Well today I sold my shares in Medical Developments International. It was a borderline call, as the thesis is still mostly there. However, the new piece of information was that the company gave the following guidance:
"We expect profit after tax for the six months ending 31 December 2013 will be approximately $500,000,
which includes a one-off tax adjustment of $360,000."
However, the company also said:
"We are confident volumes of our respiratory devices will return to forecast levels during the last six months of FY14."
If there is one thing I can't stand it's an ambiguous market sensitive earnings guidance. What does that even mean? What's the tax adjustment for? Is the tax adjustment a credit or a debit? I assume it's a debit, but seriously, it wouldn't kill them to make it clear.
For my own sake, I'm just going to record the unsuccessful investment in MVP here.
Buy prices: $1.35 and $1.16
Average Dividend adjusted buy price: $1.27
Sell prices: $1.50 and $1.158
Average Sell Price: $1.47
Return: 19.8% in less than 6 months (a mild outperformance of the market at best)
Musings on Medical Developments International
I either made a mistake buying or made a mistake selling. It is not clear which is the case. However, I have now sold because there are, quite frankly, better places for my money. The latest announcement confirms my increasing frustration with the ambiguity of what is going on. I have spent a large amount of energy trying to value this company; it's simply very difficult. The conclusion is that when it is very difficult to value a company, you need to get a really great margin of safety.
The core business - supplying Penthrox - is still working, and the company still has plenty of irons in the fire. It has suffered a setback, that we knew. However, the more annoying thing is the manner in which guidance was announced today. Mercifully, I don't have to make that decision. Keep in mind the Directors bought at above $1.20 quite recently. It seems like there is a still interest in the shares at around that price and those buyers have a decent point... the investment thesis isn't shattered, it's just taken a few hits. It is certainly good news for the company that the Penthrox sales are on budget for this half.
Main Reason for selling
Analysing this holding is simply too difficult because of the ambiguous announcements. There are other companies that have a stronger investment thesis. I don't like how they took on debt but paid a dividend - it just makes it even more difficult to value the business, and it adds additional interest expense. It is a mechanism to allow the Chairman to buy more shares through the dividend reinvestment plan (and release franking credits). However, I do think that the Chairman has a lot of faith in the company and is a good man (he reinvested right at the top of the market, which is a benefit to all the other shareholders). Still, the interest expense seems a bit unnecessary.
The Author does not own Shares in any of the companies mentioned in this post. Nothing on this website is advice, ever.
Sign up to the Free Newsletter to receive the best research, first.