Dewhurst - Unfairly Neglected?

7th Aug '15 by Tom Firth

26 comments 14554 reads

Peter Lynch is well known for his sometimes unorthodox investment criteria. In “One Up on Wall Street”, his bestselling book, he talks about investing in companies with no broker coverage, operating in boring or depressing industries and with unusual, uninspiring names on the grounds that neglected companies are more likely to be undervalued. Dewhurst seems to tick all of these boxes and certainly appears inexpensive, but is it neglected for good reason?

Screen Summary

Note that these ratios are applicable to the A class ordinary shares – LON:DWHA

At a PE ratio of 8.15x, the company appears to be priced cheaply relative to its earnings. The long term sustainability of said earnings will have to be assessed to determine if the metric represents a true undervaluation.
A PB ratio of 1.46x appears reasonable, it is not prohibitive but would be more indicative of a fair valuation than an undervaluation.
A PS ratio of 0.71x would also indicate an undervaluation.
Return on capital of 15.1% is good and operating margins of 11.4% are also encouraging.
A dividend yield of 2.41% is modest.

Company Background

Dewhurst was founded in 1919 and supplies components to the lift, keypad and rail industries. The products are not recognisable by name but I would encourage anybody interested in learning a little more about the company to have a look at the product listing on the website. We have almost all used them at one time or another and it is difficult to imagine them vanishing any time soon.

Recognise this from your local ATM?

The oldest financial information available free from companies house is the 1994 annual report, although this report does conveniently contain some comparative information going back as far as 1985. Back then revenue was a mere £4.2m but under the guidance of Richard and David Dewhurst (both appointed as directors in 1992) it has since risen to £46.6m.

The two brothers took over what, at heart, still appears to be the family business (the majority of voting rights are held by insiders) and they have done an excellent job of it to date. The company is prospering better than ever as it nears its hundredth birthday and, with a little luck, perhaps there is more to come.

Financial Statements

On the income statement, with the exception of a poor year in 2013, revenue and earnings have been consistent and steadily…

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Rusty2

7th Aug '15

Thanks Tom,
For breakdown, so it is about 80% lifts.

Yes its interesting about the A shares, I don't really understand why the A shares have performed differently from the ordinary shares. If you compare over 2 years the A shares have gone up a lot more?

Yes the A shares are at a discount but then they will always will be?
The only other company I hold that have A shares is Dee Valley.

Tom Firth

Agreed that net/operating margins are more important over all, but (apologies if I misinterprented your post slightly) as we were talking about margins being squeezed by buyers then we were talking about gross margin. Buyers do not have the ability to influence how much Dewhurst spend on their premises or finance staff, for example, but are able to influence the price they pay and therefore can only influence gross margin directly. Operating margins will definitely be affected by FX though so I will be bearing this in mind when I come back to thinking about the company.

Will have a look at Paul's report when I get the chance too later - thanks for the advice! I am not doubting in anyway that large majority shareholders can be a negative thing, but nor am I trying to say that it is a guaranteed great thing in the case of Dewhurst or in any other case. I am simply trying to discuss the scenario and determine what is really the case in this instance and I am inclined to think that you might not be in bad hands here if you were to invest.

If you had invested in the ordinar shares back at the start of 2000 at around 75p, for example, then despite the agency issues and the rest of it, you would have earned just over a 14% CAGR in capital gains alone, with dividends on top. That's pretty good going for a 15 year period and it was not in spite of the large inside ownership that you would have received this return, it was because of their expertise in the field and their commitment to building the equity value of the company that this happened.

Any thoughts? Thanks for your posts again, I really enjoy having the chance to bounce ideas off of you!

Tom

It is mostly lifts, yes. I don't understand the discrepancy either and am pretty sure that they are worth the same in practice as the voting shares.

Again this point was missing from Stockopedia but is inlcuded in the full post - I don't think the gap is likely to close either. Although the discrepancy wasn't always this big it has always been significant so it seems unlikely that it will reverse.

The benefit in my eyes would be that the lower price improves the dividend yield and, theoretically, there is less downside due to the shares being priced closer to book value.

Tom

Yes good point about the dividend. Have added it to my watchlist.

janebolacha

Tom, sorry to say this but your reasoning in the first para of your last post is false. If customers push down the price they pay Dewhurst by 5%, then half of Dewhurst's operating profit goes. Similarly if the exchange rate moves 5% the wrong way. Of course, they may be able to cut their own overheads to make up some of that, of course, but that's a different matter and they may or may not be able to do so and so my point remains valid. As for investing in Dewhurst and having to trust to being fairly treated by majority family shareholders, thanks but no thanks, there are plenty of other investments without that complication. Whatever their past record may be, I always invest for the future, not through the rear-view mirror.

Ah! Ok, valid, I retract my statement. Changes in selling price do indeed feed through to operating profits in that manner. Sorry for my ill considered response, perhaps you can forgive my foolishness?

I completely understand and respect that perspective by the way, I can see how that aspect of trust could be really off putting. I am not a shareholder of course and probably won't be but the idea does interest me and, for some reason, the notion of having to trust the current management doesn't seem to be as big an issue for me as for you.

To a degree such trust is necessary in all investments is it not? And I'd rather that the people I was trusting were reumnerated when the stock did well rather than through bonuses and paychecks (the Dewhurst's take small salaries by Director standards). Here I am more concerned that future performance is unlikely to be very exciting.

On your final point, yes, we must invest for the future but we have, philosphically speaking, only past events on which to base our understanding of it. Therefore historical analysis will always be important to some degree in investing I think. I would certainly not invest purely because management have a good track record though. Warren Buffett is very much in agreement with you there when he says: 'when a managment team with a good reputation takes control of a business with a reputation for bad economics, it is the reputation of the business that stays in tact.'

Have a good afternoon!

Tom

Tom, I really don't agree that "we have, philosophically speaking, only past events on which to base our understanding of it (the future)". I think that's a tremendous mistake in investing. For me, past performance simply tells me how a business got to be the way it is today and in its present financial and operational position.
Imo, it's an investor's work in trying to understand the future, from market trends and developments, competitors' activities, developments in the economic environment in which a business operates and so on that matter more. Yes, of course, the probity and strength of management matter to carry the business forward but, imo, projecting from past performance should be done only very cautiously.

Yes I agree with your definition of an investor's work and, in my view at least, that process you have described is what 'true' investment is all about. There are of course many ways to make money in markets but if we are talking about the long term allocation of capital then considering the qualitative factors you describe is absolutely key.

I don't think I communicated my previous point well though. I'll try again as I was not, in any way, trying to suggest that thinking about the future is the wrong thing to do! Nor am I trying to suggest that projecting from past performance is the correct thing to do.

I say 'philosophically speaking' because, in the study of philosophy, a concept that is often discussed is the idea that our own knoweldge comes only from past experience (I'm not an expert but my girlfriend is quite good and tries to educate me!). We can only be aware of what we have experienced (whether as an event, idea, through sight or sound etc), and because we can only think about what we are aware of, it follows that we can only think about that we have experienced through some medium.

To apply this to investing, I think it translates as 'we cannot make useful attempts at understanding the future, unless we have experience of what it is why are trying to understand.'

So, to then apply this specifically to Dewhurst, and more specifically the management team at Dewhurst, 'we cannot make useful attempts to understand the future actions of management, unless we have experience of the actions of management.' If the management team are to have so much influence, surely it is important to understand how they might behave in the future? And how could I understand how they might behave in future circumstances if I don't know how they have behaved in the past?

That is all I was trying to communicate, hopefully I have explained myself a bit better. Do you agree at all? No worries if not of course, each to their own. I absolutely am with you that it is very important to understand the future and am always very impressed by your forward looking analysis in comments, I just don't think it is possible to literally foresee the future. All we are really doing is extrapolating our past experience and knowledge of the company, the industry, of people, economics and so on in order to derive logical forward looking conclusions.

Hopefully that explained what I meant a bit more clearly although I'm aware I've departed a little from Dewhurst...

Tom

Tom, last post on this but I really do think you're way off the mark, philosophically, at least as applied to investing.

"All we are really doing is extrapolating our past experience and knowledge of the company, the industry, of people, economics and so on in order to derive logical forward looking conclusions."
No! We aren't! Or at least I'm not!

"Our own knowledge comes only from past experience"
No, it doesn't, our own knowledge does not need to be limited to past experience.

"We can only be aware of what we have experienced (whether as an event, idea, through sight or sound etc), and because we can only think about what we are aware of, it follows that we can only think about that we have experienced through some medium"
No, it's self-evident that there is knowledge we are unaware of but it is equally self-evident that we are capable of realising we need that greater knowledge and of seeking it out and then using it.

I'm actually seeking new "experience and knowledge" from wherever that may be available in order to test, validate or invalidate my " past experience and knowledge of the company, the industry, of people, economics and so on", precisely in order to derive logical forward looking conclusions.

In simple terms, knowledge and experience are never finite, there are no limitations.

Tbh, I do find it rather trying when people use formulaic approaches to investing based essentially on past knowledge, figures and results while spending next to no time on trying to project forward the businesses and industries they are investing in. I know that is seen as one of the strengths of this site but personally I rather use Stockopedia as a library, a database and as a forum for ideas, not as guidance for investments I may make or not make.

Best wishes,
Jane.

to

10th Aug '15

Sorry for a slow response Jane, I was away all weekend. Sadly I think I've failed to communicate my point effectively, my fault entirely of course. I agree that a purely backward looking, extrapolative approach to company analysis is flawed and this is not what I was trying to advocate. I also agree that knowledge is not limited to past experience and that knowledge and experience are not finite.

I was instead attempting (clearly very poorly!) to describe how I think our current thinking (whether it be forward looking or not) is inherently shaped by our understanding and experience of the past.

Wittgenstein famously says that 'doubt occurs within the context of things undoubted.' He means by this that we cannot question or doubt something unless we have a pre-existing notion of what is correct (note that this refers to specific criticisms; while I can generally doubt anything, I cannot accurately identify something as incorrect unless I have pre-existing knowledge of correctness regarding that thing). I think that this is as self-evident as the idea that knowledge is not limited to past experience (how else could society advance?) – it seems clear, for example, that someone with absolutely no knowledge of a given industry would be unable to comment accurately on its direction and prospects.

This is not to say that we cannot look forwards, or that knowledge is forever limited to past experience. Instead, it is merely saying that we cannot help but seek and interpret new knowledge through the lens of our past experience. I believe the confusion over this point in my prior post came from my using the phrase 'our own knowledge comes only from past experience.' I did not intend this to mean limited although in retrospect it was poorly worded and explained.

I think this limitation is why Buffett talks about his circle of competence so much. He understands very well that it is pointless for him to try and assess the prospects of some industries (famously tech), because he does not have the relevant experience to do so. Equally, when it comes to those industries where he is an expert, he makes full use of his forward looking reasoning and that has undoubtedly been the key to his success as an investor.

This then relates to my view on your point on formulaic approaches to investing. Firstly, that such methods remove inaccurate forward looking analysis from the investment process is one of their key strengths. All the evidence suggests that the majority of us are very poor indeed at such analysis (even Buffett won't engage in it for every company!) and so performance often benefits from the use of mechanical methods instead. Secondly, many managers and private investors have achieved excellent results with these techniques over long periods of time so I really don't see any grounds for it being considered as inferior. What works, works, at least from my point of view.

Sadly, becoming a bona fide expert in most fields is a process that takes many years and while we are building up our knowledge we are likely to make mistakes. I'm not saying that that is a reason not to try and learn and improve our understanding, just that it should be born in mind by people if they are honestly trying to assess what investment approach is best for them.

Anyway, thanks for the comments as always, it's kind of you to take the time to explain how you approach these problems; personally I'm always looking to improve so will be sure to reflect further on your thinking.

Tom

WarrantStar

Jane,
I agree with you. My decision making process before buying any share always involves assessing the Strengths, Weaknesses, Opportunities & Threats to the business. I introduced this to my process a few months ago. I don't find doing it easy. I cannot do it by relying on my current knowledge and experience. It often means that I have to go off and do further research before I arrive at my decision on whether to buy or not. However, I am convinced that it does help me reach a better decision.

Warranstar, yes, an approach that requires extensive personal research certainly does take time and effort but it forces you to think seriously about where you're investing the money you've worked hard to earn and it forces you to choose among competing opportunities. I hold only ten shares at present but they include Character (LON:CCT), Crest Nicholson Holdings (LON:CRST), Empresaria (LON:EMR), Entertainment One (LON:ETO), Finsbury Food (LON:FIF), Fairpoint (LON:FRP), Spaceandpeople (LON:SAL) and Waterman (LON:WTM), all of which have brought me excellent returns on risks that I understood very well at the time of investing and that I understand even more and better now. I hold two other shares that I prefer not to disclose, both bought in small lots and on dips after equally detailed analysis and where I'm making a little, not that much for now but both of which I understand and am confident enough to retain. It's an investing approach that requires self-confidence and that involves a lot of work and that not everyone would be happy with but that has worked and works very well for me.

Good luck!

11th Aug '15

Jane,
Thank you for generously sharing some of the details of your current holdings. I already hold some of them myself, and will check out the ones that I don't currently hold.

Howard Adams

13th Apr '16

Hi all

Many thanks to all the above and to Tom for the discussions on Dewhurst (DWHA). I am re-balancing my SIPP and examining in detail Stockopedia's sector of 'Industrials' and specifically the Industry of 'Machinery, Equipment & Components'. DWHA had made it onto my shortlist, but informed by your very insightful discussions I have dropped DWHA from my list. As you will note if anyone who returns to this posting, I am writing this 13/04/16, almost a year after the initial discussions. To me this discussion is an excellent exemplar of the power of such Stockopedia discussions. They are an excellent reference and offer candid insights. Thanks again for all who post so informatively. I for one am an avid reader.

Regards
Howard

Richard Goodwin

14th Apr '16

My issue is strategic. Will anyone use lift buttons in the future? Surely touch sensitive glass will take over? As for ATMs not only does the same apply but with the growth of digital payment and shrinkage of the AGM estate I can't see that as a LT growth market?
This could all of course take many years so there may be lots of life left in Dewhurst, however the firm shows little sign of developing new markets.

Hi Richard

Ref touch screens. I'm a fan of Zytronic (ZYT) if you have not already had a look at it. Several posting by Paul Scott about it. (disclosure I hold a long position in ZYT).

Regards
Howard

Its great to look back at older articles and see how things did turn out, I never did invest in Dewhurst (LON:DWHA) mainly due to valuation and some of Jane's comments.

I do hold Zytronic (LON:ZYT) as well.

cig

They're already making touch panels, surely they can adapt to what the customer wants. You could see them as lift control panel suppliers rather than simply button manufacturers.

(And btw I expect buttons to remain popular for lifts: it's an application where there's little to gain from using touch screens, and you lose being blind-friendly...)

My impression is that at heart Dewhurst (LON:DWHA) are defined by steel button manufacturing facilities. Switching to a completely new technology might be way outside their experience. Also modern lifts are starting to share buttons with a single set outside the lift itself rather than individual sets inside each lift.
This doesn't of course mean that dewhurst's market won't be a profitable niche for a long time to come.

jonthetourist

3rd Apr '18

Perhaps worth revisiting this article now in light of the fact that the SP has around doubled in less than three years. The tone of both the article and the comments suggests this is rather unexpected. Can we learn anything useful from this?

Dewhurst - Unfairly Neglected?

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Tom Firth

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