Dewhurst still pushes the buttons
Keeping the faith. I first spotted Dewhurst (DWHT), a year ago when its shares cost 185p. The company featured in the February 2009 edition of my Share Sleuth column (PDF) in Money Observer, and they were in the first group of shares included in the Thrifty 30 portfolio when I started it in September, added at a price of 238p. The publication of its 2009 annual report is an opportunity to revisit the reasons for favouring Dewhurst and see if they still apply at the current price of 250p. As with all Thrifty 30 companies, the basic case is it looks like a good company, at a cheap price. In particular I liked its:
- Price. At 185p the shares cost eight times average earnings over the previous ten years, well within bargain territory.
- Financial strength. With an F_Score of seven out of nine and no debt at the end of the year it looked like it was in recession busting good health.
- Profitability. Dewhurst had been profitable for 28 years. Instead of succumbing to the low cost competition from abroad it relocated some of its manufacturing to Hungary and found a way to compete on quality and price.
- Prosaic products. Lift buttons, keypads for ATMs and traffic bollards aren’t as exciting as iPhones but there’s a big, established and unglamorous market for them.
This chart sums up the first part of the case for Dewhurst, that it is a good company: It takes two elementary measures, earnings per share for the company’s performance, and the ratio of shareholders’ equity to total assets for financial strength, and plots them on the same chart. Profits have increased by 200% over the last decade, despite, or rather because of the relocation and modernisation of its factories, and Dewhurst’s done it without taking out a huge mortgage. In fact the company owns more than twice what it owes (shareholders’ equity is 64% of total assets, therefore liabilities are only 36% of total assets), much the same as in 2000. Although average profits rose (because 2009’s profits replaced 1999’s, which were much lower), Dewhurst’s price rose too and the shares are no longer as cheap as they were. At 250p they cost 10.5 times average earnings, right on the upper limit of bargain territory. Meanwhile its other virtues are intact. It’s still churning out buttons. It’s latest being the weatherproof US97-EN Pushbutton (left) and the antibacterial US95-AB Compact 3 Pushbutton. It’s been profitable for 29 years now. The company celebrated its 90th birthday in November, although it traces the most recent phase in its history back to the acquisition of Thames Valley Lift Company in 1994. And frankly, it’s a relief to read an annual report in which a company clearly explains what it actually does. Dewhurst is about producing better, cheaper buttons and other lift components more quickly. It’s not the most glamorous of niches, but Dewhurst is dedicated to it. If we were to go by the numbers alone, Dewhurst is a textbook Thrifty 30 company, which is why I like it so much. But there are two nasties, and one of them has got worse. It has a defined-benefit pension deficit, a liability that escapes the F_Score, my preferred method of testing financial strength, that has risen from £4m to over £6m. The value of pension funds, and the obligations they must meet are a bit of black box, governed by complex actuarial calculations that are beyond me. My own rule of thumb is not to worry if a company’s other liabilities are small, unless the overall size of its pension obligation is bigger than the market value of the company itself. That’s not a recognised red flag, just a personal reminder not to ignore big pension deficits. Dewhurst’s pension obligation now stands at £24m, while its market value is about £19m. The company could make its shares more attractive by closing its defined benefit scheme, but five of the directors are members so that would be a bit like turkeys voting for Christmas because nasty number two is 71% of the shares are not in public hands. By persisting with a defined benefit scheme, management may be acting in its own interests rather than minority shareholders’, but in most respects its done a fine job. So fine, in fact, that I’m happily overlooking the pension fund and the immediate outlook which in the words of Richard Dewhurst, its chairman and biggest shareholder, sounds dismal: ...short term 2010 is likely to be more challenging than 2009. The economic climate means there is no let up on the pressure on prices and costs. Project related demand is beginning to tail off as few new projects have been started in the last year. We are also likely to be affected by the coming squeeze in UK public finances, as directly and indirectly the public sector is an important proportion of our UK sales, but it is difficult to predict the degree and the timing of the impact. The problem is that even if the construction industry picks up, Dewhurst is likely to be a late beneficiary as lifts are installed towards the end of projects. The discipline of value investing is to stick with good companies until the market recognises them and the value comes out. We may have to be patient with Dewhurst if 2010 turns out as tough as it sounds, but that’s no reason to dump the shares now. - Decline of deep value Blll Mott says manufacturing is benefitting from the weak pound, but the sector is too small to turn the economy around. Is it a sign of the times? Deep value is getting thin on the ground so Greenback’d is spreading his wings.
About the author
Richard is companies editor of Interactive Investor and a columnist at Money Observer magazine. A keen private investor through his Self Invested Personal Pension, he manages two virtual portfolios. The Share Sleuth portfolio is a hand-picked collection of mostly small-cap value shares, while the Nifty Thrifty is a mechanical portfolio designed to pick large, successful companies at cheap prices.
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