Shares in estate agent Purplebricks (LSE: PURP) were up one minute and down the next this morning following the release of the company’s latest set of interim results, suggesting investors weren’t exactly sure what to think of the ‘progress’ made since April.
Once you wade through the waffle, however, it seems clear to me that this is one company that should still be avoided like the plague — and not simply because it was once a core holding for fallen fund manager Neil Woodford.
Stable…for now
Revenue was very slightly up to £64.8m on a pro forma basis over the six months to Halloween, with almost three-quarters of this amount coming from the UK (and the remainder from the company’s operations in Canada).
This, however, couldn’t save the former market darling from swinging to an operating loss of £1.2m for the period. Once the impact of closing its businesses in Australia and the US are taken into account, a loss of £14.1m was recorded.
As one might expect, attempts were made to accentuate the positive. Fairly meaningless numbers, such as the fact that Purplebricks had saved its customers over £150m in commission over the period, were highlighted. Relatively new CEO Vic Darvey also stated that management was “very pleased with the progress made” given the generally skittish housing market, adding that “diverse revenue streams” and 12% year-on-year growth in the average amount of money it is making per instruction had helped smooth things out.
Remarking that the business is now “stabilised” is one thing, but I think the suggestion that Purplebricks is “enjoying profitable trading” is stretching things somewhat.
Cautionary tale
Today’s market reaction might not raise any eyebrows, but it’s worth reminding ourselves just how poor an investment the company has been lately.
At the beginning of the year, Purplebricks’ shares were trading at 147p a pop. Go back to August 2017 and the very same stock was around 485p. As I type, the price is 104p.
Could this have all been foreseen? I think so.
Purplebricks is a cautionary tale of what happens when companies try to grow too quickly. As mentioned quite a while ago, it’s risky expanding into new markets when you’re still attempting to verify the business model back home.
Indeed, this desire for growth at any cost is coming back to haunt the business and beginning to impact its balance sheet. At £41.6m, Purplebricks’ cash position at the end of October was 34% less than where it stood just six months earlier (£62.8m).
Not that management seems rattled, stating that it “remains confident” of hitting its medium-term target of holding a 10% share of the UK market. Personally, I’m struggling to see a catalyst for another purple patch that will be sufficient to raise it from the 4.1% share it held at the end of October. The company’s TV ads may have grabbed attention, but so too has the fact that it charges a fee to sellers even if it’s unable to shift their property. That might be a risk worth taking when the market is buoyant, but it becomes a significantly less attractive proposition in a Brexit-obsessed, recession-fearing UK.
All told, today’s numbers haven’t changed my view on Purplebricks. I’d leave it to the traders and focus instead on finding quality businesses that can be held for decades.