Colefax in two minutes

A two minute monologue.

What it does: Designer of fabrics and wallpaper

Colefax designs luxury fabrics and wallpapers under its Colefax and Fowler, Cowtan and Tout, Jane Churchill, Manuel Canovas and Larsen brands. About 12% of revenues come from decorating.

Category: stalwart

Return on equity bottomed at 9% in 2009 demonstrating Colefax’s resilience. Median return on equity is 18%, although the impact of share buy backs above book value mean shareholder wealth has compounded at 13% a year over the last 11 years.

Colefax designs remain sufficiently popular it can absorb the vacillating costs of fabric and enrich shareholders over the long term.

What needs to happen: business as usual

Colefax already earns more money than it can invest in its niche, so it returns cash to investors. Assuming it remains as profitable and undervalued, nothing needs to change. Although Colefax grew strongly after David Green, the current chairman and chief executive, took charge in 1986 the company has not grown revenues much in the last decade.

What could go wrong:

Half-year results were poor, and full-year results will be too. The decorating division, where profits are variable because of the timing of large projects, made a loss, trade is deteriorating in Europe, and Colefax’s biggest market, the US, is recovering more slowly than expected. My theory is the business is strong and well managed and setbacks will be temporary.

competition
There are countless brands of fabric and wallpaper and Colefax’s are high end. In terms of competitive advantages, the listing particulars (1988) suggest the expertise of its interior designers is used in product design. John Fowler (who died in 1977) invented the "English Country House" style and decorated Buckingham Palace, The Bank of England and numerous stately homes. His reputation must live on in the company he co-founded. Conservative management is also a source of strength.

management
Chairman and chief executive, David Green owns 32.4% of the shares and has the experience and motivation to continue the company’s success.  He’s overseen the growth of Colefax and the acquisition (in the 1980′s and 1990′s) of its brands. He’s 65 though.

company finances
At the half year (31 October) Colefax had no debt and net cash of ''5.3m. The ratio of equity to assets was 66%

valuation
Since Colefax is reliably profitable, the most appropriate measure of value is the long-term earnings yield, which, at 210p is 16%. I think that’s very cheap considering the business is profitable, unindebted and managed well.

This morning, I added 468 more Colefax shares to the portfolio at 214p, the actual price quoted by my broker, deducting as always ''10 in fees and .05% stamp duty.

I don’t plan to eject the shares.

More on Colefax.