With the De La Rue share price in pennies, should I buy?

For a company that prints paper money, there is some irony From the road (LSE: DLAR) trades shares for coins. But after a 44% drop in its share price over the past year, the company is actually selling for less than a pound per share.

The company has several unique competitive advantages. So should I take advantage of the current stock price to add to my portfolio?

Change the world

De La Rue has had a strong business for centuries printing paper money for central banks around the world. That remains an important source of income. But as the world moves to higher levels of digital payments, the company has broadened its horizons while drawing on its established expertise. For example, it produces authentication products like duty stickers that appear on alcohol and cigarettes in many markets.

This business mix makes sense to me. But it is not enough to stop the profit from falling. In the first half they decreased by 8.3% compared to the same period of the previous year. Having a license to print money is not necessarily a license to print money!

The authentication division’s revenue grew by 2.5% year-over-year, while the small identity solutions division recorded double-digit percentage revenue growth. The problem for De La Rue is that the currency division is part of the profit. The division saw a 12.3% drop in revenue.

Should this be sold for money?

De La Rue currently has a market capitalization of around £128m. It has net debt at the interim stage of £87m, which means it has an enterprise value of approximately £215m.

It has been consistently profitable in recent years. Even at the nadir of 2021, annual post-tax profits hit £8.5m. Last year they were £22.9m.

For the full year, the company expects adjusted operating profit of £30m to £33m. This is a different measure of unadjusted post-tax earnings, but it suggests that De La Rue continues to have strong profit potential despite the challenges.

To me, De La Rue’s stock price seems low right now.

But I see some significant risks that can explain the price. The demand for paper money may be in a long-term structural decline, potentially damaging the economics of De La Rue’s business. A company’s performance can be greatly affected by the loss of a single contract, as we have seen in the past. A pile of debt also has to be paid off at some point, earning a profit.

In to the pound?

I considered buying De La Rue shares for every cent in the first half of 2020. I decided not to – and they quadrupled in less than a month! I could have been sitting pretty if I had decided to invest again.

Falling prices offer more buying opportunities for less than a pound a pop. I still see a lot to like in the business. But I think the risk is too high for me. So I won’t buy it.