Since the start of this year, Pace Micro Technology (LON:PIC) is down about 35%. I actually remember the company appearing on value screens some time in mid-2010 and with this latest dramatic decline it is popping back up again. I can’t remember why I didn’t get involved last time but this obviously makes me cautious. I believe the dramatic declines we are seeing now are probably a function of two technical factors (as well as more fundamental factors I will look at in the main body of this post): first, the company used to be a growth stock. In 2009, it put in a good performance shedding the stigma attached with its dismal performance in mid-2000s/tech blow-up. To me, this potentially means we are going to see dislocations as ownership changes from growth to value investors. Second, the company wasn’t as open with customer order delays as it could be (here). To most investors (and me), this was a massive red-flag which potentially makes the company uninvestable at almost any price. These are obviously quite intangible and unique factors but I think they are worth mentioning, outside of the normal factors, as I think they will play a significant role going forward.
As usual, I will first deal with quantitative factors. From the above we may see some signs that PIC isn’t the “usual” value candidate. First, its operations have been very volatile. Indeed, these figures may mask it slightly. Revenue in 2005 was only £178m, net profit in 2006 was only £6m and the company lost £28m in 2005. What this means is that we have to be very careful in valuation. Past results are likely to be very different from future results and there is considerable ambiguity over true operating results as turnarounds are always accompanied by more non-operating/extraordinary items. In particular, I would highlight my treatment of impairment as inconsistent as PIC has a habit of charging it in a different place every time (i.e pre-tax/after tax/pre-finance expense). Second, the company made a big acquisition of 2Wire in 2010 for around £280m, net of cash (details of acquisition: circular and presentation). This was financed with debt and apart from these balance sheet effects, I believe it represents a change in business model. Either…
