When is commission not commission? When you call it something else. Anyone watching TV adverts from estate agent Purplebricks (PURP) could be forgiven for thinking they sold your house without making a charge. On the contrary, they make a charge even if they fail to sell your house. It was all bound to end in tears.
Large scale TV campaigns cost money and Purplebricks was losing money hand over fist. Far from being realistic, the board threw caution to the winds and rushed to expand overseas – in the US, Canada and Australia – at even more unaffordable expense, not to mention stretching management more thinly.
It’s all very well being a “disrupter” – a company that nips in with a new approach and tears apart the existing cosy set-up – but the pioneer of the new approach is not necessarily the one that makes a fortune. Others also spot the opportunity and step in to do it better, so customers are lured elsewhere and advertising becomes more intense and more expensive.
Revenue at Purplebricks leapt from £87.8 million to £136.5 million in the year to April 30 but the pre-tax loss grew just as rapidly, from £29.2 million to £56 million. Even more alarming, the cash pile shrunk from £152.8 million to £62.8 million. I wouldn’t bet against a rights issue before the current year is out.
After two and a half years of struggling against “increasingly challenging” market conditions in Australia, Purplebricks was finally forced to admit in its last trading update two months ago that it cannot build the business there to the size at which it can make money. Reality has taken slightly longer to dawn in the US, where despite early rapid expansion into seven states it has become clear that Purplebricks cannot commit the necessary management time and resources. That, too, is for the chop. It is possible that the business could be sold but the company will be in a weak bargaining position unless more than one potential buyer steps forward quickly.
Canada is living up to management expectations and will continue – for now.
The shares started trading around 100p at Christmas 2015 and hit a peak 500p in July 2017 before slumping back under 100p in less than two years. It’s been quite a rollercoaster ride. The latest figures were greeted with an optimistic 2p rise to 95p and an even more optimistic surge back above 100p.
Investors should, in the company’s own advertising words, spare themselves from commisery. Stay well clear of the shares.
Brexit Impasse and Osborne’s Cunning Plan
The FTSE 100 index edged above 7,600 points this week, something we would not have dared hope for six months ago. While some of the boost has come from the recent decline of the pound, which makes shares quoted in sterling cheaper for overseas investors, this is not the whole story. The two main indices in the US, the Dow and the S&P 500, have hit new records so UK stocks look positively undervalued by comparison.
I do think that the current limbo regarding Brexit is the worst possible situation for the UK to be in – worse, despite the dire warnings, than no deal because we cannot move forwards. Until there is a decision one way or the other there will inevitably be a damper on UK-oriented shares.
I have no doubt about the motives of former Chancellor George Osborne in seeking to become head of the International Monetary Fund. He reckons that the UK economy will collapse after a no-deal Brexit and he can gain his revenge by taking control and imposing another dose of austerity in return for an IMF bailout.
Osborne will be disappointed. We have survived three years of limbo and we will survive any outcome. The UK is not about to collapse and neither is the stock market.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar
