Smiths News (NWS): Missing the Boat

Tuesday, Jan 15 2013 by

I first blogged about Smiths News almost a year ago, and saw on Twitter that they'd released an interim statement today. Having read it, it seems they've really done rather well over the last year since I first looked at them, so they definitely warrant a second look. What interested me then is exactly what interests me now - they're the larger firm in a tight duopoly. Additionally, in a situation where this might not be a huge disadvantage, they're in that competitive position in a slowly declining market. If you want to deter competitors, being one of two dominant firms in an industry with an uncertain future seems a good way of doing it.

That industry, of course, is distribution - newspapers and magazines mostly, though they're diversifying into books and more niche markets like education. News is still by far the largest segment, and contributes the most to operating profit. The obvious danger, of course, is that a cash cow is being milked in the wrong way. There is clearly a temptation on the part of directors to prefer to diversify and try to create a long-term business model in other distribution segments, rather than simply wind down the news division and pay out the copious cash flow to investors. Which one is the right thing to do? That's a little more difficult to decide. How easily transferable are these distribution skills that Smiths News has acquired? To note - both new divisions are earning better margins than News, on much smaller revenue. Is that question already being answered?

Putting the cart before the horse

There is one more fundamental difference between investing in Smiths News in 2012 and investing in Smiths news today, though, and one that does do quite something to put me off. Look at the graph below: 

The fact is that the company is considerably more expensive than it was when I first looked at it. It's gone from around 90p to 157p today - and given about 7p of dividends, if I'd bought then I would've made about 82% on my capital in that timeframe. That's not to say it's by any means a poor investment now - I think it's a terrible fallacy (though one I'm definitely not immune to) to look at a stock that's gone…

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Connect Group PLC is a United Kingdom-based distribution company. The Company's segments include Connect News & Media: News Distribution (Smiths News); Connect News & Media: Media (DMD); Connect Parcel Freight (Tuffnells); and Connect Books (Bertrams, Dawson Books and Wordery). Smiths News segment distributes newspapers and magazines to approximately 30,000 retailers across England and Wales from over 40 distribution centers. DMD segment supplies newspaper and magazines to airlines. Tuffnells segment provides next day business to business (B2B) delivery of mixed parcel freight consignments. Bertrams, Dawson Books and Wordery segment distributes physical and digital books to high street and online retailers, public libraries, academic institutions and direct to consumers. more »

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3 Comments on this Article show/hide all

A1ex99 31st Jan '13 1 of 3

Smiths News is the biggest holding in my portfolio, currently at a profit of 40.4% when I bought in at 95p and 120p in May and September 2012. My biggest concerns are pretty much summed up in this article.

I worry about the diversification of the business and its long term prospects, which are as you have identified is in a declining market. With the specialist nature of the business and the existing asset base I would hope the business could go into more general distribution or something on those lines but only time will tell.

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Fangorn 31st Jan '13 2 of 3

Quite a chunky sale today by the CEO I see....

CEO,Mark Cashmore SELLS 219,605 shares @ 164p/sh(£360k)

Interested in the company but think i will wait, hopefully, for a cheaper entry point.

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Ardipithecus 11th Apr '13 3 of 3

A good article which sums up most of the pros and cons. NWS has been on my watch list for a while as a possible buy but I have just taken it off. The cash flow is still good and had been matching earnings from 08 to 10, but over the last two years, whilst earnings have apparently grown, cashflow has been fairly static . At the same time net debt has doubled to £100m! Reminds me of HMV. They tried a few desperate diversions but the cash flow dried up very quickly before any of them took off.

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About ExpectingValue


Private investor turned hedge fund analyst, looking predominantly at global small caps. Sector agnostic.


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