A company life map - the rise and fall of a hot stock

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

618

In 1997-1998 Country Bumpkin begins its buying spree in earnest. Its formula is simple:

It acquires privately-owned garden stores on a low multiple (average 4 times post-tax profits)

It rebrands and upgrades the stores, centralises administration, and looks for increases in both turnover and profitability.

Country Bumpkin's acquisition strategy is popular with investors. Why?

The company is acquiring earnings cheaply
CB's share price during late 1997 is in the 120p to 180p range. This puts it on a P/E of about 16. Or, put another way, every penny of post-tax profit it makes is valued by the stockmarket at 16p.
When it buys private businesses on a multiple of 4 times earnings, it is paying just 4p for every penny of profit that they make.
So it is buying something for 4p which, once absorbed into its business, is being valued by the market at 16p.
It is extracting benefits from its acquisitions
As soon as it brings a new businesses under its wing, CB puts it through the mill. Its financial management, stock control, marketing and staffing is made to conform to the CB model, reducing costs and improving margins. Lacklustre businesses suddenly start to make profits.

By mid 1998, Country Bumpkin's figures are:

Shares in issue: 14 million
Current share price: 300p
Market Capitalisation: £42m
Net assets: £18m
Net asset value per share: 128p

Turnover: £18m
Profits before tax: £3m
Profits after tax (net earnings): £2.01m

Earnings per share (eps): 14.3p
Price/Earnings ratio (P/E): 20.9

Your 1,000 shares, bought for £1,000, are now worth £3,000. They have tripled in value in the last three years.

Recommend Reading