A takeover bid for the engineering consultancy Waterman saw the price of its shares leap today. At 140p-per-share, the agreed cash deal with Japan’s CTI Engineering represented an 85% premium on Waterman’s previous price.
While the deal is yet to be sealed (and there is always a risk it may fail), this development ought to be of interest to onlooking investors. That’s because it comes against the recent run of play for Waterman, whose shares have been generally out of favour and drifting for several months. It begs the question of whether this turn of events could have been predicted...
Since last summer, the market mood has been very much ‘risk on’ towards profitable, growing, small-caps like Waterman. Yet this micro-cap - valued at just £23 million before today’s price rise - failed to ride that wave despite having some appealing features.
Of course, it’s very easy to look for all the plus points after the unpredictable arrival of a takeover bid. But the fact is that for more than a year prior to last autumn, Waterman had one of the strongest combinations of high quality, appealing value and positive momentum in the market.
It was only when its momentum began to weaken last October that it slipped from what we call a Super Stock into classic Contrarian territory. It was still high quality and attractively valued - it was just that the market had got nervous about it.
A high quality micro cap on the cheap
Our small-cap specialists Graham and Paul have both written extensively about Waterman in the past. Overall, they’ve been upbeat about it. But part of the challenge in assessing this business is that it operates in a highly cyclical industry. Plus its small size makes it vulnerable to setbacks. This was arguably part of the reason why it has generally always looked cheap at first sight. Its sensitivity to problems means the market has been wary of bidding it too high.
In terms of balance sheet health, over the past 18 months Waterman has consistently scored well against the nine-point Piotroski F-Score - our ‘go to’ litmus test of financial improvement. And this has really underpinned its strong Quality Rank (the Quality component of Stockopedia’s StockRank).
Waterman is undeniably a low margin business. But importantly, the trends have…
