Tuesday, November 24, 2015

ALTICE intrinsic value guesstimate based on Graham Defensive stock selection

This analysis is done as reaction to "When the musics stops." piece about Altice's stock price in the Dutch Financial Times (FD) http://fd.nl/ondernemen/1128018/als-de-muziek-stopt This was the graph displayed in the newspaper:

The price has gone up and down, but what about the value? Is now a good time to buy? (Price is what you pay, value is what you get.) In Dutch I would say: "De bedrijfseconomische waarde is niet wat de gek ervoor geeft."  Update May 28th 2017: Sales are up, still making a loss, book value has decreased. Stock price dipped to 10 and is back above 20 Euros.

Here is an analysis of Altice using the methodology of Benjamin Graham, the father of value investing as explained by John Reese and Jack Forehand in The Guru Investor.

SECTOR: [FAIL] ALTICE is in the Technology sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. At that time they were not the driving force of the market as they are today. Although this methodology would avoid ALTICE, we will provide the rest of the analysis, as we feel times have changed.

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. ALTICE's sales of 14 billion, based on the trailing 9 month sales, passes this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. The current assets are 6,5 billion and current liabilities are 10 billion. ALTICE's current ratio of 0.65 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for ALTICE is 32 billion, while the net current assets are minus 3,50 billion. ALTICE fails this test.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. ALTICE made a loss in 2014.

P/E RATIO: [FAIL] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. ALTICE's P/E can’t be calculated because it made losses (using the 3 year PE) fails this test.
(Note: IF ALTICE’s Earnings per share were 0,5 than the price shouldn’t be higher than 0,5*15 = 7,5. )

PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. (Or Price/Book shouldn’t be higher than 1,5). ALTICE's Book value is 2 billion equity divided by 1 billion shares is 2 Euros per share and the Price/Book ratio is 13/2 = 6,5. ALTICE fails the Price/Book test.

Conclusion: ALTICE is very difficult to evaluate. The company’s financials have changed drastically in the past year due to deal making. Assets have increased dramatically and could result in fantastic earnings for shareholders going forward, but it is not a company for the Defensive Investor. ALTICE might be cheap at a price of under 10 Euros per share, but belongs in what CharlieMunger calls the “too hard pile”.
See www.MoneyMakingMachines.nl for Graham Defensive Investing

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

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