Currency headwinds have partly caused the shares to slide this year, as this led to a downward revision in profit estimates, but the major reason is due to a stock overhang created by a major shareholder selling: activist investor Peter Gyllenhammar who earlier this year held an 18.25 per cent stake through his investment vehicle Bronsstädet AB. This is something I had not bargained for.
Clearly, one shareholder attempting to offload almost a fifth of the issued share capital would depress the share price of any company. In the case of Pittards, and as I pointed out when I initiated coverage, the top six shareholders controlled over two thirds of the 9.26m shares in issue, so Pittards shares can be volatile due this lower than average free float. And it’s this overhang which has contributed to the share price underperformance.
The good news is that following his last sale two weeks ago, Mr Gyllenhammar now has a stake of 198,600 shares, down from 1.69m when I initiated coverage in February. This means his shareholding has contracted from 18.25 per cent to 2.1 per cent of the 9.26m shares in issue. Moreover, other investors have been popping up on the share register in his place, indicating that the shares have been placed and the stock overhang is almost clear.
I also note that Pittards’ directors have been buying. In the past month there have been three small transactions by the insiders: Jan Holmstrom, non-executive director, purchased 8,000 shares at a price of 120p per share in late September; chairman Stephen Boyd purchased 9,000 shares at 114p each at the start of this month; and last week chief executive Reg Hankey bought a further 5,000 shares at 109p per share.
It would be very odd for the directors to be buying so late in the financial year if the company was going to miss its full-year earnings forecasts. True, there is a second-half weighting to this year's earnings, which raises execution risk. And reflecting currency headwinds analysts expects full-year pre-tax profit of £1.6m, a decline on the £1.7m reported in 2013. Still, if Pittards hits these estimates then expect EPS of 14.9p, down only slightly from 15.7p in 2013. This means that with the shares trading on a bid-offer speared of 100p to 104p, the PE ratio is only 7. The shares are also priced on almost half book value of 181p. In my view such a rating attributes no upside at all to the possibility of a second half profit rebound being maintained into 2015 as analysts anticipate.
In addition, the shares are massively oversold: the 14-day relative indicator is only 20. The share price has also pulled back to a support level around 100p which acted as a floor in the first half of last year. So although my advice has yet to work out, I still feel there is decent recovery potential in the Aim-traded shares and continue to rate them a buy on a bid-offer spread of 100p to 104p. My target price of 200p may seem a long way off, but it also highlights the value on offer here.
Please note that I last updated my recommendation five weeks ago (‘Pittards to lather it in the second half’, 22 September 2014), since when the directors have been buying and Mr Gyllenhammar’s stock overhang has been cut significantly.
I have written two other columns today, both of which are available on my IC homepage...
I have also written three articles in the past week on financial markets:
Equities: Eurozone growth scare spooks investors (13 October 2014)
Monetary policy: Normalisation is coming so plan ahead (17 October 2014)
Bond markets: Lessons to learn from bond market flash crash (17 October 2014)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
