Wednesday, August 31, 2016

The intrinsic value of Euronext itself. The house always wins? Benjamin Graham Valuation.

SECTOR: [PASS] Euronext  runs stock exchanges. It went public in 2013-14.

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Euronext's sales of €518 million, based on 2015 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. Euronext's current ratio €158m/€156m of 1,0 fails this 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 do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Euronext is €117 million, while the net current assets are  €2 million. Euronext 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. Euronext's earnings are growing, but the long term results are difficult to determine because of its corporate history and recent IPO. 

Earnings Yield:  [PASS]  The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Euronext's E/P of 7% (using last year's Earnings and taking growth into account) passes this test.

Graham Number value: [FAIL]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Euronext has a Graham number of (15 x €2,5 EPS x 1,5 x €7 Book Value) = €20 

Dividend: €1.24/€38 = 3% 

Conclusion: Euronext is creating value and was a good buy at €30 recently, but is not a stock for the Defensive Investor. 

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