I’ve always disliked hearing companies talk about maintaining an efficient balance sheet. As far as I can see, this is a euphemism for juicing up short-term shareholder returns using cheap debt.
The end result is a business with very little margin of safety. In recent years, this hasn’t seemed so important. By using cheap debt to return cash to shareholders, companies have been able to boost both earnings per share and metrics such as return on equity.
For a hired CEO with a five-year mental timeframe and a juicy incentive plan, efficient balance sheets have made sense. But as Warren Buffett said in 2008, “you only learn who has been swimming naked when the tide goes out”.
It turns out that efficient balance sheets are a bit like skinny dipping. A number of FTSE 350 stocks that were highly regarded by investors have already launched cash calls to repair their efficient balance sheets.
Unsurprisingly, the first wave of fundraisers have come from the hospitality and travel sectors. Last week I mentioned Compass Group and Whitbread. Two other notable examples are travel food specialist SSP Group and WH Smith, whose business also relies heavily on trade at travel outlets.
All four of these are businesses that - in general - I admire. But I think it’s fair to say that they might all have avoided having to go cap in hand to shareholders if they’d held onto more of their free cash flow over the last five years.
I’ve chosen to take a closer look at SSP Group this week, because it’s currently very close to qualifying for my Stock in Focus screen. Although a near-total halt to global air traffic has left SSP in a perilous position, I think this FTSE 250 firm could be a good recovery play following its recent fundraising.
Flying too close to the sun?
If you’ve travelled through any major UK airport or railway in recent years, you’ve probably walked past (or entered) at least one of SMEs eateries. The company operates around 2,800 units in 35 countries. In the UK alone, SSP runs 570 units at 130 airports and railway stations.
The group runs a mix of franchised and own-branded outlets, plus localised and bespoke units designed to have a tailored appeal to the local market. Franchised…
