Shares of YouGov (LSE: YOU) are trading modestly higher at 214p in early trading this morning after the company posted annual results ahead of consensus expectations.
There’s an accounting matter — a perennial concern for some investors — that I’ll come to shortly, but let me say at the outset that I believe YouGov is a quality business with tremendous growth prospects.
Credible adjusted earnings?
Revenue for the year came in at £88m, 16% ahead of last year. Growth at the group’s higher margin data products and services businesses is racing ahead of the traditional market research division, and adjusted operating profit climbed 27% to £10.9m.
Adjusted earnings per share (EPS) increased 26% to 8.8p, but statutory EPS was just 3.3p. Behind this wide difference lies the accounting matter I referred to. To cut a long story short, YouGov’s always-elevated adjusted EPS reflects a high level of capitalisation of internally-generated intangible assets (an area open to manipulation), which may indicate over-aggressive or even fraudulent accounting in some cases.
However, in YouGov’s case, management is fairly transparent about its intangibles, I see no other ‘red flags’ to give me cause for concern, and I’m happy with the acid test of cash generation. For example, since YouGov started paying dividends during 2013, it’s distributed £2.9m in cash to shareholders, while cash on the balance sheet has more than doubled from £6.7m to £15.5m.
As such, I’m satisfied that valuing YouGov on its adjusted EPS is credible, and that the price-to-earnings ratio of 24.2 makes this an attractive buy for the level of growth on offer.
An undertaking of great advantage?
Shareholders of YouGov have enjoyed a rise in the company’s value from around £70m to £222m over the last three years. Investors in Tungsten (LSE: TUNG) have suffered almost the exact opposite.
Tungsten was founded in 2012 “to identify and acquire a company, business or asset within the financial services sector which could be grown into a business with a significant market presence in a segment with potential for sustainable long-term cash generation, return on equity and growth.”
A bit vague but nowhere near as vague as the enterprise which, during the South Sea Bubble of 1720, famously advertised itself to investors as “a company for carrying out an undertaking of great advantage, but nobody to know what it is.” Tungsten — by the time of its stock market flotation in 2013 — had at least lined up acquisitions of a lossmaking e-invoicing firm and a small bank, with the idea of transforming the former by offering invoice discounting through the latter.
Things haven’t gone well and the market value of the company has fallen from £225m at flotation to £68m at a current share price of 54p. Tungsten says it processes annual transactions worth over £133bn, including invoices for 70% of the FTSE 100. But it generated revenue of just £26m last year, of which a mere £194,000 came from invoice discounting. It made a loss of £28m for the second year running.
Unfortunately, in the absence of evidence that Tungsten is carrying out an undertaking of any greater advantage (to investors) than we’ve seen so far, I can only rate the shares a sell.