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Part 1 of these CAKE Blogs can be read here:
CAKE issued ‘Preliminary Results’ for the Year ending 30th September 2016 back on the 29th November 2016 and you can read it here:
The bits that stand out to me are as follows:
Something perhaps not so positive (ha ha, what am I on about, this really is a negative !!) is that “(CAKE) - owner of Patisserie Valerie - doesn't report like-for-like sales figures because "they're a bit meaningless", says chief executive Paul May” which is text from an Investors Chronicle review. Personally this doesn’t upset me too much (well, not enough to put me off CAKE on its own) but it does run the Risk that Trading could be deteriorating and it might not be immediately obvious from Headline Numbers.
To cheer us up, the IC write up also includes this bit “Bosses are still planning on doubling the number of Patisserie Valerie sites, so there's a clear view of the growth plan.” This is the kind of Target I like to see and it reminds me of Dominos Pizza DOM years ago saying “we want 500 Stores”……..
There is a certain serendipity about me writing this bit - it is giving me unusually pleasant FlashBacks to when I was lying in Bed back on the Morning of 29th November 2016 and reading these Results on my 7” tablet at about 8.30am - the overwhelming memory is just how impressed I was back then when I was looking through the numbers and the words. I knew there had to be a good reason why my Gut was telling me that CAKE really needed proper investigation - and not just because I love Cream Slices…….
Further Information on Baker & Spice
‘Asagi’ on the Free ADVFN Bulletin Board for CAKE (if you are not a subscriber/user of ADVFN.com then get yourself on it because it is Free and extremely useful - the App is excellent) gave the following info about Baker & Spice and also the possible Maison Blanc transaction (huge thanks mate !!):
“Patisserie Holdings only owns the rights to Baker & Spice in the UK. So that rollout cannot go international. And it only 'works' at very few locations because of the high price point. I've visited though and it's great!
Philpotts and Druckers are much lower margin. It's 'all about' Patisserie Valerie. That's why Maison Blanc matters. The biggest challenge that Patisserie Holdings face is finding suitable new sites. They want to open 20 a year. Acquiring Maison Blanc would achieve much of this. Save loads of time. Maison Blanc seems to still be on the block. Could they be arguing with vendors over how many sites to take? The Trip Advisor reviews for Maison Blanc are catastrophic.
Asagi (long CAKE)”
Ah, we finally have got to what is probably my favourite bit - well, at least it is a part I think is extremely important although many People see Valuation as unimportant and inaccurate. For me it is quite simple - I know for a 100% fact that my own Investing improved almost overnight by me understanding Valuation and I love the way in which it tends to steer me into ‘Cheap’ Stocks (“Buy low”) and to keep away from overvalued, ‘Expensive’ Stocks (“Sell high”) - as well as helping me time my Sells.
The ScreenShot below is from the classy ShareScope Software that I use to monitor/manage my Stocks. If you look in the Top Right Hand Corner, you should see ‘Norm EPS(p)’ for ‘Sep 2018 Forecast’ of 18.37p. At the Closing Price today (Friday 24th February 2017) of 328p (this is the Mid Price not the Buy or Sell Price - it is sufficient for our purposes), this gives a Forward P/E Ratio (Price to Earnings Ratio - the standard and simplest Valuation method) of 17.9 (328p divided by 18.37p).
This number can be tweaked a little because CAKE has a chunk of Cash worth about £13.3m at the Year End (I got this from the Preliminary Results RNS) which is equivalent to roughly 13p per Share - so we can rework the Forward P/E Ratio after stripping out the Cash as 17.1 (328p minus 13p divided by 18.37p).
This is not something I would call particularly cheap, however, CAKE is a Growth Stock and needs to be considered in the light of the Growth that Shareholders are likely to be able to take advantage of. To understand if this is decent Value, we need to calculate the PEG Ratio (Price/Earnings Ratio divided by the Growth Rate of Profits). I have used a Calculator (I tried with the Abacus but I kept getting confused with all those beads) to establish that the Growth Rate of Profits over the Periods 2015 to 2019 runs as follows: 18%, 15%, 16%, 9%.
I have used the ‘Pre-tax profit (£m)’ numbers from the Top Right Corner of the Screenshot and these include a mix of Actual Historic Figures achieved and Forecast Figures which Analysts expect. Going forwards, I think it is fair to say that the Growth Rate is roughly about 13% and if we use this figure in the Forward PEG Ratio, we get a figure of 1.3 (17.1 divided by 13%). The conventional view is that a PEG Ratio below 1.0 is cheap and anything above is getting more expensive but I would say a PEG of 1.3 is probably ‘Fair Value’ - in other words it is not Cheap but it is not really Expensive either.
Note: I NEVER use published P/E, Dividend Yield, PEG numbers etc. - they are rarely if ever correct (and it is impossible to know what basis they have been calculated upon) and I always go back to the raw data and calculate them myself.
Now, we have some scope to tweak these numbers, but I won’t do that here - I will just point out the following factors that could influence these Numbers and Readers can make their own minds up about how to adjust the Numbers I have used to come up with the Forward P/E and Forward PEG ratios:
In terms of the Dividends, if you look at the Line called ‘Dividend (p)’ for ‘Sep 2018 Forecast’ there is a figure of 3.911p. On the Price today of 328p, this gives a Forward Dividend Yield of 1.2% (3.911p divided by 328p multiplied by 100%). The next year, 2019, it is expected to rise to 1.4% - I’ll let you work that one out !!
These are by no means massive Dividends but they seem to have a ‘Progressive’ Dividend Policy (which means it should rise each year) and it is a good discipline on the Directors to ensure Shareholders get some reward each year. With a nice chunky Cash Pile (£13.3m at Year End and probably higher by now), they should be able to afford to pay out a Divvy even if they have a difficult trading period (which is almost inevitable at some stage in CAKE’s future).
There are in effect 2 factors which make a Share Price rise - firstly it is the Earnings Progression whereby for a static P/E Ratio, the EPS rises each year and that drives the Share Price up. For example, if we assume a Static P/E of 15 for ‘My Imaginary Stock’ which is due to do 23p of Earnings per Share this year, then the Share Price will be 345p (15 x 23p). If we then imagine that ‘My Imaginary Stock’ does 26p of Earnings the following year, then on a Static P/E of 15, the Share Price will be 390p (15 x 26p).
Hopefully you can see how even with a Static P/E Ratio, the Share Price can steadily rise up over coming years provided that the Earnings Per Share rise.
The other way in which a Share Price can rise is by ‘P/E Ratio Expansion’ - and this is my favourite !! In the example I have already used, let’s start off with the same Earnings Per Share of 23p and the same P/E of 15 - so the Share Price starts the same at 345p. Let’s then assume the same 26p of Earnings per Share the following year, but this time say the P/E has Expanded to 18 - so now we have a Share Price of 468p (26p x 18). See how the Share Price is now significantly higher although the Earnings per Share is the same?
So in essence there are 2 ways to get the Share Price up - rising EPS and P/E Expansion. Now, my utterly favourite thing on the planet is when we get the beloved ‘Double Whammy’ where we get EPS growth AND we get P/E Expansion - this accelerates the Share Price up with some gusto. I love it when I can buy a Stock on a P/E under 10 and see it get re-rated over time to maybe a P/E of 20 against rising Earnings Per Share - this gives huge gains.
On the flipside, this is why Share Prices can utterly fall off a cliff. When there is bad news, it usually means that Earnings Per Share REDUCE over time but also we get a P/E Ratio Contraction - if you think this through you will see what I mean (do an example on paper yourself like I did above). Now we get a Negative Double Whammy - and we really don’t want none of that nonsense.
P/E Multiples (this is another word commonly used for Ratios) can expand over time as Buyers get more confidence in a Company/Stock and they drive the Price higher - this is in the expectation that Earnings Growth will be stronger in the future or that it might be more reliable or stable or something. This is often called a ‘Re-rating’ of the Stock.
Anyway, where the hell was I going with all this? Ah, Targets. Right, if we assume a Static P/E Ratio of about 17 and look out to maybe 4 or 5 years time, it is not hard to envisage CAKE doing Earnings per Share of about 25p (I am being quite generous here but I always like to set High Targets because it keeps me in the Share and stops me selling - something I bang on and on about is the crucial importance of ‘Running your Winners’ and I have no doubt that one of the biggest mistakes I made repeatedly in the past was to sell great Stocks too early), this would give a Target a few years out of 425p (17 times 25p).
Frankly, I think this Target is way too light because in reality, if CAKE continues to make steady progress (I think it should be able to and for me this would be a Long Term Investment) then a bit of P/E Expansion would be realistic and if we run the potential of 25p EPS on a P/E of 20, then we get a Target of 500p (25p times 20). Against today’s price of 328p, this would give Potential Upside of about 52% over maybe 3 years - not stunning by any means, but maybe worth going for. There would also be some small Divvys on top.
In practice, if I was to Buy into CAKE, I would probably be buying Chunks over time and if there are short term issues, maybe the Price could be back down around 250p at some time and this would give the opportunity to buy cheaper.
As I always say on this stuff, it is ‘Best Practice’ to start with the Longer Term ‘Big Picture’ view - so here is the longest Chart I can do on CAKE going back to when it IPO’d in 2014 (as usual this Chart is from ShareScope). Probably the most important line here is the Black Line at the bottom marked with my Black Arrow - this should act as Long Term Support and if we see any weakness, then it should be able to bounce down here and there is clearly a Strong Zone of Support around 250p to 290p ish.
At the top we have a Horizontal Red Line (marked with my Red Arrow) which is the All Time High level up at 472p and I would expect this to be a very difficult Resistance Level to get over - if it can ‘Breakout’ however, that would be a very bullish development but I suspect we are some years away from this. This is also linked to the ‘Targets’ I talked about in the Section above - 472p lines up nicely with the numbers I mentioned there so it would probably be a good Target to aim for.
My Green Line shows a Downtrend which was in place from about Early 2016 to December in 2016 when the Share Price broke-out of this Downtrend Line where my Green Arrow is. This is Bullish and of course back at the Breakout Point was a good time to have been buying the Stock.
The Chart below Zooms in and the Green Line is still the same one from the Chart above. The most exciting thing here for Holders of CAKE (and of course it means an Uptrend for Fresh Buyers and we always want to be buying into Uptrends and avoiding Downtrends) is a Bullish ‘Golden Cross’ between the Dark Blue Wavy Line 50 Day Moving Average and the Lighter Blue Wavy Line 200 Day Moving Average - I have marked this Cross with the Pinky sort of Arrow. Once you get a Golden Cross of this ilk, it usually means many Months of Gains to come - but of course with Charting, nothing is 100% guaranteed - I am just showing the ‘Path of Least Resistance’.
Allied to this Golden Cross we have a new Uptrend Channel which has been formed since the Breakout of the Green Downtrend Line - I have showed this with the Blue Parallel Lines. Holders of the Shares want them to stay inside this Channel or to breakout above (dropping below out of the Uptrend Channel would not be good news for Holders of CAKE).
Also note there is quite a bit of Resistance up above around 360p to 380p where the Shares traded back in April / May 2016 - this could be a difficult area to wade through. Also the Share Price is currently at the Dark Blue Wavy Line 50 Day Moving Average - this should act as Support. If this level fails, then the 200 Day Moving Average down at around 310p should act as Support.
Normally when I write a Blog about a Stock I have a Holding in it myself, at least as a small ‘Pilot’ Position. However, in this case I do not hold any CAKE shares, simply because I am trying to be disciplined to get myself down to the fictional ‘WD40’ and am being strict with myself (don’t panic, there are no whips involved or Nazi leather gear).
I did this Blog for a number of reasons - firstly I have been very keen on CAKE for some time (my mum would say I have been a fan of CAKE from a very young age - usually with a cup of PG Tips - other Tea Brands are available), and I wanted to do a thorough investigation to understand the Business in depth; as you know that is always how I do things. In this case I am really chuffed that I have taken the time to do this because it has opened my eyes to many aspects of CAKE that I had not seen before particularly around the Bakery businesses and the full history of Luke Johnson - I like what I see.
The other big driver for this Blog was that I know Readers like it when I do these because they are hopefully a big help with Research for you Peeps, and I had got a bit bored of doing the ‘Educational’ type Blogs and I wanted to mix things up a bit. I find that the Individual Stock Blogs also give the whole WheelieDealer thing a lot more exposure and I tend to gain a lot of new Readers and Twitter Followers as a result - this pleases me immensely because even though WD is and always will be ‘Free to Air’, like all Artistes (come on Wheelie, you are really stretching it there mate !!) I like my ‘Artwork’ (oh, for goodness sake) to be suffered by as large an audience as possible.
Anyway, I really like what I see here and in particular the Slide Image above paints a lovely story of growth and that is what really gets me excited. I am very much a fan of Diversification across my Portfolio and that is not just in terms of Sectors and Market Cap sizes etc. but also in the ‘Investment Style’ and I often feel that I am light on Growth Stocks and so CAKE would fit the bill of bringing in another Growth play.
Having said that, I think CAKE would make a good Long Term Hold with a view to be in for perhaps as much as the next 5 years - I can’t see it doing much in the immediate Short Term because on a P/E of 17 there is not much scope for P/E Expansion although an event like CAKE buying Maison Blanc might get Analysts to up their Forecasts and drive the Share Price up as a result. However, it is never just about the Company and it’s valuation etc., I like to also consider how it would fit in with the rest of my Portfolio and to a large extent it is quite different to anything else I am holding - although I do have a number of Retailers which might share some of the same drivers.
Due to the Cash Generative nature of CAKE, it is possible that there are Special Dividends in the future if they do find they have more Cash than they need for their Expansion Plans - this is of course not certain, but I think it is very possible. In addition, CAKE Directors have stated their aim to double the numbers of Outlets they have - if they can achieve this (it may take many, many years) then it seems likely the Share Price could be considerable higher - simplistically perhaps it could double or more with patience.
As I mentioned in the ‘Valuation’ Section, the Price is pretty reasonable now although not a stunning bargain and I am hoping that it can stay down around this level (or even better get cheaper) so that I can initiate a Position once I have a spare ‘Slot’ in my Portfolio and I have the Cash Firepower to get stuck into some CAKE. I got lucky with 32Red TTR this week and should get a pile of Cash from that one soon and I should also get the Dosh from the NPT takeover - so in a few weeks I expect I will be in a position to make my move on CAKE - of course this assumes that something else hasn’t taken my fancy by then !!
I hope these Blogs have been useful,
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