Friday, September 16, 2016

ForFarmers seems like a good stock for the defensive Intelligent Investor. Graham intrinsic value.

ForFarmers is a company that used to be a co-op that recently went public.

SECTOR: [PASS]  ForFarmers is in the animal feed sector. Technology and financial stocks were considered too risky to invest in when this methodology was published. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. ForFarmers' sales of €2 247 million, based on 2015 sales, passes this test.

CURRENT RATIO:  [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. ForFarmers' current ratio €414m/€193m of 2.1 passes this test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] 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 ForFarmers is €132 million, while the net current assets are €221 million. ForFarmers passes this test.

LONG-TERM EPS GROWTH: [PASS] 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. ForFarmers' earnings have increased 70% since 2013.

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. ForFarmers' E/P of 7% (using the average of the last 3 years Earnings) passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. ForFarmers has a Graham number of (15 x €0,5 EPS x 1,5 x €3,8 Book Value) = €6,5 

Dividend: €0.24/€6,08= 4% 

Conclusion: ForFarmers has a strong balance sheet, an easy to understand business and seems like a good pick for the Defensive Investor at a price of €6,08 in September 2016. 

Recall Warren Buffett's rules: Rule Number 1: Don't lose money. Rule Number 2: Don't forget rule Number 1. ForFarmers isn't going to make you rich overnight, but you probably won't lose all your money. 

See: for more in depth, qualitative analysis of "good" companies.

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