OPD: A classic boom and bust share

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In practice:

Another cheap recruitment company

The fortunes of recruitment companies depend on the fortunes of the economy, but OPD (OPD) looks like a boom and bust share par excellence.In practice:

Another cheap recruitment company

The fortunes of recruitment companies depend on the fortunes of the economy, but OPD (OPD) looks like a boom and bust share par excellence. Founded by its current chairman and biggest shareholder, Peter Hearn, in the teeth of recession in the early 1990's, its share price chart booms and crashes with the stockmarket until 2003, when the company made a loss.

If you go by the statutory measure, OPD made a loss in 2008 too, but exclude a non-cash charge against the value of Ogders, a company OPD bought in 2005, and profits slumped from £10m to just under £6m. For the third time this decade, it's cut the dividend. This time to nothing. It's cutting jobs too.

In the first two months of 2009 things got worse, with net fee income down 20% compared with the same period in 2008 and in its latest annual report, the chairman says there are no signs of improvement.

By rights, the share price ought to have collapsed, and so it has from a high of almost £5 less than two years ago to less than 50p now. Its recent lows are its lowest since it floated in 1997 and exist despite the enthusiastic buying of Mr Hearn who over the course of 2008 invested millions to increase his holding from 18% to 27%.

His most recent purchase was 93,000 shares at 83p each last October, though, and since then the shares have halved again.

But so far OPD's survived the busts, and although its focused on the UK, where pundits fear the worst for employment, and permanent posts, for which there's less demand in a recession, I think it’s extremely low price and relatively strong financial position mitigate some of the risk, and increase the profit potential of a strong recovery.

OPD's price is only two times the average of its last ten years of earnings, and although it appears to have paid too much for Ogders and wasted money fruitlessly pursuing another company, Imprint, at the end of the year it had no bank debt and £10m in cash. It was, in cash rather than accounting terms, a reasonably profitable company in 2008.

2009 could be a different story unless the increasingly widely anticipated recovery happens this year. Since I wouldn't be prepared to bet on that, OPD may be one to watch, rather than buy for now.

Having said that, investors seem to be putting a lot of faith Robert Walters’s larger business. Maybe it earns more of its income abroad, and from contract staff, but is that really worth a long-term PE of ten, when ODPs is only two?

I shouldn't be asking that question, I know. I should be answering it. Perhaps I'll give it some thought next week, after the bank holiday break has relieved me of the stock picking fatigue that's been building up in recent weeks.

Have a good one.

In theory:

To P/E, or not to P/E

James Montier is under siege. Hard-core bears say cheap debt in the last decade has inflated company profits and invalidated the earnings denominator in the calculation of the long-term P/E ratio.

If earnings are artificially high then the PE will be artificially low, making shares look cheaper than they really are.

I'm interested in this skirmish because I've adopted the long-term PE as a measure of value and, like him, I've been saying the market's cheap.

Fortunately, Montier says the long-term PE is still valid and does exactly what Benjamin Graham and David Dodd intended when they invented it back in 1934. It stops us being swept up in the economic cycle by including both booms, and busts.

The evidence, according to Montier:

  1. Far from being inflated, over the last decade the average deviation from the earnings trend has actually been negative (-1.4%)
  2. PE ratios based on ten year averages are very similar to those based on twenty years and even thirty years of earnings, which suggests that ten year PEs are not over inflated.
  3. If you recalculate average earnings over the last ten years from the bottom up by multiplying the average return on equity by current book value, you get the same level of earnings used in the calculation of the PE.

Point three seems a bit circuitous to me, and I’m not sure what it means, so if anyone wants to explain please do!


Now that swine flu has arrived in two dozen countries with deaths in Mexico and the USA Moreover as its three flu types in one; bird pig human. With pig to human as also human to human spread it looks more like a virus from a laboratory than one nature cooked up?

If you do a simple algorithm and it becomes every day more like pandemic flu; in light of the human to human spread and the speed of the spreading.

I have just liquidated our shares in life insurance companies because using mathematics in a country like the UK a pandemic could spread to 13,200.000 people with a death rate of 2% [some mathematicians state it will be 2,5%] however at 2% that's some 2,640.000.Moreover then there will be those who are unable to work that will deplete the reserves of any UK insurance company.

Given the insurance industry quotes for how many people they provide life cover, health care and permanent health care cover and similar healthcare products these life insurance companies are going to be selling assets now before their investors wake up to find that there Stock Market Value of their shares become penny shares as quickly as the flu spreads do not forget in previous similar outbreaks its next November to March that is the critical time.

Maybe Montier is using ROE to try to eliminate the impact of inflation over a longer period.

Anyway, if you use normal earnings data from ‘spglobal’ you get an average bottom-up earnings of $60 for the last 10 years for the S & P 500 (if you exclude the banks disastrous quarter) and $62 (if you include it) so the impact of the bad quarter is negligible over 10 years. The current earnings, if they remain flat for the year are about $50 so well below average.

However, if you look at the period of earnings between 1990 and 2000 you get an average earnings of $37. If we assume you have inflation of 4% between 2000 and 2008 then this figure gets to about $50. Therefore either inflation was over 6% during the last 8 years or earnings were inflated by cheap debt, low inflation and low interest rates!

... and low rates of taxation, I almost forgot that one!

[...]   Wednesday 06 May 2009 Home / Editors' Blog About « « OPD: A classic boom and bust share [...]

[...] wrote about the recruiter last week. It fits my pattern. The shares are dirt cheap. The 10 year price earnings ratio is about two, [...]

OPD and Data going back 10 years
I think that what Montier was simply trying to say is that if you are attempting the thankless task of actually calculating earnings for a share 7,8,9,10 years ago (in order to sum them). You might have to extrapolate a year's earnings figure from the published capitalisation and % return on capitalisation when your data table misses out the earnings figure itself.

Best wishes for guiding us through the next 8 months of this mess.

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