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I’ve bought shares in Tandem Group (LSE:TND) for my Modified price earning ratio portfolio at £1.59. At this price its market capitalisation is 5.03m shares x £1.59 = £8m. This company has been on a roller-coaster ride over the last 25 years, with its shares barely higher today than in 1996. But there are reasons to believe that the business is now on a firmer footing and will flourish in the future, even if we do need to remain vigilant and on the look-out for reversion to its old bad habits.
If there is no future growth for Tandem, and profits are stuck at the same level as the average for the last 10 years, the shares stand at low price. Even with this conservative assumption there are good reasons to expect the market to reappraise them, not least because they stand on an earnings yield of 20% based on 2018’s profits, or 12.5% based on the average earnings over ten years. If profits do rise over the next few years then there is the possibility of it being a multi-bagger.
Naturally, a company (i.e. the managers) which has disappointed so often in the past might do so again. Many strategic, acquisition and tactical errors have been made before; and the same managers who guided the firm toward those errors are still in place today. That said, so long as the error rate is no worse than that of the last ten years, the shares are under-priced. And it could be that the error rate in the future will be much less than it has been.
What it does
A few years ago, Tandem derived most of its total turnover (£30m or so) from importing low to medium price-range adult bicycles from the Far East and flogging them to the major bicycles chains and independent retailers across the UK.
Power resided with the retailers and therefore there were periods of very poor profits in bicycles. In response, the directors significantly reduced the size of this part of the business so that it now accounts for a mere one-fifth of sales.
The other four-fifths of sales come from selling items such as children’s branded bicycles (e.g. Peppa Pig), selling mobility scooters to those at opposite side of age range, and selling a wide variety of other stuff, from garden slides and football goals to gazebos and golf bags.
Again, these items are imported from the Far East, often after design input from people at Tandem’s head office in Castle Bromwich.
Summary of my findings (to be explained in more detail in newsletters over the next few days):
- 2018’s earnings per share, EPS, are 32p (based on Trading Statement, to be confirmed soon)
- Average EPS over 10 years is 19.83p, putting the shares on a cyclically adjusted price earnings ratio of 8
- Profits produced in each of the last 10 years
- Dividend per share 4.2p. Dividend increased every year of the last decade (average growth rate 4.3%)
- Average profit after tax over last 6 years: £1.2m
- Piotroski score: 8/9, indicating very low financial distress risk
- Good profit and cash flow
Cyclically adjusted price earnings ratio
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