Catching the Italian knife again ? – Piquadro SpA (ISIN IT00042405443)

On my hunt for cheap PIIGS or GIPSI stocks, I basically “tripped” over Piquadro SpA. I wanted to share my first impressions while looking at the share:

Company description
The company produces and distributes travel and business luggage. According to the website, the comapny exists since 1987 and sells under the current brand since 1998.

In October 2007 the company went public at a share price of EUR 2,20.

Basic Financials

Piquadro has exactly 50 mn shares outstanding, at the current price of EUR 1,24, the market cap is ~ 62 mn EUR.

Current multiples are:

P/B 2.4
P/S 1.0
EV/EBITDA 7.2
P/E 6.8
Div. Yield 8.1%

So apart from P/E and dividend yield, the company looks expensive. Howver this can easily be explained by the profitability measures (FY 2011):

ROA: 16.2%
ROE: 38,9%
ROC: 25.9%
Pretax Margin 22.7%

So we can clearly see that the business at least up until recently is rather high margin, high return on capital business.

Warning signs:

Despite the recently positive market trend, the stock price still drops like a stone:

Especially compared to example Tod’s it is interesting to see that since last November, the chart “decoupeled” from the market. One thing that one should keep in mind is: In “falling knife” situations, you will always invest too early in the short term !!!!

Shareholding / Management

CEO founder and main shareholder is Marco Palmieri with 67,0% shareholding, other big shareholders are Mediobanca (6%), Fidelity (5%), Cominvest 1.2%. Well known US value shop Royce has a tiny position which was slightly increased in Q3 2011.

According to the last annual report, Palmieri paid himself 407 k EUR, total board compensation incl. Directors was 1 mn EUR. This looks OK, Palmieri receives much more money through the dividend than through the salary, so incentives with shareholders should be aligned to a certain extent.

Cashflow generation and use

What attracted me immeadiately is the fact that free cashflow generation was excellent in the years since the IPO compared with earnings.

EPS FCF Dividend Net debt per share
2008 0.129 0.06 0.06 0.23
2009 0.151 0.12 0.06 0.21
2010 0.145 0.18 0.08 0.11
2011 0.182 0.13 0.11 0.07
         
Total 0.607 0.48 0.31 0.16

We can see that over the last 4 years, Free cashflow was 78% of reported earnings, which is pretty good for a growing company. 2/3 of the free cashflow was paid out as dividends, 1/3 to reduce debt. Net debt at 7 cent per share seems to be easily managable.

The cash generative structure of the business is also emphasised in the latest Investor presentation.

Risks:

So far, everything looks almost to good to be true. One big issue however is obvious: Up until last year 75% of sales came from Italy, the international expansion is just starting. If Italy really goes into a deep recession, sales and profits in Italy could get hit hard. It would then be questionable if the international expansion could offset this.

I just saw that Piquadro issued a sales update for the 3rd quarter (financial year ends in March on January 10th. Sales ytd still show an increase of 5%. Howevr compared to the Q2 numbers this is definitely a pretty sharp contraction.

However I have to keep in mind that I already own Buzzi, EMAK and Austostrada. From a risk managament perspective I will have to think about some hedging against specific Italian risk.

Summary: On a first glance, the company looks extremely attractive: Good grwoth, high margin business, low capital requirements, excellent free cashflow and a conservative balance sheet at bargain prices. Howver the stock is tanking as I write. So I will have to dive deeper into the business model in order to identify potential hidden risks. But for now it looks like a potentially very attractive Core Value investment.

8 comments

  • Concerning the stores: The Frankfurt store exists, but it is a really small one. I guess the company is so far not one for extravagance (like big flagship-stores) etc.

  • If their sales grew by 5% and the sales in their own stores grew by 6.6% (monobrand stores account for approx. 30% of sales), this means that their sales at large department-stores only grew by about 4%, right? Not VERY impressive for a young company, but probably the result of Asia not making up for the problems in Italy.
    Maybe share-prices started to drop because inventory (very important factor in retail) increased by about 30% (Jun.´11 over Jun.´10), while revenue grew by about 15% and EBITDA was flat. When a growth-company starts to pile up inventory while not increasing EBITDA, investors get nervous.

    I find it a bit unsettling, that the annual reports etc. are quite organized and comprehensive, but if checked, they do not always make sense. For example the shop in Frankfurt ( a new shop was mentioned in the last annual report and key money was paid for it) is not listed in their June-interim report and also not on their web-site (shopfinder). I think, however, that it does exist (?). Address Steinweg 12, or was it never opened?
    In Munich their shopfinder lists Hertie as the only point of sale, which is kind of sad, since Hertie was closed two years ago… . For a premium-brand it is a surprise, that they have two monobrand-stores in Belgrade, Serbia, but not a single monobrand store in France, Germany or Switzerland. They also do not even have any point-of-sale in rich cities like Hamburg, Brussels, Paris or any city in Scandinavia. So the expansion-strategy for Europe looks a bit strange (or leaves a lot of potential if you want to look at it positively).

    The department-store that I checked, did not display a lot of Piquadro-merchandise (and also not in a good space in the store). It is very interesting how many brands are now fighting for market-share, including large players like Porsche Design, Hugo Boss, many luxury-brands, newer players like Victorinox (swiss-knifes) and very professional competitors like Tumi, Rimova, with a typical design. Piquadro seems to specialize in bags made of leather, but of course there are also other strong leather-companies with good quality like The Bridge, Bree, Coach. As in almost any industry the premium leather-goods industry has seen its share of consolidation and even bankcruptcies (Goldpfeil and MCM (now revived) were excellent brands that went bust). So where is the competitive advantage of this company? Maybe the strong market position in Italy and some asian cities? Or cheaper production?

    • thank you for your insights. I will try to incorporate this in my follow up post.

      I think in this sector (fashion retail) Competitive advantages are very rare. However, those companies manage to achieve ahigh level of profitability. I think this has more to do with trends and fashion.

  • The same stores sales growth for the period 01 April 2011 to 31 Dec 2011 was 6.6%. So at first glance there seems no problem with that, at least recently.

    source: http://www.piquadro.com/comuni/php/file_get.php?w=3KBUKIW5MA6HS438EX1IC61326188199

    Does anybody know the reasons for the sharp fall in share price since May 2011? I can’t imagine there is no reason, although there might be an overreaction.

  • Already had a look at this company too. In addition to the distinct Italy exposure I did not like the fact that Piquadro seems to be somewhat of a “fashion-hype” brand. The examples of Geox and Esprit demonstrate that these stocks often turn out to be somewhat of a value-trap.

    Against this background it might be useful to determine brand awareness and related factors more closely. This is surely always a tricky thing to analyse, but for a example a Google Analytics search might help.

    Are there any figures about same-store growth and alike? Because this figure has shown to be a reliable indicator of whether a company is really growing or just creating its sales growth by opening new stores (and thereby diluting its brand).

    I remember having seen a Piquadro store in Frankfurt, so maybe there are same-store figures in the report.

    Just my two cents, overall this seems to be attractive.

    By the way: What about having a look at Tesco?

    • #stairway,

      thanks for the comments. I just visisted a Piquadro shop at the vienna airport. My impression was rather that they try to emphasize the “Italian design” aspect, i did not find the backs especially “trendy”.

      mmi

  • ROE is impressive , but has dropped fast over the last 5 years

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