Charlie Sheen on answering a question as to why he used prostitutes - "I don't pay them for sex, I pay them to leave". And just like Charlie had a clearly defined exit strategy with women, we need a good exit strategy with stocks.
PMP has been a wonderful investment over the last number of years, despite a business that is in long term decline. However, the business is in decline and unless something major happens like industry consolidation, it's hard to see the glory days returning. So this will probably remain a business that will not grow in value and therefore has a ceiling on its valuation. I modelled a basic scenario of declining revenues of 8% p.a. (it's average decline since 2012), maintaining EBITDA margins (which is probably generous - you can't cut costs forever!) and assuming the business has a terminal value in 5 years time of 4* PBT, and discounting back at 10% I get a valuation of 75c. This number of course is based on some pretty simplistic assumptions and could of course be wrong.
But at 50c, and assuming my numbers are roughly right, the discount rate being factored in by the market is over 20%. Given PMP re-financed a bond at 6.43% p.a. plus generous terms in its favour, it looks like the equity market is treating PMP pretty harsh. While this may be all true, what is also true is the market may never want to pay up for a declining business: it could easily be 'cheap' forever, and a stock trading at a discount to valuation alone without a catalyst is rarely a good enough reason to buy at least in my experience - unless it is a huge discount.
The other issue I consider far more these days is return on my time. I would prefer to spend my time on ideas that will yield a much bigger ROI such as companies that can grow and get re-rated by the market and value opportunities that represent massive value.
Hence the reason for recently selling PMP.
Kristian
Disclosure: no position in the above name
