Don't bend the rules!

DCD Media.

How long have I held shares in this media company? Too bloody long is probably the correct answer. Certainly from when its name was Digital Classics, and the shares were about £1. I’ve topped up all the way down to its relatively recent nadir of 7p. Ouch!

What’s the expression? “A man who never made mistakes, never made anything”.  I have certainly made many errors of judgment here. What is slightly irritating is that I shouldn’t have.

 I’d had some very early successes with applying my criteria for ‘value’ investing. In short, I got ‘cocky’ and thought that I could keep bending those criteria, even when it was clear that they didn’t fit. It was at this time that I also started posting on the ADVFN bulletin boards, and arrogantly dismissed and argued with the skeptics out of pure bloody mindedness. Blindly I ignored my own misgivings, and even argued in defence of ludicrous management decisions which proved to be disastrous, and could have led to DCD’s complete collapse.

When I originally invested, Digital Classics was a small company that had a decent looking balance sheet, but assets were largely intangibles and goodwill. When valuing a company I always strip these out. I did with this company, it didn’t look great value for money, but I ignored it because I liked the outlook statement.

Next came their growth through acquisition strategy, great if you are getting a bargain, but not when you’re paying over the odds for loss making companies with little tangible value, particularly when you’re diluting shareholder value with hefty share issues and destroying the balance sheet with significant debt. DCD did both.

Along came the financial crisis, and this was a company in trouble.

As an aside, also beware the company that changes its name. If you have a good reputation and a strong brand then why would you jeopardize future business by changing your name?  In most instances name changes simply imply a wish to dissociate yourself with your past. It doesn’t really instill confidence does it?

Finally, and significantly the company had never made a profit. It was the ultimate ‘jam tomorrow’ company.

What the bloody hell was I thinking?

Anyway let’s fast forward.

It should be no surprise that in 2009 (I think!) the company looked like it might go under.

However, something remarkable happened. I don’t know how they pulled it off, but DCD managed to agree a re-financing deal that totally changed the face of the balance sheet.

In short, the debt was slashed for relatively little equity, and the Chief Exec was ousted. As a consequence, over the last couple of years DCD is now a profitable company trying to grow organically and with the comfort of a very respectable looking balance sheet. Currently, it trades on a miserly single digit p/e ratio. What is most encouraging is that they are making great strides into the US market, and the sum of the parts is surely far greater than the current market capitalization.

Probably for the first time in its history, DCD Media is genuinely very cheap.

Of course this hasn’t gone entirely unnoticed, and recently TAYA Investments (see Avesco), an activist investor, have taken a near 20% stake in the company.

Hopefully DCD can produce a glittering set of results when they are released at the end of April, and an optimistic outlook statement.

I am at last genuinely excited that they have turned a corner, and if they haven’t then I expect them to be acquired sooner rather than later.