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This designer and distributor of toys has produced very high profits over the last decade relative to its share price, and relative to its net tangible assets. This gave Character Group (LSE:CCT) a cyclically adjusted price earnings ratio of 10.3 when I bought it in October (or 9.1 when using the earnings expected in 2020 as one of the ten years in the CAPE calculation).
The low CAPE, high dividend yield (7.9%), consistently high cash flow, strong balance sheet, good business model and good management led me to buy shares in October for my Modified price earning ratio portfolio.
Now that I’ve met the directors and carried out a more in-depth analysis of the toy industry, and Character’s strengths within that industry, I’ve bought more shares (at £3.29, MCap £70m), this time for my Warren Buffett-style portfolio.
Character has some strong product lines and an organisation capable of creating a stream of new “Top Toys” in the future. It, therefore, has some strong businesses.
The key directors each have over three decades of experience producing toys (four of them founded Character in 1991) and they work very well together as a team. They are both capable and behave honourably with respect to minority shareholder interests, even if they pay themselves rather well.
The finances of the business are arranged for shareholder safety. The spread of products brings some stability to the bottom line.
Having said that, the share price has declined by around 45% since August. This is mostly due to the announcement of cessation of the license to produce Peppa Pig plastic products in Summer 2021. It’s also because there has been a significant decline in UK toy sales.
Given my detailed analysis in October, see newsletters dated 29th Oct – 5th Nov, here I’ll concentrate on the Warren Buffett factors.
An economic franchise?
There are two main influences on the strength and durability of an economic franchise.
- Structure of the industry. The Valuegrowth investor (see my book The Financial Times Guide to Value investing – the Valuegrowth investor follows the Buffett-style approach) should look for an industry in which the constituent companies generally exhibit high returns on capital.
- The possession of extraordinary resources by a particular company. Such resources provide the ability to generate exceptionally high long-run rates of return on capital employed. If the industry taken as a whole generates very high rates of return it is sufficient for us to ask that the individual firm has extraordinary resources that allow it to at least match the others.
Industry
First, we need to define the industry. I’m not talking
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