This historic brand has just become a penny stock! What’s going on?

Although definitions vary, I define a business as a money stock if its market cap is less than £100m and its share price is below £1. Due to recent stock price declines, From the road (LSE:DLAR) is currently in this category. The 200-year-old money printer may have a rich heritage, but is it something stock investors should be interested in buying?

There are many issues to note

Over the past year, the stock has fallen by as much as 55%. It’s a fairly linear move at this point, coupled with company-specific issues.

For example, the latest issue comes from activist shareholder Crystal Amber. The fund has called for its chairman, Kevin Loosemore, to resign. This is due to what is believed to be a financial failure in the company since the turnaround plan was announced back in 2020. Since then, he said that the number has not increased, so it has to be rolled back.

Another problem at a broader level is the decline in demand for paper money. Especially over the last year as we’ve come out of the pandemic, I’ve seen more and more companies running out of cash. Even my favorite restaurant near me is out of money now! I can appreciate that there is a strong correlation between De La Rue’s stock price and the need for cash in society.

The dangers of value metrics

The demise has pushed the market cap below £100m, but as the company is technically profitable, I can try and assess the value from the price-to-earnings ratio. Currently, the ratio is 3.65. Given that I usually say the ratio of 10-15 is a fair value, 3.65 is too low.

This can indicate to investors that the stock is undervalued. However, people should appreciate that sometimes that ratio very under the red flag. Essentially, De La Rue has gone beyond the point of being undervalued. Many other investors just don’t have enough to buy!

Put another way, people don’t buy stocks even if their earnings are higher than the current stock price. This was a clear warning sign for me.

The other side of a coin (or paper money)

The company is trying to diversify its income from just printing. In the latest half-year report, revenue from authentication increased by 22% compared to two years ago. It contributed £45.5m of the total revenue of £164.3m generated in the first half of the year.

Another point that will help provide sustainability going forward is the growth of profit margins. The operating profit margin has increased from 0.3% to 9.6% in two years. This gives them some breathing room to make money even as costs rise this year.

But ultimately, I don’t feel De La Rue is in a good position, especially with the ongoing shareholder war. It’s not a business I see growing in the long term and therefore won’t be buying anytime soon.