Why are PACE shares so cheap?

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1st Apr '15 by WarrantStar

16 comments 14501 reads

I can't understand why Pace (LON:PIC) is so cheap after 3 years of EPS growth of at least 36% per year. Value rank of 75, Graham formula Margin of Safety of 100%, ROCE is 16.5%, Dividend has been increasing rapidly. What are your thoughts on why the share price is so low? Is it a screaming BUY?

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WarrantStar

Premium Member

I am a keen & experienced investor. I love my spread sheets, and like to think that I know what I am doing. I wouldn't be offended to be described as a bit geeky. Mostly I do well, but I always strive to do better. Married male. Born 1957 England. Good career in industry for 35 years. Been successfully investing for about 30 years. I chose to retire from salaried employment at age 57 to look after my investments. I consider myself to be quite analytical / logical / mathematical, but also take into account how the world is likely to change & how people behave. I always follow my processes before taking action. more »

16 comments

Edward Croft

1st Apr '15

I think Pace is in one of those industries that every fund manager knows is being usurped by the internet so nobody wants to own it. I mean we are all using iTunes, Netflix, Apple TV, Amazon Prime... why should anyone need a Pace set top box ? The stock is an easy sell - who'd want to be seen owning it ?

But of course, Halfords is in the same position - and I remember in 2012 it was at the top of everyone's sell list... but it became ridiculously cheap, started passing loads of screens on Stockopedia and rebounded strongly - more than doubling since. There's a lot of companies being usurped by the internet, but consumer habits, and business models can take longer to change than many think.

I notice Pace is a 98 StockRank stock. I've always said the StockRanks tend to highlight unpopular, difficult to buy stocks. Maybe Pace is a classic example of this - a boring, cash generative business model with a cheap valuation reflecting future problems...

I note the brokers are having to upgrade their numbers, so it may be picking up some momentum. Perhaps a lot of value has been left on the table here? Have dumb heuristics taken over here ?

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WarrantStar

1st Apr '15

Ed,
Thank you for your reply. You may well be right that the PERCEPTION that Pace products will be rendered obsolete by the internet is what is holding the share price back. However, the reality is:

1) They have a range of 3 different types of WiFi internet set top boxes
2) They have different types of PVRs that are internet enabled for HD TV and 4K TV
3) They have products suitable for satellite TV, cable TV, terrestrial TV, internet TV, and hybrid transmission routes
4) They are not just manufacturing products for domestic use. They also sell media servers and access gateways to network operators. 5) Their recent purchase and integration of Aurora Optical Networks has proved to be a successful part of their diversification into service offerings to TV network operators.

All in all, they look pretty switched on to me! And hopefully their share price will soon catch up with the reality of their successful products and services.

roque22x

20th Apr '15

I have to totally agree. Pace is very cheap by whatever price measure is applied. I think there is a lot of psychological and emotional selling of this stock which does not reflect the sound business model. It is in a sector of the market that is strong. If set up boxes are a no no then why are shares in sky doing so well? In my opinion this stock is extremely undervalued and agree with ED it could be like Halfords where if the shares suddenly start to go up then they could go massively up.

Ramridge

23rd Apr '15

Looks like Arris, the US company, was thinking the same. Agreed takeover offer of around 426.5p .
Interesting days ahead.

Ramridge

23rd Apr '15

Hmmm. I just took Ray Winstone's advice "sometimes you've just got to take the money and run." Cashed in @462p

Novice Investor

23rd Apr '15

Dumb heuristics indeed Ed. Even the original poster quotes a Stockopedia ranking when quoting value criteria. It must be heart warming to see people do that...

As it happens, we're not 'all using iTunes, Netflix, AppleTV, Amazon Prime...' although, just like your desire for people to quote Stockopedia rankings as a proxy for the usual company metrics, the owners of those companies sure hope we begin to think like that.

NI

WarrantStar

23rd Apr '15

What a great start to the morning! I just sold my holding in Pace (LON:PIC) at a handsome profit.

underscored

23rd Apr '15

So annoyed. Decided yesterday evening I would sell out of ShoeZone into Pace! How about that for bad timing!

John18v

19th May '15

There is a possibility sale could fall through if US govt objects to this deal. Does anyone have a view on this.

WarrantStar

19th May '15

I don't know about the probability of the deal going through. If you are concerned that it may not go through, and you are in a position to take some decent profit from the share price rise, then my advice would be to sell now at the market price.

Michael_P

10th Aug '15

Wondering what people think about this now? At the time the takeover bid was announced the 50 day moving average was around 350p which is almost exactly the current share price. In the 50 days prior to the bid it had traded above 380p. After the bid it went up above 450p briefly. In the meanwhile the Arris share price rose but has since fallen below where it was initially. It was around $30 and is now around $28. Given an FX rate of around 1.55 then adjusted by 2% from the interbank rate to account for any commission brokers may charge on repatriating funds to sterling. I reckon that that the Arris shares component of the bid is worth about 258p and the cash element is 132.5p. Making a total of around 390p. Without the interbank adjustment I reckon it is around 396p. So my questions: 1) Have the prospects of Pace gone down since the bid was announced? 2) since the Pace (LON:PIC) price is basically back to where it was before the bid was announced does this mean that the market thinks the bid is not going to go through? 3) Since the value of the bid is only a small amount above the trading range prior to the bid, if the bid does go through is it a sufficient premium?

On Question 1 I think a good case could be made for saying that Pace prospects have not diminished in the meanwhile. H1 adjusted EPS up 11.4% announced a couple of weeks ago, StockRank now 96.

dmjram

12th Aug '15

Re (2), the last time I looked at it, the US regulators were demanding information and there was talk of it being driven by the tax inversion aspects ie not popular with the authorities!

Michael_P

12th Aug '15

Agreed the US authorities are making noises about clamping down on tax inversion deals which could scupper the deal. On the other hand, Pace management stated in their results a couple of weeks ago that they still expect it to go through in Q4. Arris shares and the dollar have both fallen today, but at today's prices, I reckon the premium for Pace shareholders if the deal goes through is 10% - 12% (depending on the FX rate you can achieve, and any commission/spread payable on selling Arris shares). I guess what I am thinking is that if the deal does go through at this level, it would make a good short term investment. If the dollar or Arris shares fall further, the premium may not high enough to convince Pace shareholders to sell and may need to be increased. Indeed long term shareholders of Pace may feel that even 10%-12% is not very generous. Another possibility is that the dollar or the Arris share price may remain stable or rise increasing the premium Pace shareholders would receive. On the other hand, if the deal falls through, Pace (LON:PIC) is where it was before the deal was announced, has a very low P/E , good PEG, qualifies for 3 guru screens, and has a StockRank of 96. Could it be that the number of variables involved is creating uncertainty that is undervaluing where the stock will be regardless of how that uncertainty is resolved? Disclosure: I sold at a respectable profit when the bid was announced and bought back in once the shares had retreated somewhat, although they have fallen further since.

cig

13th Aug '15

You can't really judge the premium based on a post-merger announcement price. The real premium is on what the company would be worth were it stand alone, which is not directly observable at the moment.

The market price pre-merger but post announcement will usually be close to:

T * takeover-price + (1-T) * standalone-price

where T is the probability of the merger going through (expressed as a number between 0 and 1). When T is close to 1, a relatively small discount on market price implies a much greater one for the stand alone price.

Whether that implied stand alone market price is fair value is another question, but I wouldn't trust the stock rank or screens on this one, as they're not that suitable for pricing structurally declining industries.

bargainvalue

21st Dec '15

The acquisition of the Aurora looks like a very good and profitable idea. Net profits has started to rise very rapidly after this event:

I agree, that PIC is in "boring" business, but I don't see a big threat for them in the nearest future. I have conducted an analysis of this company recently and in my opinion it is still a good investing opportunity.

WarrantStar

21st Dec '15

It now looks likely that the proposed takeover of PACE by ARRIS will go ahead. SEE RNS DATED 17/12/2015 BELOW. RECOMMENDED COMBINATION OF PACE PLC ("PACE") AND ARRIS GROUP, INC. ("ARRIS")

to be effected by means of a Scheme of Arrangement

under Part 26 of the Companies Act 2006

Court sanction of scheme of arrangement

On 3 December 2015, ARRIS announced that preliminary approval had been received from Brazil's competition authority, CADE, for its proposed combination with Pace. Final clearance in Brazil is subject to the expiration of the applicable mandatory appeals period (the "Waiting Period"), which is now expected to occur on 22 December 2015.

Pace is pleased to announce that at the Scheme Court Hearing today, the Court made an order sanctioning the Scheme under Part 26 of the Companies Act 2006 (without modification or amendment) (the "Court Order"), subject to the expiration of the Waiting Period.

It is expected that dealings in Pace Shares will be suspended with effect from 5.00 p.m. (London time) on 23 December 2015, that the Scheme will become effective on the delivery of the Court Order to the Registrar of Companies on 4 January 2016 and that the cancellation of the listing of Pace Shares on the Official List and admission to trading of Pace Shares on the London Stock Exchange will take place by no later than 8.00 a.m. (London time) on 5 January 2016.

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Why are PACE shares so cheap?

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WarrantStar

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