Here's something I wrote back on 23 June when doorstep lender Provident Financial issued its first profit warning.
"So while I'm aware that I may be anchoring' to the old days when I could have bought Provvy for closer to £6 a share than £24, I'd rather wait and see how this personnel problem pans out. This strikes me as one of those profit warnings that could easily turn into the first of many."
I don't always get things right far from it but I have to say I'm pretty pleased with this particular call. If you missed this week's news from the company, a simple glance at the chart below will demonstrate why.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
As you might be able to see from the chart, a follow-up profit warning from the company this week saw its share price collapse by more than 60% in a single session.
Hopefully you didn't buy in after the first warning.
The basic problem with Provident Financial, as I mentioned in the previous post, is not as some might assume that its customers are having difficulty repaying their loans. Instead, this appears to be a case where a company has somehow managed to set fire to its own business model without quite realising just how much damage it was doing.
The basic problem is that Provident decided to replace its freelance, incentivised workforce with a smaller, full-time one, which would be assisted by the latest technology.
Two problems arose: they couldn't find enough staff quickly enough to replace the old ones; and the technology didn't work very well, mismatching collectors and customers. As a result, the debt collection rate has collapsed from around 90% to a quite staggeringly bad 57%.
On top of that, there's a brewing Financial Conduct Authority investigation into a specific financial product that Provident's Vanquis banking unit was selling. The company has stopped selling it, but clearly news of any regulatory investigation particularly into an area as politically sensitive as sub-prime lending is going to rattle the horses.
As a result of all this, the division is now going to post a full-year loss of between £80m and £120m. Just a few months ago, even after its initial profit warning, it was meant to make a profit of £60m. Provident has scrapped its dividend, and quite understandably, the chief executive has left the company.
The decision to replace the workforce does seem to have been driven as much by regulatory concerns as by cost-cutting ones. I suspect it's to reduce the risk of being accused of mis-selling or of having skewed incentivisation schemes in the future. So turning the freelance workforce into a fully-employed one is not necessarily a bad idea in itself.
But what is troubling is that Provident didn't appear to appreciate that it's running a relationship business. The repeat business, the regular free cash flow, and to an extent, the credit checking, all depend on that relationship between borrower and collector.
If you are going to tamper with that process, you had better make very sure that you protect it. That should have been a top management priority. The fact that it has ended in absolute disaster shows that the people at the top do not understand their own business. That's a major problem.
A part of me agrees with Neil Woodford by no means a neutral bystander, owning a big chunk of the company when he argues that this is an over-reaction. This is not about the company going bust and I also doubt that the regulatory investigation will end up being an existential issue. Nor am I worried about the creditworthiness of the company's customers.
My colleague David C Stevenson had a brief look at the Provident bonds in MoneyWeek magazine this week, and if you're tempted, they might be worth a look.
Yet, I have to say, I'm not keen to buy in now. It's already bounced sharply from the bottom, for a start. Moreover, these sorts of personnel issues are sticky. They take longer to deal with than I feel I have the patience for, and it's possible that they won't get dealt with at all.
But what really worries me that the company has managed to shoot itself in the foot so comprehensively. This is a tricky business you make a success of it, and you can make a lot of money, which is why Provident was riding high in the first place. But you screw up, and you might not recover.
So, on balance, despite the collapse in price, I simply don't have enough confidence in the company to feel comfortable about investing, even down here. That might be wrong, but better safe than sorry.
Two more profit warnings of note
What's interesting is that Provident is just one of several surprise profit warnings that have popped out of the UK market this week. And they all seem to be driven by business model issues, rather than economic ones.
Dixons Carphone warned yesterday. The problem for them, apparently, is that people aren't upgrading their smartphones fast enough. Smartphones are no longer ultra-new technology, so the impetus to upgrade every time a new one comes out is fading. New models are both a lot more expensive, and a lot less of an evolution than their predecessors, so people don't see the need to change.
If I'm honest, I'm just surprised that anyone buys their phone from a shop at all these days. I upgraded my old Samsung S3 to a rather less old second-hand Samsung S6 the other day. I bought it online, got it for a decent price, stuck my Sim in it, and didn't have to deal with a pushy sales assistant.
I'll likely keep this phone for at least two years or until Google Maps becomes slow enough for me to want to hurl the thing against a wall. Either way it's a lot cheaper than buying brand new. Now I realise I'm not necessarily the target audience here, but I'm not a technophobe either. I struggle to see that selling new smartphones via bricks and mortar shops is a sustainable business model. So, this isn't a company I'd be for investing in either.
Finally, there's WPP. The global ad agency saw its share price topple as spending from consumer products groups fell. Advertising is a tough business to be in just now yet another area that's being disrupted by digital. Both the traditional advertising model, and the customers who pay for it, are having their businesses turned upside down by online competitors and that's not going to go away.
WPP is a survivor and it'll no doubt be back on top again at some other point in the cycle. But again, it's another company I struggle to get overly-excited about the 10% drop in the share price looks pretty reasonable and doesn't leave WPP looking desperately cheap, particularly not when this, again, feels a bit like a "first" profit warning rather than the last one.
So, sorry, bit dull there but none of these walking wounded look like bargains to me right now.
The charts that matter let's hang on for Jackson Hole
We won't worry about reviewing the charts this week they've been largely frozen this week, waiting for Federal Reserve boss Janet Yellen to speak at Jackson Hole today, so we'll analyse the fallout from that next Saturday.
