Luxury watch retailer Hour Glass Ltd (SGX: AGS) has been a wonderful long-term winner in Singapore?s stock market.
Since the start of 2005, shares of the high horology outfit has surged by 743% in price to S$0.85, significantly outpacing the 59% return that the Straits Times Index (SGX: ^STI), Singapore?s market barometer, has generated over the same timeframe.
But that is then and this is now. What can Hour Glass do for its investors going forward? For help with answering this tough question, we can take a look at the quality of its business, keeping in mind the idea that a…
Luxury watch retailer Hour Glass Ltd (SGX: AGS) has been a wonderful long-term winner in Singapore’s stock market.
Since the start of 2005, shares of the high horology outfit has surged by 743% in price to S$0.85, significantly outpacing the 59% return that the Straits Times Index (SGX: ^STI), Singapore’s market barometer, has generated over the same timeframe.
But that is then and this is now. What can Hour Glass do for its investors going forward? For help with answering this tough question, we can take a look at the quality of its business, keeping in mind the idea that a stock’s long-term returns are ultimately driven by the performance of its business.
A checklist for quality
To have a rough grasp on the quality of Hour Glass’s business, we can turn to a nine-point checklist that was developed by investor and author Pat Dorsey.
The checklist, which was shared in Dorsey’s book The Five Rules for Successful Stock Investing, was meant to help investors quickly sieve out companies that are worthy of a deeper look.
Here are the nine criteria:
- The firm provides regular financial updates, has a long track record as a publicly-listed entity, and has a market capitalisation that isn’t too small.
- It has consistently earned an operating profit.
- It has generated consistent operating cashflow.
- The firm earns a good return on equity.
- It has been able to grow its earnings consistently.
- It possess a clean balance sheet.
- The firm can generate lots of free cash flow.
- There are infrequent appearances of one-time charges.
- There has not been major dilution of shareholders’ stakes in the firm.
A company that has a positive response to most or all of the nine points would mean that it’d likely have a quality business which can stand the test of time. If you’d like a deeper look as to why these criteria make sense, my colleague Chin Hui Leong has a good three part series explaining just that: Part 1, Part 2, and Part 3.
With that, let’s see what the checklist can tell us about Hour Glass.
Hour Glass, as mentioned earlier, retails luxury watches and it does so through 38 of its namesake as well as brand-specific boutiques across the Asia Pacific region. It went public in 1992 (that’s more than 17 years ago), carries a market capitalisation just north of S$600 million currently, and has quarterly earnings releases; these traits would give the company a thumbs up for the first criterion in the list.
Meanwhile, Hour Glass has had a commendable track record in consistently generating operating income, net income, operating cash flow, and free cash flow over the past decade (see Chart 1 below). It’s also worth noting that the firm’s operating and net income have been climbing upwards strong and steadily over the years.
With that, the company would also deserve a positive response for criteria 2, 3, 5, and 7, though investors might want to watch the firm’s operating cash flow and free cash flow as they have been somewhat erratic.
Source: S&P Capital IQ
Moving on, we have Chart 2 which plots Hour Glass’s returns on equity and balance sheet figures from the fiscal year ended 31 March 2005 (FY2005) to FY2015. The luxury watch retailer has had a great balance sheet for the most part with the level of cash far exceeding debt. Meanwhile, it has also managed to generate a respectable average return on equity of 13.9% over the timeframe we’re looking at.
These traits would let the firm tick the “yes” boxes for criteria 4 and 6.
Source: S&P Capital IQ
We’re down to the last two criterion on Dorsey’s checklist and the 8th point is where Hour Glass may have hit a snag. In FY2009, the company suffered a S$14.1 million impairment loss in an investment it had made in a company called Gems TV Holdings. That’s a big amount and though Hour Glass has not logged frequent “one-off” charges since, it’s still enough of a blemish, in my opinion, to warrant a negative response to criterion 8.
Source: S&P Capital IQ
Chart 3 above shows us how Hour Glass’s share count has changed since FY2005. Over the timeframe under study, Hour Glass’s outstanding shares have inched up by just 0.8% annually and so, there hasn’t been any major dilution to shareholders that have occurred over the years.
A Fool’s take
If we tally up the scores, we’d see that Hour Glass has been up to mark with eight of Dorsey’s nine criteria. This doesn’t mean Hour Glass will necessarily be a good investment though – as mentioned earlier, Dorsey’s checklist is meant to help narrow the field and not to pick investments.
With Hour Glass, there are also some important risks to consider. For instance, as Chart 4 below shows, the company’s current valuation – as measured by the PE ratio – is near the upper end of its range over the last five-plus years.
Source: S&P Capital IQ
Then, there’s also the issue of succession to ponder. Hour Glass’s current Executive Chairman, Dr. Henry Tay, has been in his position since October 1987. He has done a fabulous job leading the firm over the years, but he’s also 71 years old now. Are the next generation of leaders in the firm up to par? This can be an important factor in determining Hour Glass’s future.
All told, investors would have to dig deeper into Hour Glass and weigh the risks and rewards before any investing decision can be made.
There's more to talk about when it comes to quality businesses and if you're interested to do so in person, you can come meet David Kuo and the rest of the Fool Singapore team on August 15!
In the meantime, if you'd like more investing analyses, insights, and important updates about Singapore's stock market, you can sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. To follow our latest hot articles, you can like us on Facebook.
The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.