value and opportunity

Accell is by far the best Scoring stock in my Boss Score Top 25 Benelux. According to Bloomberg their business is focused on bicycles:

Accell Group NV designs and manufactures racing, children’s, hybrid, mountain, electric, and luxury bicycles. The Company manufactures its bikes under the brands Batavus, Hercules, Koga-Miyata, Lapierre, Mercier, Loekie, Sparta and Winora. Accell also makes bicycle accessories and fitness equipment. The Company markets its products in Northern and Central Europe.

Traditional metrics:

Market cap 299 mn EUR
P/E 8,1
P/B 1.19
P/S 0.39
EV/EBITDA ~ 12Div. Yield 7.4%

So the company looks cheap from a P/E perspective, but expensive from an EV/EBITDA point of view. Debt to Equity is ~56% or 5.12 EUR net debt per share.

Business model

Accell is producing and wholesale distributing bicycles, not retailing them. They have been constantly acquiring smaller competitors over the last years. Bicycles were good business over the last years. If we look at the currently listed manufacturers, we can see that valuations are generally quite high (just for fun I added Shimano to the peer group):

Name	Mkt Cap	P/B	P/E	EV/EBITDA T12M	P/S	PM LF	ROE LF	ROIC LF
MIFA MITTELDEUTSCHE FAHRRADW	62.7	2.0	83.2		0.6	2.0	2.2
MERIDA INDUSTRY CO LTD	894.6	4.7	17.6	17.0	1.6	6.7	29.6	13.8
SHIMANO INC	4664.3	2.5	17.1	8.3	2.0	12.3	15.2	14.2
GIANT MANUFACTURING	1510.0	4.1	18.9	12.7	1.1	5.7	22.7	12.4
ACCELL GROUP	300.6	1.2	8.1	12.3	0.4	4.6	15.0
DERBY CYCLE AG	242.6	3.7	21.7	11.4	1.0	4.8	22.3	20.5

I guess this is mostly due to the fact that the bicycle producers have gained from two major tailwinds: high fuel prices and E-Bikes. One can also see that Accell looks relatively cheap on a P/E and P/B basis.

From a business model perspective, I see some positive and some negative aspects for bicycle producers:

+ there are no really dominant retailers for bicycles. So a large producer does have a better competitive advantage
+ the business is not very capital-intensive
+ there is a secular trend in many countries / cities to a more bicycle friendly environment (health and fuel cost, see for instance here)
+ The internet might not disrupt the sector as much as other area
+ the market is still divided between many smaller players, so further consolidation might be possible

Howver there are also some factors which I consider negative

– brand awareness: People might pay a little more for a branded bike but there is not so much brand loyalty like for instance cars
– the high tech part of bicycles are mostly outsourced to suppliers. Best example is Shimano which has basically a monopoly on gear shifts
– it is therefore quite easy for small competitors to start production, as welding a frame is not so difficult and you can buy the parts pretty easily
– the European market is protected by a heavy 48.5% tariff. According to the Bloomberg article, this has been extended 3 years until 2014. But if this falls, the European producers would be in big difficulties soon. A good general source for market data, news etc. is this website.

So to sum up the industry:
The industry has/had some secular tailwinds, however the overall competitive landscape is average. Combined with the really expensive overall valuation, the listed companies look vulnerable to a certain extent. The success of the European producers might also be a result of the massive tariffs for Chinese manufacturers, so there is also some kind of “regulatory” risk.

Company valuation:

The company scores so well in my model because they have shown phenomenal ROE and ROICs in the last years and steadily increasing net margins:

	ROE	Ni Margin	EPS	EBITDA/share
31.12.2002	17.02%	2.6%	0.41	1.01
31.12.2003	20.34%	3.2%	0.55	1.23
31.12.2004	24.23%	3.9%	0.77	1.59
30.12.2005	22.51%	4.2%	0.88	1.70
29.12.2006	21.72%	4.3%	1.00	1.91
31.12.2007	19.91%	4.2%	1.30	2.17
31.12.2008	23.89%	5.3%	1.48	2.86
31.12.2009	23.07%	5.7%	1.65	2.88
31.12.2010	21.91%	6.3%	1.79	2.64
30.12.2011	20.39%	6.4%	1.93	2.13

However I also showed EPS and EBITDA per share over this period. The strange thing is that EBITDA per share and earnings per share more or less “converged” whereas in earlier years, the relationship EBITDA to EPS was on average 2:1.

So let’s quickly compare the 2003 P&L (from the 2003 annual report) against 2011:

	2003	%	2011	%
Sales	289		628.5
Material cost	-184.5	-63.8%	-420.2	-66.9%
Personel	-45.1	-15.6%	-82.9	-13.2%
Depr.	-3.8	-1.3%	-7.4	-1.2%
other oper.	-39	-13.5%	-83	-13.2%
Financial /part	-2.5	-0.9%	8.6	1.4%
Tax	-4.9	-1.7%	-3.1	-0.5%
Net	9.2	3.2%	40.5	6.4%

So we can clearly see that there is a big “special” effect in 2011’s results. If we look into the P&L, we can see the following note:

This is the result realized with the sale of the in 2011 acquired 22% investment in Derby Cycle AG. The result consists of the capital gain less corresponding expenses.

So this was a nice but one-time gain during the (short) fight for Derby cycle, the German listed bicycle manufacturer where Accell lost out against Dutch competitor Pon.

So let’s look at 2010 instead to see if this was a “normal” year:

	2003	%	2010	%	Delta
Sales	289		577.2
Material cost	-184.5	-63.8%	-373.9	-64.8%	-0.9%
Personel	-45.1	-15.6%	-76.6	-13.3%	2.3%
Depr.	-3.8	-1.3%	-7.5	-1.3%	0.0%
other oper.	-39	-13.5%	-73.3	-12.7%	0.8%
Financial /part	-2.5	-0.9%	-4.1	-0.7%	0.2%
Tax	-4.9	-1.7%	-5.8	-1.0%	0.7%
Net	9.2	3.2%	36.0	6.2%	3.1%

One can see that also in 20110, there must have been some special effects, for instance the tax rate looks low. Again the notes give the following explanation:

The effective tax rate is the tax burden relating to the book year divided by profit before tax. The effective tax burden amounts to 20.6% (2009: 27.5%). Accell Group and the Dutch tax authorities agreed on the applicability of the so-called patent/innovation box. For the years 2007 – 2009 part of the Dutch taxable profit is taxed against a tax rate of 10% (instead of 25,5%), resulting in a refund of b 1.7 milion. In 2010 part of the Dutch taxable profit is taxed against a tax rate of 5% (instead of 25,5%) resulting in a tax saving of approx. b 1.0 milion. In accordance with IAS 12 a tax receivable is recorded as tax receivable for an amount of b 2.7 milion.

So just based on those 2 examples, I would already state that “earnings quality” at least in 2010 and 2011 is somehow mixed. Especially the 2011 result would look a lot worse than reported if they wouldn’t have the gain.

Other considerations:

So let’s have a quick overview on some other check list items:

+ Good growth over the last 10 years
+ Consistent payout of around 509% of net income
+ good underlying “story”: E-Bikes, roll up opportunity
+ only covered through 7 local analysts, bad ratings (which i see as a positive)

– many acquisitions
– increasing share count (increase by 50% over the last 10 years)
– accounting “special effects”, operating results more volatile than they appear
– free cashflow generated only ~ 20% of stated earnings over the last 14 years
– insiders are/were constantly selling according to company info
– deteriorating Business in 6M 2012 despite large acquisition, again suspiciously low taxes
– balance sheet now much weaker after Raleigh acquisition (more debt, more goodwill)
– according to the shareholder information on the company web site, there seems to be some kind of take over poison pill in place which limits any take over /control premium catalyst
The stock price seems to be clearly reflecting those issues:

On a 2 year basis we can clearly see that the stock looks vulnerable:

Longer term, the cahrt looks relatively OK, the stock had an incredible run over the last 10 years or so:

So let’s stop here and summarize:

– the reported earnings, especially in 2011 do not show fully the underlying results
– Accell made a rather large acquisition into a difficult market
– going forward, it is pretty clear we will see lower earnings and lower profitability
– if things deteriorate, there is not a lot of margin of safety in the balance sheet (high debt load, Goodwill)
– the business doesn’t look a lot like a moat either
– insiders are constantly selling, any take over seems to be unlikely
– despite the low P/E, valuation is rather expensive on an EV/EBITDA basis and cash flow generation to earnings is weak

So in short, despite the fantastic score, the company at the moment does not look attractive to me. Past profitability seems to be clearly above the historical achievable mean. As I don’t by in principle into “stories” like E-bikes, I will not invest in the stock.

Allow me a small excursion at the end:

Accell might still be a good investment going forward, but in my opinion it is not a good “value” investment. Why ? For a value investment it is not enough to look cheap. You have to have a margin of safety. This comes in two forms

– either a margin of safety based on the balance sheet (Graham style)
– or a margin of safety in the business model (moat, Buffet style).

Accell in my opinion has neither. Maybe they will make a ton of money with E-Bikes or not. I don’t know. But if things get worse, there is not real downside protection for the stock. As a value investor one should not speculate on stories or secular trend, because they can change more quickly as one might think (see Solar).