Stockwatch: Two stocks with change at the top

CEO exits can be tricky for investors to interpret. Our companies analyst examines two recent cases.

How can investors discern positive from negative when a company announces its CEO is stepping down?  An adage says: “the chairman exists to fire the CEO” i.e. when not up to the job, but it could just as simply be the need for a fresh perspective.

Such announcements can be tricky to decipher whether a director is going of their own will, or being pushed. It could be by mutual agreement if the role isn’t working for both sides. Whatever, you must quickly get a grasp – likewise if it’s the finance director – because it can mean the company/share price is entering a more difficult period.

Pretty much all you can do is weigh the corporate context versus the nature of the dismissal: whether it’s managed or abrupt. Has this incumbent run out of fresh ideas?

At Moneysupermarket.com (LSE:MONY), a mid cap that’s one of Britain’s largest price comparison websites, its chief executive “wishes to step down and pursue his career in a new direction”. I would say this is amply more positive than if Wednesday's RNS said “has agreed to resign”.

No date has been agreed but the incumbent wishes to ensure a smooth transition, during which time he will be fully engaged.

I do, however, see the departure as symptomatic that Moneysupermarket has matured as a business: price comparison websites have got more competitive and they are all struggling for a new angle beyond tempting us to switch energy, insurance and current accounts.

Hardly a game-changer for the industry.

A wary view of Moneysupermarket would be that its CEO of three years can’t identify change enough to make a difference, thus prompting desire for a new career direction.

So the stance on MONY is mixed: overall a “hold” given its circa 4% ordinary dividend yield but growth investors will want to weigh up the new boss and their plans.

Four special dividends have been paid out in the past but given that these were 2013 and earlier I wouldn’t assume anything.

This stock’s heyday was 2010 to end-2015, during which time I drew attention several times for capital growth and income, from 145p when it yielded 5% in October 2013. Since 2016, however, it has traded in a volatile-sideways consolidation that breached 400p last June but then drifted down to 310p just prior to the 2019 prelims announced yesterday.

The table shows earnings growth moderating progressively from a mid-30% rate to mid-single digits — affirmed also by yesterday’s results. Yet a steady recovery through the day near 370p suggests the stock became over-sold relative to a quality yield.

It may only be around 3.5% going forward though, after yesterday's price rise.

The company/CEO may be doing as well as is possible to get net profit up 10% to £94.9 million on revenue up 9% to £388.4 million; the operating margin rising from 20% in 2013 to over 30% by 2018 and 30.5% for 2019.

Basic EPS rose 9%, albeit adjusted EPS by 5%.

“Overall dynamics have improved in the first six weeks of 2020…the board is confident of delivering market expectations for the year.”

Yesterday’s 19% rise in the stock needs context, being only mid-way its consolidation range, though to establish a new growth trend over 400p probably requires “something new” c/o another CEO. That’s how I regard the situation – nothing worse – around his leaving. Hold.

Stepping down “with immediate effect” is more disconcerting.

At AIM-listed Angling Direct (LSE:ANG) – the UK’s largest fishing tackle retailer – it was announced on 7 February, the CEO of 17 years was doing so. In itself the announcement seemed unproblematic, saying he would stay on as a non-executive director which rules out any recent boardroom bust-up.

While it doesn’t tick corporate governance rules for NEDs to be “independent”, it’s a sensible arrangement for a founder CEO.

Joining dots with an 18 February pre-close update for the year to end-January leaves me uneasy though. In the context of Angling Direct listing three years ago it begs questions how some of the overall £29 million raised has been applied, given the business is modestly loss-making and faces a plethora of challenges for 2020 onwards.

The company has flagged a classic “weather” excuse – though admittedly flooding must have halted much angling – for a post-Christmas hit. My guess is the coronavirus must very soon be interfering with sourcing product from China, and continued uncertainty over any trade deal with the EU begs questions for UK-owned websites selling to Europe.

On consideration of the update I’m not surprised how a more seasoned retail boss, who joined last October as a non-executive director, has stepped up to become CEO.

New CEO does at least have something to work with

Angling Direct has achieved a 12% like-for-like annual increase in shop sales within a 41.3% overall rise to £27.9 million helped by new openings. Group revenue is up 26.5% to £53.1 million, helped also by a 13.3% rise in online sales to £25.2 million.

So there’s a decent balance between stores and online, website sales being leveraged in Germany, France and the Netherlands by 24.6%, 70.9% and 86.7% respectively (low arithmetic bases likely helping).

What’s odd however is total international sales rising by only 7.6% to £5 million, for 19.9% of total online sales, as if a falling short elsewhere needs clarifying.

The update also cites margins compromised in the last year by needing to clear stock in acquired stores, although a margin recovery is promised henceforth.

Together with demand for higher-margin consumables hit by the post-Christmas flooding, the year to end-January 2020 will see a pre-IFRS 16 EBITDA loss around £500,000.  You wonder how the headline loss will pan out.

End-January cash of £5.9 million compares with £13.5 million a year before, and £20 million raised via a placing at 92.5p with institutional investors in October 2018.

Presumably they were sold the story like I understood it: to leverage profit by rationalising a fragmented industry of smaller stores, adding website sales. Yet the stock is down around 40% to 60p with the business looking somewhat on the ropes.

New CEO claims the business is sound/promising

I’ve previously rated Angling Direct an “Avoid”, or to buy if the stock was to weaken from a demanding PE. I have new concerns, and it looks like a challenging year during which we’ll see what the new CEO, Andy Torrance, comes up with.

His background includes chief operating officer roles at Dunelm (LSE:DNLM) and Holland & Barrett, as well as a number of executive positions during a 12-year period at Halfords (LSE:HFD).

His current pitch is to credit Angling Direct’s founder/team with doing “an excellent job at rapidly building our brand, both online and through store expansion.

He said: “I look forward to consolidating that base and leading the business into the next phase of our exciting growth plans.” Shareholders can take encouragement from this but with fresh money and the stock well above last July’s net asset value of 42p a share, I’d wait to see what evolves. For now: Avoid.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.