The one aspect of equity investing that really gets me angry is when companies try to hide profit warnings. The latest culprit is car retailer Pendragon (PDG ), where the board has shamefully tried to hide such a warning by pretending that they have launched a strategic review.
After 14 paragraphs chief executive Trevor Finn gets round to saying: “We anticipate that our full year underlying profit before tax will now be approximately £60 million.”
No mention that this is a £13 million fall from last year, or that when the interim results were released three months ago Finn was promising to “enhance our profitability streams further”.
Yet it would appear from the statement that the strategic review was already underway when it was drawn up. Indeed, Pendragon had already concluded its assessment of the American operations and decided there will be no further acquisition in the US, which makes you wonder why the company is so enthusiastic about the one it has just completed in California.
The shares promptly fell 5p to 24p, meaning they had lost nearly 40% of their value in five months. Who on earth do these mealy-mouthed directors, who apparently have difficulty facing up to unpleasant reality, think is fooled?
Finn believes that profits will start to climb next year but since he thinks current market conditions will continue past the new year it is hard to see this as more than a pious hope. I never invest in companies that are unwilling to face up to reality. Stay well clear.
Buying When the Share Price Dips
I thought something similar must have happened the next day at Whitbread (WTB) when the Premier Inns and Costa Coffee group’s shares slumped 5% on interim results.
This seemed strange, as revenue and underlying profits were up around 7% in the six months to 31 August. Despite the opening of 2,000 Premier Inn rooms, the rollout of a new breakfast and lunch range at Costa and spending in Germany and China, capital expenditure was actually lower than in the previous first half. Cash flow and return on capital improved.
You can usually reckon there is nothing much wrong if the dividend is increased, and Whitbread’s was raised 5%. Directors don’t want to raise the interim if there is any likelihood that they will have to claw the gain back at year end.
So what was the problem? It seems that some investors were worried that growth at Costa has slowed. However, I see no signs that people have lost the desire to buy overpriced coffee so I’m not too worried.
I decided to take advantage of the share price fall to top up my holding. I am currently down a bit on my original purchase but dividends are making up for the deficit and Whitbread has two very strong brands that should weather the economic uncertainties well.
Banking Stocks Living in Lalaland
In my opinion Lloyds (LLOY) and Royal Bank of Scotland (RBS) are still refusing to accept the reality of, respectively, the disastrous takeover of HBOS and the fraudulent destruction of small businesses but at least the Lloyds disaster is in the past while the RBS outrage keeps coming back to haunt it.
As a shareholder I was perfectly happy with the Lloyds update this week. It showed that recovery is still on track and I felt that the share price fall that accompanied it presented a buying opportunity. RBS, in contrast, is still struggling and the government’s holding continues to overhang the market.
I would say don’t touch the shares with a bargepole but I feel it is unfair to bargepoles to put them in the same sentence as RBS, which remains the least attractive of all the banks.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.
