“Proudfoot” is back on the ropes: a contrarian opportunity in the making, or warning of wider woes? I have followed this rollercoaster of a consultancy, Management Consulting Group (MMC), since it reversed into a London-listed shell company in 1987. Founded in 1946 by Alexander Proudfoot in Chicago, it aims to help firms “better execute their plans and strategies to deliver substantial improvements in performance and profitability.”
This should be a worthwhile business, if well-managed. While consultants’ salaries check the operating margin (last at 6%), the set-up implies low capital spending and high returns on capital employed. When industry cycles turn down, however, consultants are in the firing line for cost-cutting by clients – and project-based working means chasing new business. All this can make the stock interesting to follow, given what it reflects about wider economic trends and buying opportunities in tough times.
After Proudfoot declined in the 1990s’ recession, the plc changed its name in 2001 to Management Consulting Group as its bid to diversify. In 2007 it acquired Kurt Salmon Inc., a consultancy specialising in global consumer goods, retail and US healthcare, which in 2011 merged with Ineum Consultancy – itself spun off from Deloitte France.
Yet the French and some other European operations are being sold for a net £58.5 million, which initially looks odd when the European Central Bank has just reduced its stimulus ambitions because the economic outlook has improved.
The price looks decent enough – a full values based on 2014 profits and representing over 80% of the group’s recent market capitalisation. Kurt Salmon was bought, with a mix of debt and equity, for £62.7 million eight years ago, and some of its consumer goods and retail-oriented operations are being retained.
Mixed upshot from this sale
It concedes defeat in the 2007 strategy, where Kurt Salmon was declared “a key development…which will benefit all stakeholders”, and/or it implies Proudfoot is problematic to an extent the group must de-gear or suffer worse.
Net debt of £50 million will be eliminated and cash bolstered. More positively, if the US economy remains a bright spot then the board is correct “to focus on higher growth opportunities in North America and Asia.”
Downsizing brings risks, however. As a circa £72 million FTSE Fledgling share – with the price currently 14.5p – MMC is already off-radar for most institutions and is reducing mainly to Proudfoot, whose volatility has not married well with the expectations of a listed company. After the last recession, it tried to seize new opportunities in the natural resources boom, but these have slumped as clients fight for their own survival.
A 23 November trading update cited disappointing third-quarter performance for Proudfoot, with like-for-like revenue from natural resources clients 40% lower during 11 months of 2015. Proudfoot is expected to deliver significantly lower second-half revenue and an operating loss for 2015 as a whole.
Kurt Salmon’s business serving US retail and consumer goods (being retained) has seen slightly lower revenues and margins, although management is generally optimistic of healthy demand. It remains to be seen if they will back their words with share purchases once any restrictions are lifted.
Stock may fester at a useful discount
Investors’ likely reaction will be to see how all this settles down and – given Proudfoot’s history – also to mind the risk of staff defections and losing clients after a major change to operations. Interest may also ebb because the disposal will leave the group with no distributable reserves, i.e. no dividends for the foreseeable future.
It will be tricky to define a fair value until the slimmed-down group shows how it can perform, hence a possibility the stock could fester to a genuine discount – albeit with growing risk of a management buyout. Any offer could still be pitched at a useful premium to market price (at the time).
Mind how forecasts (in the table) have been overtaken by events and serve only as a reminder how brokers under-estimated Proudfoot’s ability to disappoint. Maybe a new generation of analysts is unaware of its history.
In October 2014, I drew attention to a shocker of a profit warning as possibly an amber light for the global economy (revenues have split 50% Europe, 43% Americas and 8% rest-of-world). Some sectors are doing well, others not, and it remains to be seen whether Proudfoot can position itself adeptly.
Near-term, the stock will be on a high multiple of earnings with no dividend or tangible assets – so even after retreating from 45p in 2011 to 14.75p it’s hard to call a bottom.
Yet the remaining business won’t have any debt and the Proudfoot/Kurt Salmon operations being retained have long histories – Kurt Salmon goes back to1935 – and are capable of flourishing. With capable management, the risk/reward profile can become useful.
Bonuses for chief executive and finance director
Reflecting how this board still doesn’t twig outside investor expectations, a 17 December shareholders’ vote on the disposal includes “transaction incentive bonuses” of £200,000 for the chief executive and £130,000 for the finance director. But it’s not as if they initiated the deal – an approach came early last summer.
Moreover, the outcome will have plenty to prove. Page 56 of the 2014 annual report shows the chief executive remunerated a total £597,007 – if down from £955,796 in 2013 – and the finance director £350,755, down from £411,346.
Total board remuneration was £2,180,520, down from £2,900,678, but that’s still a generous pay cheque, given the share price has halved since 2013!
All this triggers cynicism about some smaller companies, especially, being run for the benefit of directors. Properly, a greater element of remuneration should have been in stock. I draw attention to this cash going out of the company to directors, to consider the context of any future purchases they may make.
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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.