Spring Ram leads its flock astray: The City showed blind faith in an incredible success story. Then it all fell apart. Robert Cole reports

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IF Bill Rooney, the chairman of Spring Ram, had been expecting a barrage of criticism when he announced a 30 per cent fall in profits to a group of City analysts in the Savoy last Monday, he must have been pleasantly surprised. The analysts sat almost mute, asked few questions and then meekly filed out of the room.

It was only later that day, during lunch with institutional investors, that executives of the bathroom and kitchen distributor ran into severe criticism and sharp questioning. The institutions were angry - understandably so.

They had thought Spring Ram was a high-flyer, a business of extraordinary and consistent growth. The Leeds-based company's results had borne this out for nearly a decade and profits had continued to power ahead even when recession was beating rivals into the ground. Equally significantly, City analysts treated the company as a wonder stock and for years had been putting out wildly enthusiastic buy recommendations. They had confidently predicted profits of pounds 42m for 1992.

It became clear this week, however, that Spring Ram had been the subject of hype. Far from a wonder stock, its profits slumped 30 per cent in 1992 to pounds 26m. The shares have halved from 129p 10 days ago to 65p. Every pounds 1,000 invested in Spring Ram shares at their height last year is now worth just pounds 370. No wonder the analysts seemed dazed and sheepish at the Savoy.

To regular consumers of stock market research, it comes as no surprise to learn that City forecasts are mostly, sometimes wholly, based on indications from the company. All too often, there is little thorough and genuinely independent research. Analysts settle on a credible number, pass it by the finance director and then adjust it according to the reaction they get.

Most companies know that to give misleading indications usually ends in tears. It may work wonders in the short term but sooner or later reality will catch up and confidence will be sapped, often fatally. In the process, however, investors all too often end up losing a lot of money.

It happened with Polly Peck, British & Commonwealth, Coloroll, Maxwell, Brent Walker and MTM, the chemicals company. All of these caught the City by surprise when they suddenly hit disaster. Spring Ram is only the latest in a long tradition of analysts and investors getting carried away by their own enthusiasm and, lately, gullibility.

At first, the support for Spring Ram seems to have been entirely justified. The company was founded in 1979. ('Ram' was derived from the names of its two founders, Mr Rooney and Bob Murray.) Between 1983 and 1992, it pushed sales from pounds 7.6m to pounds 194m. Pre-tax profit climbed relentlessly from pounds 1m in 1983 to pounds 37.6m in 1991. In the same period, earnings per share rose 20 per cent a year.

It is still hailed in the building industry for the way it identified and developed its market, particularly the previously negligible do-it-yourself market. It also discovered it could replace large volumes of imported product. Margins were wider because Spring Ram cut out the builder's merchant, the middle man.

The City gained directly from the company's success. Every pounds 1,000 invested in Spring Ram when it was launched on to the Stock Exchange in 1983 was worth pounds 54,000 when the share price peaked in May last year.

'Spring Ram grew from zero to a business with sales of pounds 200m in 10 years. You do not do that unless you know what you are doing,' said a rival. He continued: 'It had a clever and disciplined approach. It identified key pricing points and produced volumes of kit to satisfy demand. And its delivery service was always superb.'

Angus Phaure, the building materials analyst at NatWest Securities and rated one of the City's best in the sector, was, and still is, the most enthusiastic Spring Ram fan. 'A brilliant investment,' he wrote in 1989. 'A fantastic and probably unique company,' he said in 1990.

He was not alone. 'Buy for growth,' said Henry Cooke Lumsden in March 1992. 'We regard Spring Ram as quite the safest investment in the building materials sector,' said Greig Middleton last August.

But the company clearly found it increasingly hard to live up to the City's inflated expectations when the recession closed in. The first doubts about Spring Ram began to stir among the analysts when its reported growth continued upwards, unimpeded by the onset of the harshest recession in the building industry in living memory. During 1989, 1990 and 1991, growth was as impressive as that recorded in the kinder economic climate of the early and mid 1980s.

Moreover, unlike many of the boom-bust stories in corporate history, Spring Ram achieved growth organically. Other 'miracle' companies have relied on a rapid series of acquisitions to dazzle investment managers.

A further worry was that Mr Murray left the company in June 1990. With profits from share sales making him a millionaire many times over, he concentrated on his position as chairman of Sunderland Football Club. Other stalwarts of Spring Ram have also left to join him in a new rival venture called Omega.

A more serious blow still came last November when financial irregularities were uncovered at a Spring Ram subsidiary called Balterley Bathrooms. Mr Rooney and Stuart Greenwood, the finance director, embarked on a comprehensive tour of institutional investors and stockbrokers' analysts to persuade them that Balterley was an isolated incident. It would not affect the long- or short-term future of the group, they asserted.

Astonishingly, perhaps, the City gave Spring Ram another chance. Days before the Balterley affair was made public, Mr Phaure told investors to 'pile in . . . Spring Ram is the most outstanding company that this author has followed in 32 years of working lifetime'. And he still led a sizeable pack of Spring Ram fans after Balterley. 'Without hesitation: BUY', he chimed in December. The shares that had slumped from 180p to 89p recovered to 129p.

It is not fair to say everyone swallowed the Spring Ram story hook, line and sinker. Last summer, more probing questions were being asked. It was noticed that stocks of finished product, according to the 1991 accounts, jumped by 75 per cent compared to 1990 - far outpacing the 33 per cent rise in turnover. What was happening to all this stock?

Previously strong cash generation started to weaken. The average time it took for Spring Ram to settle its debts also increased from about two to two and a half months. Nothing major, but room for concern.

The question of how long investors have been misled has yet to be answered in full. What does seem obvious, however, is that a manic culture with success as its god permeated Spring Ram.

Financial results for 1992 released last Monday demonstrated that the doubters were right. Instead of neat figures showing profit flowing cleanly from the sale of bathrooms and kitchens, investors and analysts were presented with a tangle of figures revealing that profits had been bolstered by abnormal financial engineering.

In 1992, Spring Ram netted pounds 7.8m by selling non-trading subsidiaries, made attractive by their tax status, to companies overburdened with advance corporation tax liabilities.

Its profits benefited from pounds 1.3m of government grants, awarded to offset the cost of developments in areas needy of industry. Spring Ram made pounds 1.1m from the sale of assets, which were subsequently leased back from the new owner. The company's interest bill on its debt was reduced by pounds 578,000 by capitalising the cost into new borrowing. Spring Ram tried to maintain that the change of course had been forced by tiresome new accounting standards.

And what of the auditors? Arthur Andersen has handled the Spring Ram accounts since the company was floated in the mid 1980s. In recent days, it has tried to distance itself from the fiasco by saying it warned management that problems would eventually surface. It may well have done, but that is little comfort to shareholders since the real picture has not emerged until now.

Whatever the pressure on the company's surviving management, one source close to a leading building industry supplier believes Spring Ram is heading for more choppy waters. The company is putting up a 300,000 square foot factory in Barnsley to make doors. The plant has the potential to expand nationwide door production by 60 per cent.

'It is the biggest mistake the company has ever made,' he said. 'Bill Rooney is beginning to believe his own public relations cackle. The market for doors is competitive; either Spring Ram is being wildly optimistic about economic recovery or it is has made wildly inaccurate assessments in the UK door market.'

But even now, after the full horror of the 1992 results, the City's faith in the company has not entirely evaporated. NatWest continues to recommend the shares as a hold. Its view of the long-term future for Spring Ram shares is that they will outperform the stock market average.

It remains to be seen whether faith or scepticism about the prospects for Spring Ram is the correct stance to adopt. But until the fug clears, investors can be reminded that blind faith is no basis for sound investment strategy.

(Photographs and graph omitted)