But they have a problem. Because if they dare utter such phrases such as ‘we are cautious about the outlook for the coming year,’ or ‘some of our customers may consider deferring their orders by a month of two’, or ‘given that the great might of the economics profession, fund managers and the broking and banking community are predicting that the world is shortly to come to an end, we feel it only fair to point out that while we are presently enjoying record levels of business, a complete halt to consumer spending and global trade may have minor and temporary negative consequences at the periphery of our business…’ – then they know that their share prices will be hammered. Their investors will walk off in a huff and anyone who might have been contemplating an entry onto the shareholders’ register will put it off for another day.

Last September, John Kembery, chairman of Belgravium Technologies, had the task of delivering the right message to the market. Choosing his words with the utmost care he said, ‘Whilst we have fully met our expectations for the first half of 2007 and succeeded in building a full pipeline of sales opportunities for the second half of 2007 and beyond, recent economic uncertainty has introduced some caution into customers’ buying patterns. So, while we have every reason to believe that the Group will continue to successfully convert its pipeline of sales opportunities in the second half, there remains the prospect of some small delays in the timing of certain contracts. In overall terms, however, we remain confident that the progress achieved in the first half will continue into the second and that plans already actioned will continue to bring further benefits.’

Market overreaction…

Now I don’t know how that sounds to you, but to me it was an honest, unsurprising and by no means alarming description of Belgravium’s situation. And yet Kembery was rewarded for his candor by seeing an immediate 17% fall in the share price and watching it carry on falling until five months later the shares had lost half their value.

Everywhere I go I meet bosses of small companies who are terrified of the market’s reaction to even the hint of bad news. This is not just a matter of pride. Many small companies have rewarded their staff in the form of shares. It is not good for staff morale to see the share price slide. Others want to issue shares to companies that they intend to buy. If the share price is too low it simply does not make sense to do this, and deals have to be abandoned. Worse still – and this can be very serious – some companies are on the hook to pay for previous acquisitions by issuing new shares. And the lower the share price the more shares they have to issue.

The latter is not a threat to Belgravium. But all the same Kembery is understandably frustrated by the low share price and last week’s annual results showed why. Belgravium provides industrial mobile computing equipment that enables data from, for instance, bar codes to be recorded remotely and in real time and fed into the supply chain and other management systems. It is also a market leader in mobile retail systems, in particular for airlines which are increasingly making their money from on-board product sales rather than through selling tickets.

Consistent with the remarks that Kembery had made in September the annual results were very good. Belgravium’s profit grew for the fifth successive year, topping £2m. Earnings per share were 1.41p from which a 0.38p dividend will be paid, and net debt was cut by about a quarter. Despite this at the current share price of 10.75p Belgravium is valued at below £11m.

So what is Kembery now saying about the outlook? This time he has kept it simple. ‘Looking ahead, there are some attractive projects in the pipeline and we look forward to delivering organic growth in 2008 and beyond.’ In other words this is a small company that is financially strong, has an excellent record and clear prospects for growth. The question is – does anyone in the City want to know?

Until next time,

Tom Bulford
for The Penny Sleuth

PS: I write a newsletter each month called Red Hot Penny Shares which delivers exciting small company share tips to a loyal set of subscribers. My latest Red Hot company has a ‘Torpedo Technology’ that could unlock an energy supply bigger than Saudi Arabia’s! To discover more click here.

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The really interesting part of this story however is the quick rebound Wall Street analysts are projecting for this year. They’re talking as if banks aren’t still writing-off billions in losses. While the financial sector led the hit-parade last quarter, the broad economy is being impacted by a slowdown now. It isn’t just the financial sector.

To be sure, financial sector results are at the bleeding-edge of reported losses. In fact, banks and brokers in the S&P 500 financial sector saw profits disappear in the fourth quarter with a 122% year over year plunge in earnings! The financial sector reported losses of US$2.10 per share – a big drop from profits of US$9.48 per share posted in the final period of 2006. That’s quite a negative reversal of fortune!

Financial stocks account for nearly 20% of the S&P 500 by market-cap. In fact, it’s the largest sector in the index by far. So the gushing red ink in this sector was enough to drag overall S&P profits down to MINUS 20% in the fourth quarter. Ouch!

Financials, however, weren’t alone posting poor results at the end of 2007. Companies in the S&P Consumer Discretionary sector (construction, auto, retail) saw profits drop 10.5% last quarter. Also, the S&P Basic Materials sector suffered a 12.2% profit decline.

Still, all other sectors of the S&P 500 Index, except for Utility shares, posted double-digit profit growth in the fourth quarter.

Information Technology shares led the way, posting stellar earnings growth of 29.6% in the last three months of 2008. Energy and healthcare weren’t too far behind – with profit growth of 24.5% and 22.7% respectively.

This shows the dichotomy of the bruising bear-market we’re in. The sub-prime market shock that began last summer has been centered on housing and finance from the very beginning.

Meanwhile, most other parts of the economy seem to be functioning pretty well – at least for now. The real question is: How much of a spillover effect will the weakest sectors have on the rest in 2008? First-quarter profit reports begin hitting the fan in less than 30 days. Stay tuned!

Craneware is serving the US hospital market. Most of the administrators with whom it deals are females. When they ring Craneware’s office in Livingstone, Scotland, they think they are talking to Sean Connery. Who can blame them? When I phone a call centre and hear a Scottish voice, it is always Claire Grogan.

But Craneware’s staff is too busy to contemplate offers of marriage. They are fully occupied managing the growth of a business that was founded back in 1999 by Keith Neilson and Gordon Craig, who now occupy the positions of chief executive and chief technology officer and own about 30% of the shares.

Determined to set up their own business they looked at a number of alternatives. But their mind was made up when they met Nora McNeill. This healthcare consultant was hired to check the records of hospitals in New Jersey. When she asked for data on billing she was presented with a print-out that she had to check manually. This did not come as any great surprise because back then almost all hospitals in the US were relying on manual methods to determine the cost of treatments and their claims for reimbursement from insurers and the public health authority. This was inefficient, but it could just about cope with a reimbursement system that was based on a cost-plus method of determining the value of dispensed treatment.

Now though the rules have changed

Since the US Outpatient Prospective Payment System was introduced in 2000, the value of treatment and consequent claim for reimbursement is based upon a schedule of agreed fees for each separate drug or procedure. Hospitals are finding it hard to cope with the extra work involved, and to make matters worse are now threatened with penalties for getting it wrong. These are no mere slaps across the wrist. In July 2006 hospital operator Tenet Healthcare was fined $900m for manipulating the government’s Medicare health insurance system to its own advantage while another hospital chain, HCA, agreed to pay the federal government $631m in respect of false reimbursement claims.

So the pressure is on hospitals to keep track of all stages of a course of medical treatment, and bill for it accurately. This is where Craneware steps in with its software packages, headed by its Chargemaster Toolkit that provides an automatic audit of a hospital’s billing and reimbursement claims, and can spot coding mistakes and mis-pricing.

Here is an example. A hospital in Indiana had been buying pacemakers. Initially these came in separate packages – the pacemaker in one and the various wires in another. The hospital claimed reimbursement for both. However the supplier then started to deliver the whole kit, pacemaker, wires and all in one pack. The hospital continued to claim the cost of a pacemaker – but because it was not receiving a separate package of wires, it did not make a claim for this part of the equipment. It lost $600,000 in consequence. Chargemaster ensures that bills and claims are accurate, meaning that the hospital receives neither too little money nor too much, and without the need for lengthy manual checks it can receive the money sooner.

Craneware has now signed up 878 hospital clients, double the number three years ago. With serious competition coming from just two players, Accuro Health Solutions and Med Assets, Craneware now has a share of about 15% of the USA’s 5,756 hospitals and with half of these still relying on manual calculations there are plenty left to pitch for. This looks like a rare example of a small software company that is conquering the mighty US market – and conquering some female hearts along the way too.

You’d think, after chopping off a quarter of its market value, this sector would be cheap… It’s not. In fact, this sector is the third-most expensive in the country (in relation to its median valuations).

This sector is also extremely sensitive to a weakening economy. In the 1970s bear market, it fell 53%. During the dot-com crash, it fell 49%.

The sector I’m talking about is leisure goods.

So what’s in this sector?

The DataStream Leisure Goods Index contains videogame companies (Electronic Arts and Activision), toy companies (Hasbro and Mattel), camera makers (Eastman Kodak), navigation manufacturers (Garmin), and audio/electronics makers (Harman International).

Aside from a weak rally attempt last November and another this month, the sector has gone straight down. The rally in November was short-lived, and I believe this one will be as well.

How much farther could the sector fall? Well, it would have to fall another 31% from its current level in order to match the 50% fall it experienced during the previous two major recessions.

And trend and a weakening economy aren’t the only reasons this index is headed lower…

Take a look at the following chart of the Leisure Goods Index versus its price-to-earnings ratio: