Good morning! Another exciting morning, with a lot of price volatility in some more speculative stocks.

Hornby (LON:HRN)

Share price: 73p
No. shares: 39.2m
Market Cap: £28.6m

Interim results - for the six months to 30 Sep 2014 are published this morning. A modest improvement in underlying profits is reported, on turnover up 8% to £24.2m. See the excerpt below from today's results, for a reconciliation of statutory and adjusted profit. These adjustments look reasonable to me, so I'm prepared to accept the £245k underlying profit figure as representing the true performance of the business:


It's not clear what the seasonality of the business is. I note that turnover was weighted towards H2 last year, but profit was only slightly better in H2 than H1. One would expect more buoyant trading in the H2 period, as that includes Christmas & the run-up to it - this type of product must be popular as a seasonal gift, maybe not so much for children, but older customers who seem to now be the market for this kind of product - as a nostalgia for their youth thing perhaps?

Outlook - as this is a turnaround situation, the outlook statement is vital for signs of progress, so here it is;

The final results for the year as a whole depend on the success of the Christmas trading season and current indications are that it will meet the Board's expectations. As a consequence, and despite the additional costs of the ongoing investment in the future of the business, the Board currently expect to meet market expectation for the year as a whole in terms of sales and profits.

Valuation - broker consensus is for 2.8p EPS this year (to 31 Mar 2015), so the market is ascribing a PER of 26.1 times, based on the 73p share price. Clearly that is too high a valuation, were earnings to plateau at that level, so the market is effectively pricing in a future doubling of profits from this year's expected level of profit (since a PER of about 13 would be the right ballpark valuation once the turnaround is complete).

Balance Sheet - net tangible asset value is £19.3m, which I'm happy with. The current ratio is satisfactory at 1.32. However, this company has £14.8m in inventories, which is too high in my opinion. That compares with cost of sales (on…

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