Character (LON:CCT) are one of my portfolio's picks that's holding up better. They're up about 6% after fees and spread since my initial purchase, which is heartening given the state of the general market in that time, though on an earnings basis they still appear very cheap - trading on a historic P/E of just 6.4 and a forward P/E largely the same. Some of the problem, I suspect, is highlighted in the graph. Sure, they had a strong year last year, and are forecast a good one next year - but how much faith can we have in a continuation of that trend given 2 huge swings in the last 6 years?
To justify an investment, then, we have to qualify why the downswings occurred, how likely they are to happen again, and whether the price they're trading at justifies the risk we've quantified. Obviously, that's a lot of touchy-feely factors - it's difficult for me to pluck a number out of the air and decide there's a 23.4% risk of a sizable downswing in 4 years time - but that shouldn't be a reason not to attempt it. The world of finance is difficult, and the same difficulties are faced by all market participants. We're just looking to apply a solid set of principles and a little common sense to find shares that the market might be pricing incorrectly at this point in time.
With the introduction aside, then, we move on to the business itself. Character Group have a trait in common with a lot of the businesses I like - what they do is fairly simple. They design, produce, and sell toys - a growing number of which with well-known 'names' attached to them, such as Doctor Who and Peppa Pig. In this sense, they provide a route for monetising those intangible assets (brand names) that other firms hold, which makes it an attractive proposition for them; and Character hardly do badly out of it either, with a 34% gross margin most recently reported. The toys are largely produced in China to keep costs down, almost a prerequisite in this day and age, and sold both in the UK and internationally - around 18% of group sales come from outside the UK.
Why the volatility, then? To begin, I should probably note I consider the 2005 figures…
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