...when the directors of a listed company start making large on-market purchases of the shares in that company, you could reasonably infer that they think the shares are undervalued, right?
Board of the company I work for are known to do this - but they've been doing it all the way down from 30c to 0.3c (yes, you read that right).
Short answer - maybe. It depends on what is happening around. Directors have been know to "pump and dump", or just "prop" a share. Sometimes it is a requirement of their position to hold a certain number of shares or sometimes their pay/bonuses are shares. All these things show up as a director buying. There are a hundred and one reasons why a director may buy shares. Not all bad but by the same token - not all good. If it is a straight out purchase with no strings attached (particularly after a share has come back a bit) it is usually a good sign (barring idiots like Goldpelican is talking about???) malachii
The shares in question are being bought by the directors' SMSFs and the share price has dipped a bit lately. PE ratio is now under 10, so I'm thinking that may have been a trigger point for the purchases and/or the directors genuinely think the shares are cheap and are going long by stashing them in their super funds. The company is listed in the ASX300 Index, so I don't think they're doing a "pump and dump" like you might see with a small cap.
Yes, director buying especially in super funds usually means the directors think the company is undervalued. However directors aren't always right in their assessment, but they are right more often than not. Let me guess you are talking about Customers (CUS). I think in the long term the margins in the ATM business will eventually be squeezed due to increased competition. I could easily see fees being charged dropping from an average of $2+ per transaction to $1 per transaction, meaning a huge margin reduction.
Yes it is CUS. I don't see fees going anywhere except up (mainly because they're already trending upwards), they're about to move into New Zealand and they've got a share buy-back in place to spend surplus cash on.
Big A.D. what do you think about the recent rash of companies offering investors the opportunity to own their own atms. They seem to be promising high returns without the investor having to lift a finger. The ATM deployer does all the work, while the marketing company acts as a middleman between the deployer and the investor. The problem I see is that a lot of the companies offering this service to investors seem rather shady to me. Look at MyATM (MYA) for instance which listed on the ASX this year. It has a market cap of under $3 million and its share price has already halved. Also the float kept being delayed and it had to reissue its prospectus several times and make changes to the board because of concerns raised by the ASX, regulators, and the investment community. Do you think there are any reputable companies offering this service to investors that you would personally consider? You know more about this industry than me so I would be interested to hear what you say. Also if every man and his dog buys an atm the prices per transaction and therefore the returns will have to drop. Big A.D. just because ATM fees are trending up in the short term doesn't mean they will go up or even be maintained in the long-term. 'It will go up more because it's already going up' is a very weak argument and your definitely smart enough to realize that. The share buyback and the move into New Zealand both probably make sense but the questions of potentially approaching market saturation (maybe another 2-3 years?) in Australia and increased competition eventually (on a 5 year view) putting downward pressure on prices and margins haven't yet been answered.
I actually can't say much about specific companies in public because in some cases there would potentially be an issue with defamation. I'm aware of some of the newer business models that have been brought out, however I personally wouldn't invest in them. If you compare MYA to CUS you should be able to see some important differences between how they both operate (and the $182 million difference in market capitalisation) and I would say the traditional model CUS operates under has been used successfully since the early 1990s when the first non-bank ATM was installed in Australia. Fees have gone up here and in the U.S. and Canada where the industry has been deregulated for a long time. Market saturation here won't be reached for another 5 years at minimum and for companies like CUS, it won't necessarily affect their ability to remain profitable anyway since they've already begun operating machines for smaller banks (like BoQ) who want to outsource their ATM networks. Once you start subcontracting for banks, you're dealing with major, vertically integrated infrastructure and a lot of doors open up, particularly in growing Asian markets.
I don't think its fair to say Customers (CUS) has been successful since the early 1990s. I you have a look at their track record they had many years were they lost money.
Actually it was the business model that has been used since the early 90s, not Customers - prior to about 2002 CUS were a mining company. After that they were acquiring ATM networks before the system was deregulated in 2009 and they're now the biggest non-bank ATM network in the country. There are a number of successful and profitable ATM companies out there that use traditional business models to generate revenue.
Hey Big A.D. care to give us an update on the situation with Customers and its recent profit downgrade. It seems the directors have been caught off-guard by developments, or else they wouldn't have been buying shares over the last few months. Are you buying more? Are you selling?Or are you holding? Do you think the outlook for the company has changed? I also noticed that Thorney (an investment trust run by a savvy investor Alex Wieslitz, the son in law of the now deceased Richard Pratt. There is a chapter devoted to Mr. Alex Wieslitz in the book Masters of the Market) has recently increased their position, but Hunter Hall has decreased their position since the last time they updated the market.
Well, their PE ratio is now at around 6 so if you're a value investor you'd probably jump on them. TBH, I wasn't really surprised by the profit downgrade and I won't be surprised when another hundred or so companies also issue profit downgrades for the same reasons CUS cited. No, I don't think the long term outlook has changed much at all.
Well I think even value investors (i.e. people like me and I'm guessing also you) should be cautious about jumping into seemingly undervalued situations after a profit downgrade. Supposedly temporary situations have a nasty habit of lasting far longer than expected and you could get caught in a spiral of endless downgrades like Aristocrat, Downer EDI, Leighton, etc if your not careful. I think after a downgrade it's better to wait until the company next updates the market to see if it is again on a solid footing. I personally wouldn't be rushing in just yet. I'll be interested to know what action you decide to take (i.e. sell, hold, or buy). There is some wisdom in the old saying that "downgrades come in 3's". Also you will often get a buying opportunity if your patient as stocks often drift lower after a downgrade. If the next result/market update is favorable the stock will rally slightly but it often takes a number of consecutive favorable results (speaking from experience) for the market to really start trusting the company again (i.e. expanding the p.e. ratio). It is this point which usually presents a buying opportunity. In other words its often wiser to buy on the early signs of a turnaround in performance rather than immediately following a downgrade.
Your guess would be correct and if you were interested in the company it probably wouldn't be a bad idea to wait a few weeks or months and see what the trend is. I really don't like to "talk my book" which is why I've never said whether I own shares in CUS and as I mentioned before, I have issues in talking publicly about some companies as well. If I was an informed spectator, I'd say this one has good long term potential.
