Carpetright

I haven't bought or sold any shares recently. My finances are in a state of flux right now, and I'm waiting until they settle before investing any more. I will have a series of cash sums becoming available over the coming months - I'll probably be investing fairly steadily from mid-August onwards.

My post today is a reminder to myself over the next few months to take a good look at CarpetRight. I took a 15-minute look today, and I like what I see:

• Strongly cash-generative.
• Strong growth possible with minimal cash requirements. They maintain high payables and low receivables, so get by with negative working capital. Provided they are prudent, that makes growth very cheap.
• They give a lot of the cash they generate straight back to shareholders - last year's dividend was a meaty 52p (on a current share price of 621p that's a yield of 8.3%).
• I think it's unlikely that carpets will start being sold online. There are big advantages to the biggest player in the market.

Lord Harris and family own about 25% of the shares. He aborted a recent offer at £12.50 per share due to funding issues. Could be a double-edged sword - I don't think he would let the company go down the pan if it got into financial trouble, but on the other hand he might look for a takeover on the cheap.

My concern would be how they would cope in a recessionary market with very few house sales happening. Carpets are presumably sold in two circumstances - when a family is feeling flush and confident, and when a family moves house. I expect both of those will be squeezed over the next year or two, hence the low share price.

I may decide to keep a watching brief on this one. It looks like a quality company, but I'm concerned that it doesn't have enough cash on the books to survive a downturn.

Portfolio review

I haven't posted a graph of my portfolio performance recently. Two reasons for that:

• Yahoo's historical share prices for Taylor Wimpey are broken, so my graph is inaccurate.
• It's down almost 30%.

Ah well. I'm sure starting my investment career in a bear market is a good experience. Here's how each of my purchases is doing, after accounting for dealing costs and dividends (all data produced by my python script):

RBS.L 2008-07-12 182.70 -- bought at 293.84p = -37.82%

BDI.L 2008-07-12 103.00 -- bought at 146.73p = -29.80%

IEER.L 2008-07-12 2158.00 -- bought at 2136.00p = 1.03%

IAPD.L 2008-07-12 1499.95 -- bought at 1587.32p = -5.50%

GNK.L 2008-07-12 427.75 -- bought at 526.06p = -18.69%

QDG.L 2008-07-12 132.00 -- bought at 150.50p = -12.29%

MXM.L 2008-07-12 125.00 -- bought at 145.79p = -14.26%

LTAM.L 2008-07-12 1354.19 -- bought at 1232.87p = 9.84%

ZRX.L 2008-07-12 7.25 -- bought at 11.42p = -36.52%

IDVY.L 2008-07-12 1815.00 -- bought at 2170.61p = -16.38%

IFFF.L 2008-07-12 1929.00 -- bought at 2176.70p = -11.38%

TW.L 2008-07-12 37.75 -- bought at 104.43p = -63.85%

The biggest losers are TW, RBS and ZRX. They're also my biggest holdings. Perhaps I should take a hint.

Some lessons to take out of this:

• Management tend to be either lie or be incompetent. Do not trust what they say.
• Leverage is very bad in a downturn.
• A low share price can materially hurt a company, e.g. by denying them a rights issue.
• A downturn can lead to a general sell-off, even of companies unaffected by recession.

I will continue to invest over the next few years; I will learn my lessons but continue to pursue value.

Taylor Wimpey - Trading Update

The big news in the TW trading update is that they have failed to agree an equity placing. That's not good.

However, they also released a market update presentation which was quite enlightening:

• After cutting costs, and freezing land spend, they can still generate cash with a 40% lower sales volume and 30% lower prices. But a lot of that will go on interest payments, which they cunningly do not mention.
• Their financial covenants are: EBITDA > 3 times interest cover. Tangible Net Worth > £1.8bn. Gearing <>

The share price is down 50% on this news. I'm not surprised. The possible outcomes from here:

• TW fail to get new equity but survive. Value ~ 250p (in the long run).
• TW fail to get new equity and go under. Value ~ 0p.
• TW get new equity on ruinous terms for existing holders. Value ~10p.
• TW get new equity on decent terms and survive. Value ~200p.
• TW get new equity on decent terms but then need a further raising. Value ~ -40p to +150p.

The odds of TW failing to get new equity has just got hugely more likely. They need new equity as a quid pro quo for renegotiating their banking covenants. Say ~£500m, and their market cap is now well below that. Pete Redfern needed to get this right first time, and he's failed.

I think there's now only a 25% chance that TW raise new equity on decent terms. Perhaps a 10% chance that they survive without needing new equity and without breaching covenants. A 10% chance that they renegotiate covenants without new equity. A roughly 55% chance of ruinous dilution.

That's not great, but at 30p I think it's well priced in. I will definitely hold, and may add more - but only after a lot of thought, and a look at their competitors.