Punch's shares take roller-coaster ride

It's very hard to fathom why Punch's shares have hit such ridiculous highs and lows in the same year, says The PMA Team

Share values are hard to get your head around sometimes. Take Punch Taverns. It floated on 27 May 2002, with its shares worth 230p each. Values climbed to a high point of £13.23 within the past year, before declining to a shade over £2 at one stage on Tuesday morning.

Anyone thinking of buying a Punch pub-lease assignment in 2002 for, say, £60,000, would have been much better advised buying Punch shares instead and doing nothing. To do so would have seen the £60,000 grow 5.75 times to £345,000 at the high point — an averaged-out gain of around £57,500 per annum plus dividends for each of the five years from 2002 up to a fortuitous sale at the high water mark.

To hang on to Punch shares beyond the high point would have seen the £345,000 shrink back to less than £60,000. Meanwhile, Punch has almost trebled profit before tax from £93m for the year ended 17 August 2002 to £133m for the six months to 1 March 2008. Punch's shares are on a price-to-earnings ratio of 2.68 — remember managed leased high street companies trading on a p/e in the high 20s within the past decade?

Buying of shares is driven by a host of rational and irrational factors. Confidence about wider economic prospects is at rock-bottom, and investors are scared away from any company that has property assets and high levels of debt.

Punch has sought to reassure investors and analysts about how secure and stable its lending and cashflows are. Given this, the market is making one mighty assumption about Punch: trading is going to get a lot worse.

One unspoken fear remains, despite best efforts by Punch's management to dispel it: something nasty is lurking in Punch's debt structure.

Buyers of Punch shares have a right to be pessimistic, but the unspoken fear is as immune from logic as the over-exuberance that sent Punch shares to silly heights.