Permanent or Temporary?
It’s a fact of life that companies in your portfolio will from time to time report bad news. When this happens, one of the most useful questions you can ask yourself is: “Is this a permanent or a temporary effect?”.
Kathmandu is a case in point. Early this week KMD announced that due to an unseasonably warm start to winter in Australia and New Zealand, full year earnings were likely to come in significantly lower than consensus. KMD makes a lot of its revenue from its winter sale, and so warm weather at the wrong time can have a significant effect on earnings. In simple terms, it appeared that expectations for FY14 NPAT needed to be pulled back by around 15 per cent.
The immediate question is what this does to an estimate of intrinsic value. If you think in terms of trading multiples then the first thing that comes to mind is 15 per cent lower NPAT equals 15 per cent less value, perhaps more if you reduce the multiple to account for lack of growth.
However, nothing has happened to alter the future earnings potential of KMD. Assuming the warm winter weather is not a permanent change, the real impact to KMD’s value is roughly equal to the 1-off loss NPAT in FY14. For a company with a market cap in excess of $600m, this equated to a 1-2 per cent change in value, compared with the 15 per cent change suggested above.
When the market opened, KMD shares briefly traded 17 per cent below their last close, although the market quickly came to its senses and the shares traded higher from there.
We had a buy offer in the market, but we just missed out. We had been hoping for a slightly steeper selloff.
Maybe next time.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Matt Conroy
:
“Assuming the warm winter weather is not a permanent change”.
Interesting statement and probably not a very resonable assumption given the evidence. Do you have room in your valuation models for environmental risk factors?
Roger Montgomery
:
You’re a better weatherman than me.
Wayne A
:
For me the jury’s out on KMD. I wander into their stores regularly and many if not most of the products seem to be priced over the odds. Their almost permanent ‘discounting’ looks only to bring items back to a similar price point to that of other comparable merchandise. KMD also do not appear to be particularly well-regarded by the serious outdoors types who regard them as positioned more for the pretenders.
No doubt this still leaves them with a future, but I doubt it is as bright as you suppose. Happy to be proven wrong though.
Sam
:
Why can’t I see the valuation of KMD on Skaffold?
Roger Montgomery
:
One of those strange situations; domiciled in NZ.