Piquadro SpA – follow up

First a quick look at the stock price:

The stockprice already jumped more than 15% from the basis of my valuation, so after purchasing a first portion yesterday at the VWAP of 1.48 EUR, I decided to stop for the time being and only continue below 1,50 EUR.

The reason was most likely not my analysis but the news that Benetton considers some form of going private.

The stock of Benetton which I owned but sold has recovered a larg portion of the larg losses from the second half of last year.

Maybe some market participants are now of the opinon that Italy is not going totally down the drain or that maybe also the owner of Piquadro might consider such an option. However in my case I was just too slow to seize this opportunity, but to consider a well known US value investor: “Just wait for the next fat pitch”……

Comments:

First of all thank you to all of you who comment on any of my article. Especially well founded comments which are of differing opinions are especially welcome.

Lets start with Stairways comment and the first part:

1.) The decline in DOS-margins in H1 is mainly attributable to the opening of new stores (I guess in China) – however I doubt that this is the whole story, because…

2.) … the sharp decline in the Spanish market is due to the recession in Spain. Which in turn means that Piquadros brand might not be that resilent after all.

The crucial question is now whether or not Italy will weather the storm – at least related to Piquadro, I would doubt that. Also the China expansion might not pay off within the next two years, since Piquadro has no world-wide brand like LVMH or alike. Usually, clothing retailers turn their stores profitable after 24 to 36 months.

Those two facts – declines in margins and recession vulnerability – might be alarming, but what really concerns me is that group sales in Q3 turned negative by approx. 7%. This sharp decline can only be attributed to problems in Italy which might have been even worse in Q4 (which is still ongoing).

Fully agreed, this is the obvious “headline” risk. One comment from my side: In my opinion, the Piquadro / Tumi store modell is a much better business than a “normal” retailer. Smaller stores, “one size fits all” etc.

Second remark: Not sales turned negative, but Q3 on Q3 growth was negative 9M on 9M was still positive, both absolute and at same store level. Now we could discuss if one bad quarter is the “harbinger” for a complete turn in business. I would argue that this might have been at least party priced in by the drop from 2 EUR to 1.20 EUR per share at the end of 2011.

Now we come to a interesting point:

All in all, I used a two-staged DCF (to consider the near term problems) with cost of equity of 14% (Italy risk-free rate is 6%) and ended up in the region of 0,8€ to 1€ per share. The problem with a one-staged DCF is that a long-term growth rate of 4% is quiet unlikely in my opinion, therefore a two-staged with 1 to 2% long-term growth rate might be better.

With the first part, I completely disagree. I know this is common knowledge to start with a “risk free rate” in form of the government bond rate and then add a equity premium, but the conceptual mistake here is the fact, that the 6% rate is already a “risky rate”. In my opinion, this is exactly the kind of systematic distortion which creates investment opportunities. I have to dig up the link, but there was a very good article of Damodaran with regard to this.

For the second part: We are talking here about nominal growth (the discount rate is also nominal). 1-2% is only inflation, if at all. If I assume 1-2% Nominal growth going forward, than I either assume very very low inflation rates or very very low growth rates. In my opnion, a company like Piquadro at least has a good chance to grow faster than nominal inflation.

Nevertheless, Stairway exactly pointed out the major current reasons for the low stock price. However, I would be more concerned if Piquadro would have specific problems rather than an overall decline in consumption. My assumption is that the general market condition should be priced in to a large extent.

Then Weljus comment:

Zu den wesentlichen Gründen für Piquadros relativ niedrige Bewertung (verglichen mit jenen Peers) gehört deren vergleichweise hohe Verschuldung und die daraus resultierende geringere EK-Quote.
EK-Quoten: Tod’s 64,1%, Fossil 68,7%, Coach 60,3%, Samsonite 55,8%, Piquadro 35,7%.

This refers to the nominal equity quote of Piquadro which seems to be lower than the competitors. In my opinion, this ratio is not really the relevant one. Relevant in my opinion is financial debt against equity. As Piquadro has very little net debt (after deducting cash on the asset side), financial debt is very low. Most of the debt comes from payables, which for me is actually a sign for good working capital management.

So the “nominal” debt equity ratio does not really explain the valuation difference as on a net debt basis, Piquadro looks s

Summary: I think both comments highlight correctly some obvious problems. However, at least from my standpoint, those are not “new” issues. The question is: Are those risks priced in, yes or no ? In my opinion the question is “yes”, but of course any other opnion might be much closer to the “truth”.

5 comments

  • memyselfandi007 :
    the risk free rate is an intersting concept at the moment.
    I would argue that for EUR, the risk free rate is most likely the German Govie rate. And this rate is ~ 0,80% for 10 years.
    So even 3% is to high in my opion expecially comapred to the assumed low growth rate
    I think this is worth an extra post….
    MMI

    That would be interesting to read! I used the German “Basiszins” as the risk-free rate in general. This “Basiszins” is the cashflow-weighted interest of German bonds. (In terms of present value) Since most of the cashflows (PV) occurs after the tenth year, this “Basiszins” is higher than 3%.

    But I guess there are many concepts which make sense; since shares are perpetuals, I would always use long-term yields.

  • As per September 2011, there were €19 million debt (borrowings and payables to other lenders for lease agreements), €10 million cash & short term investments, and €25 million equity.
    No liquidity risk. But compare it with their competitors, which have more room to increase their leverage.

  • Hi mmi,

    I mostly agree with your reasoning, however I would expect the negative Q3 trend to continue in Q4.

    ad risk-free rate: I am totally on your side here, actually I expressed myself a bit imprecise here. The risk free rate is for sure around 3%, however I added a specific Italy premium which – in light of the Q3 and Spain news – is important to consider. Same applies for Greece: I would demand a significant premium to invest there.

    Regards

    • the risk free rate is an intersting concept at the moment.

      I would argue that for EUR, the risk free rate is most likely the German Govie rate. And this rate is ~ 0,80% for 10 years.

      So even 3% is to high in my opion expecially comapred to the assumed low growth rate

      I think this is worth an extra post….

      MMI

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