Pittards: From Value Trap to Contrarian Stock

Monday, May 14 2018 by
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Pittards From Value Trap to Contrarian Stock

Warren Buffett once suggested that investors should 'be fearful when others are greedy and greedy when others are fearful'. In practical terms, this could mean that investors should take a contrarian stance and buy scary stocks that no-one wants, while selling popular stocks that everyone loves. This is indeed the essence of contrarian investing.

Based on Stockopedia’s StockRank framework for classifying shares, the StockRank style of leather specialist Pittards’ has very recently changed to Contrarian. Stocks with this StockRank style are typically cheap, with strong fundamentals - for instance, a strong balance sheet and wide or improving profit margins. Contrarian plays also need investors to be sanguine about market sentiment, as these companies often have weak share price momentum.

In this piece we take a closer look at Pittards’ financial performance over recent years to discover why it has become a Contrarian stock, and explore what this means for its future prospects.

What does Pittards do?

Before looking at Pittards’ fundamentals, we should pause for a moment to understand exactly what the company does. Pittards is classified as a micro cap with a £12.4m market cap and just 1,648 employees. It designs and produces leather which is in turn used by other manufacturers to make a finished product - shoes, gloves and so on. For example, Slazenger incorporates Pittards’ leather into its cricket batting gloves. The shoe manufacturer New Balance also uses Pittards’ leather. The firm operates mainly in the UK, where it sources most of its hides, and in Ethiopia, where it sources the majority of its hairsheep skins.

Why Was Pittards a Value Trap?

We can see the evolution of Pittards’ StockRank style by looking at historical StockReports (see here). Pittards’ StockRank Style is now Contrarian, but back in May 2017, it was a Value Trap - and it was still a Value Trap in March 2018.

5af985d11239fCont-2.png

There is an important difference between Value Traps and Contrarian stocks.  Contrarian stocks are typically cheap, but they could have strong and/or improving fundamentals, while remaining undervalued by the market. On the other hand, Value Traps may be cheap for a reason - perhaps they are in a weak financial position and are unlikely to recover.

5af986af19c62NetProfit.png

Pittards is cheap, with a P/B ratio of 0.6 - well below the…

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Pittards plc is a United Kingdom-based company engaged in the design, production and procurement of leather for sale to manufacturers and distributors of shoes, gloves, leather goods and sports equipment, and the retail of leather, leathergoods and leather garments. The Company's segments include UK Leather, UK Consumer, Ethiopian Leather and Ethiopian Consumer. The Company offers products for women and men. The Company offers products for the industries, including aviation, fashion, interiors, military and services, motorcycling, equestrian, sports, consumer electronics and outdoor performance. The Company's subsidiaries are Pittard Garnar Services Limited, which provides consultancy and other related services; Pittards Global Sourcing Private Limited Company, which produces leather garments; Ethiopia Tannery Share Company, which is engaged in leather production, and Pittards Products Manufacturing, which produces leather gloves and leather goods. more »

LSE Price
84.5p
Change
 
Mkt Cap (£m)
11.7
P/E (fwd)
22.5
Yield (fwd)
n/a



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8 Comments on this Article show/hide all

Nick Ray 14th May 1 of 8
4

As I have slowly dug deeper into how Stockopedia ranks stocks, I am getting better at reading the Stock reports and seeing whether the data tells a single story or conflicting stories. Alex's excellent article has triggered me to share what I now look at in a Stock Report to back up a QVM rank.

For Pittards (LON:PTD) the top-level  QVM report looks like this:

5af9923b21affpitt-qvm.png

Seemingly a high-Q high-V low-M stock.

But underneath that the report gives more info on the components which make up the QVM numbers.

The "Growth & Value" looks like this:

5af9927c6ecccpitt-growthvalue.png

The key to reading this table is to look at the filled boxes on the right which give a visual indication of the "rank" for that metric in the industry and the market. The whole of Stocko seems to be built on the idea of ranking. If you convert all metrics into ranks then when you combine them (as Stocko does by averaging them together) you automatically align their median values (called "centering" in statistical circles) and you align the standard deviations (called "scaling"), as well as neutralising the effect of outliers.

So what we see is that the "Growth & Value" metrics all seem to agree that Pittards (LON:PTD) is on the expensive side.

But now look at the "Valuation box":

5af993519fdfcpitt-valuation.png

This box suggests that Pittards (LON:PTD) is cheap. The valuations not based on earnings see a different story and they also agree on their verdict.

The single Value Rank of 81 cannot capture that the story is not consistent across the metrics used to compute the Value Rank - but the Stock Report reveals the details. We also see that EV to EBITDA is right in the middle.

Moving on to Quality we get:

5af993f35fb29pitt-quality.png

The quality is firmly near the middle (roughly Q=50 territory) but Stocko's ranking gives greater weight to the Piotroski F score so Q=75 because of the excellent F score of 8.

Digging a bit more deeply using my own screens, I got a score of 16/17 for financial strength and 15/27 for profitability. Looking at the breakdown of the F score in the main article seems to back that up.

The picture I see is of a financially strong company which is making an average ROCE.

What I don't particularly like is that the V picture is conflicted. Different measures give a different view as to whether the stock is cheap or expensive. Personally I prefer to see all the Value/Growth rankings near to the middle or a little either side.

But then I am definitely a factor investor. I am looking for stocks already possessing the factors I look for. Whereas clearly a Contrarian is specifically looking for hints that a stock will shortly change its spots before the rest of the market catches on.

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Alex Naamani 14th May 2 of 8
3

In reply to post #363639

Hi Nick,

Many thanks for reading the article and providing the feedback :- ) 

I guess I should point out that the PE ratio we display in the 'Growth & Value' box is based on forecast/future earnings, while the metrics we use to construct the ValueRank, including the PE are based on historical data. As such, all the metrics that underlie the ValueRank are calculated using historic earnings, historic book values and so on. Please see here for further details: http://bit.ly/2xc5XmN

You can see the metrics that underlie the ValueRank by following these steps:
1) Add a stock to a portfolio
2) Toggle to the value, quality or momentum tabs in the portfolio holdings page
3) Clicking on the cell which contains the respective Q, V or M-Rank
...please see this video: https://cl.ly/2P2W3J3p3221

We can see the breakdown of Pittards' ValueRank in the image below. The company has an expensive P/E ratio (even when we use historic data), an Earnings Yield in line with the market median, but is cheap in terms of P/B, P/S and P/FCF. Also note that the ValueRank is 81, so one might expect the company to be cheap across most metrics, but perhaps more expensive in other metrics. All metrics are constructed using historic data.

I'm happy to take further questions.

5af99d748a088PittardsValueRank.png


Thanks,

Alex

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andrewdb 14th May 3 of 8

(I followed this company some years ago, but never bought)

The P/B ratio makes me think of Stanley Gibbons (£SGI).
They had stock on the books that was reportedly worth over 100m.
- until people realised that the value of the stock was SG's valuation and that if you actually disposed of even a small fraction, there is no way the full value would be realised.

In this case, the (P/S) / (P/B)  ratio says they probably turn the stock over  about once a year by value.
This indicates that the stock overhang has been cleared.

Pittards (LON:PTD) was covered be Simon Thompson at IC, but he pulled out in March '16.

The thing that put me off was that young people do not buy leather gloves, or bags - or posh leather shoes (within the mass market).
I have the feeling the whole 'leather goods' market is in gradual decline.

Pittards base their appeal on traditional techniques. This limits the opportunity for industrialisation.
... so no matter how good the ranks / metrics are I do not see great opportunities for growth or increasing margin.

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Nick Ray 14th May 4 of 8
6

In reply to post #363647

It would be really handy to be able to get that pop-up directly from the stock report without having to add the stock to a dummy portfolio first!

I think the main point I wanted to make was how useful those filled boxes actually are. I used to ignore them and just look at the numbers, but now I am a convert to the merits of rank-based assessments.

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sdanthy 16th May 5 of 8

Great article!

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Carey Blunt 17th May 6 of 8
1

Really good article, I like the articles that explain the transitions between Stockrank Styles so would welcome more of them.

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hayashi22 17th May 7 of 8
1

Can't escape the fact that Pittards management is pretty third rate.

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Taff6 17th May 8 of 8
2

In reply to post #363659

Nick you could try this work round if convenient.
From the stock reports you can click on either the industry or sector group at top of the page.

5afdb32b92a1fpittards.JPG

This takes you through to the ranks page for related sector/industry group. Click on the rank circle for the stock rank that you want to explore. You can also sort by rank to compare if share's rank is favourably placed within peer group. Hope this helps.

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