value and opportunity

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.