MTC - my thoughts

MTC (Mothercare) is down 27% today as it released an IMS.

Over on Stockopedia, Paul Scott said (http://is.gd/14h9K5) “I would definitely not be long of Mothercare”. That view isn’t universal, and some experienced investors expressed the view that it is a buying opportunity.

UK sales had been deteriorating for some time, and seem to have gotten worse.

MTC is a recovery play – at least ostensibly – and the bull argument is that although UK sales are declining, it is International sales that will be the driver of profits. Based on the latest full accounts, international sales were £729m, whilst UK sales were £500m. I was surprised to see international sales exceeding UK sales. Underlying international profit was £42m, whilst the UK lost £22m. It might be an interesting restructuring story, were it not for the fact that the directors only seem to be pecking away at the problems with the UK.

In their latest RNS they reported a 12.5% increase in the sq ft of international space, but retail sales were only up 9.0%. In light of the RNS, analyst estimates look optimistic to me, and I think they’ll have to moderate them.

Last year’s revenues were £749m. Analysts are expecting revenues of £756m for y/e 31 March 2014 and PTP of £16.1m. That gives MTC a forward PE of nearly 30, which is high, and requires high future earnings growth to justify that figure. Sure enough, analysts are (or should that be “were”) expecting robust growth in 2014 and 2015 to bring the forward PE two years out at a more reasonable 11.6. Those projections look in jeopardy to me given the recent IMS, though.

How would I price MTC? Well, MTC has been a very unprofitable company for a long time. Its net margins have only been about 2.65% over the last decade. So, based on sales of £750m, I might expect it to earn about £20m. The future may look nothing like the past, of course. It’s historic PE has been about 15, which seems like the long-run average of the market. So MTC might be worth £300m. Personally, I think I’m being generous here. I’m worried about its balance sheet and the fact that I view it as an obsolete business, like Woolsworth. It has a market cap of £268m, so I think the kindest thing I can say is that the market is pricing it “about right”.

I think management are going to need to pull a rabbit out of the hat. Possible, but tricky. I don’t own any shares, and think it’s a risky bet to go long here.