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I bought into Tandem (LSE:TND), a bicycle, outdoor toy and furniture company, in April 2019 at 159p – see previous newsletters 3rd – 11th April 2019, 1st – 2nd July 2019. After receiving 9.49p in dividends over the 16 months I’ve now sold at 370.7p for an overall return of 139%
Normally I would not have sold given that the shares have only just crept up to a fair value range. In calmer times I might have held for a few years to receive the increased flow of dividends and share prices rises. But that attitude is only justified in a steady business environment.
My current reading of general business prospects is that we have not yet seen the worst of the impact of the coronavirus recession. Therefore, to hold Tandem shares would be to take on the considerable downside risk of the business going awry.
I know there are many people pointing to considerable growth in demand for bicycles and outdoor equipment such as gazebos, trampolines and slides that Tandem is currently experiencing. And they say that consumer demand will keep going up, so there will be good profits to come in the next few months.
While that is probably true, the share price has risen so much that a lot of that expectation is likely to be in the price already.
I could be wrong, and this share will go on to multi-bag from here. But right now, I feel easier turning yet more of my portfolio over to cash. Then I can search for and buy deep value shares when the business troubles really get going.
This is how the earnings, dividend and revenue history looked when I bought.
Tandem back in early 2019
| Basic earnings per share (p) | Dividend per share (p) | Revenue
(£m) |
||||
| 2018 estimated April 2019 | 32.00 | 4.20 | 32.5 | |||
| 2017 | 35.00 | 4.10 | 36.8 | |||
| 2016 | 16.00 | 3.90 | 38.4 | |||
| 2015 | 21.31 | 3.75 | 34.4 | |||
| 2014 | 34.82 | 3.60 | 31.3 | |||
| 2013 | 7.63 | 3.45 | 28.3 | |||
| 2012 | 13.22 | 3.30 | 29.0 | |||
| 2011 | 13.37 | 3.15 | 29.0 | |||
| 2010 | 19.60 | 3.00 | 35.7 | |||
| 2009 | 5.34 | 0.00 | 35.2 | |||
| Average (10 years) | 19.83 |
The 10-year cyclically adjusted price earnings ratio in April 2019 was 159p/19.83p = 8, almost half that of the UK stock market.
The dividend yield was 2.64%.
In the last year matters have improved considerably. Even before the boost to bicycle sales in the coronavirus crisis the company stepped up its performance. In the year to December 2019 it reported earnings per share of 40.5p, considerably above the long-term average (profit after tax of £2m on turnover of £38.8m). And that was after an expectation-matching EPS in 2018 of 32.3p
Thus, for the ten years 2010-19 the average EPS is 23.4p. At 370.7p Tandem’s shares are on a CAPE of 370.7p/23.4p = 15.8, slightly above the UK market average and no longer a value bargain as defined by proven earnings power.
Of course, if 40.5p is now the base for future growth I’m going to look foolish selling at £3.70. But, being a more cautious soul, I prefer to look at the long-term earnings record rather than pick out the best year, even if it is the most recent. Good luck to anyone who takes this risk and wins – I will not resent it, I promise.
But remember that in normal times the bicycle division was rarely profitable. This was because the UK retailers could play one bicycle importer and distributer against another to achieve low prices, especially in the mass market where Tandem plays.
Indeed, because of this Tandem drastically cut its adult bicycle volume and increased the emphasis on children’s outdoor play items such as scooters, tricycles, etc.
This summer’s boost has increased demand for bikes so much that Tandem has not been able to satisfy demand. This is likely to lead to increased margins this year.
At least, that is a reasonably assumption. But today’s trading update was more circumspect regarding sales and profits. The directors said that while “it has been a strong year for bicycles and outdoor products” and that turnover and profit for the 6 months to 30 June 2020 “are expected to be ahead of the prior year” they are not exactly brimming with confidence. They point to two problems gumming up the works:
- The high global demand for bicycles means they are difficult to get hold of. There are now long lead times when Tandem does find a supplier. And this is a message coming from a company which has been buying bicycles from Far eastern manufacturers for decades. Surely, they are in a prime spot for getting the bikes to the UK using established relationships and channels? But they’re having difficulty using contacts to demand prioritisation on shipping. Why is that? Are their relationships with suppliers actually quite poor?
- In the UK “national retailers continue to be cautious in their buying decisions.” Really? That’s not what I read in the newspapers. I heard that shops are desperate for stock – as soon as they get it, customers buy.
As a result of these issues Tandem’s “revenue fell behind the prior year during the summer period as a result of the lack of national retailer FOB orders and a limited supply of bicycles.”
What? Isn’t this supposed to be the make hay-while-the-sun-shines time for………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
