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Haynes’ (LSE:HYNS) has fallen from £4 to £1.20 because Mr Market judges that there is a high probability that demand for technical information through paper or online manuals is declining and will soon be dead.
Mr Market also seems to believe that the professional business of selling digital access to technical information on 19,000 vehicles to 40,000+ garage mechanics is too small and growing too slowly to compensate for the profit falls in the consumer business.
A company rejected by the market to this degree will usually have recorded losses year after year and exhibit a deteriorating balance sheet to the point of severe financial distress.
Haynes has not made a loss, so that is one point in its favour. The question then is whether it is showing other signs of financial distress.
Joseph Piotroski has shown that value shares can be separated into categories based on the degree of, and trend in, financial health. Those value shares with high strength can be under-priced relative to their future prospects, meaning that they subsequently outperform (see my Newsletters 5th and 9th Feb 2015 for Piotroski performance results on high book-to-market ratio shares and 7th May 2015 for Piotroski factors applied to “loser” shares in a study by Ying Xiao and myself).
Let’s see if Haynes is displaying high or low financial distress in the latest half year results.
Piotroski update
The first factor is profits.
Haynes was profitable in the six months to 30th November 2015 with £0.6m operating profit and £0.2m profit after tax. Obviously, these are not impressive numbers, but are better than the year before. A Piotroski point is awarded merely for showing a profit.
Does it produce positive cash flow from operations?
Yes, so it gains a second Piotroski point. Cash flows from operating activities in six months was £2.9m.
But it spent that money on developing new products (£2.9m) and another £0.2m on property, plant and equipment. Whether you interpret these expenditures as necessary just to stand still in the market or a wise investment permitting future growth is a difficult judgement to make – and impossible for people outside the boardroom.
Note that of the annual investment of £5m – £6m on development, about £3m is spent improving the professional offering (HaynesPro). This is a ………….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
