No Pain, No Gain: Mears shows that stock market is harder to please

Interim figures from Mears, the support services group that rejoined the No Pain, No Gain portfolio in March, received a far from enthusiastic reception. The shares, after storming ahead before the results, slumped by around 30p, although some of the ground lost has been recovered.

Why, with profits a little ahead of expectations, did the stock market behave so belligerently? There was an element of profit-taking, but it would be foolish to rule out a degree of disappointment with a "mere" 25 per cent profit advance. After all, in these tormented days, the hard-to-please stock market resolutely refuses to draw encouragement from even the most outstanding performance.

Its inability to acknowledge an impressive display is all part and parcel of the credit crunch. Investment confidence has been shattered. Not surprisingly, the professionals who descended on Mears in the days ahead of the figures, and lifted the shares to above 320p, were quick to reap their rewards. They are an essential element of the stock market and, in happier times, are needed to keep the wheels turning. The trouble these days is that another vital ingredient – the buy-and-hold investor, both big and small – has little appetite, other than to indulge in occasional bargain-hunting.

Until such an imbalance is adjusted, shares, as a whole, are going nowhere. And with the credit crisis showing little sign of abating, it is difficult to see confidence returning and buyers re-emerging in any force. As I have commented in the past, the small-cap segment has been hit particularly hard. Mears has recently switched from AIM to a full listing, but with a capitalisation of around £220m, it is still a minor player.

Of course, companies, as well as investors, are suffering. Scintillating profits are still occasionally being achieved, but many organisations, particularly banks, builders and retailers, are displaying the deep wounds inflicted by a much tighter economy that has, I suggest, already slipped into recession.

Few, if any, businesses are entirely recession-proof. But Mears can claim a resilience that others must envy. It has two main divisions – looking after social housing, and providing domiciliary care. Its customers are local authorities and social landlords, and they usually sign long-term contracts. Consequently, its earnings enjoy a high degree of visibility. Its order book is £1.7bn. So a large element of revenue for some years to come is already secured. Indeed, all this year's sales are in the bag; so are 80 per cent of next year's. Even 53 per cent of 2010's income is guaranteed. And, as chairman Bob Holt points out, its clients are "substantially immune from bad debts".

Half-year profits emerged at £8.7m against £6.9m. After stripping out amortisation relating to acquisitions, the figures were £7.7m compared with £6.6m. Interim dividend is 1.35p a share (1.1p).

The ever-increasing cost of materials and labour is a problem for all businesses. Yet impressive progress from Mears is still expected. For the full year, profits should top £20m against £15.5m. Around £25m has been pencilled in for next year. Not bad for a company that produced profits of £426,000 when it arrived on the stock market in 1996 at 10p a share.

Mears, like a number of other companies, has taken advantage of the growing acceptance of outsourcing since the Labour government came to power. Housing is its major strength, although its fledgling home-care business is growing rapidly. Since last year's £23.8m takeover of Careforce, it has been busy snapping up small care operations, and in the half-year spent £3.4m on two bolt-ons.

Domiciliary care margins were reduced largely because of the hunger for expansion. Prospects, however, are encouraging, with Mears convinced that its health operations will follow the growth pattern it has experienced in social housing.

Although profits have continued to progress, the group's shares have been damaged in the stock-market downturn. At one time, they hit 380p, but as I write, they are a little above 300p.

I have followed the group's fortunes since its early days as a quoted company. Indeed, the portfolio first alighted on the shares when they were 23p. It sold at 71.5p. In view of the subsequent progress, it was, quite clearly, not one of my brightest decisions. When the portfolio returned to the shares in March, it paid 272p for the privilege.