Tuesday, February 07, 2017

Neways intrinsic value based on Graham Defensive Screen

SECTOR: [PASS]  Neways is in electronic manufacturing services (EMS) neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Neways' sales of €374 million, based on 2015 sales, fails 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. Neways' current ratio €124m/€84m of 1.5 fails the 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 Neways is €19 million, while the net
current assets are €40 million. Neways passes 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. Neways made a loss in 2012.

EARNINGS YIELD: [FAIL] 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. Neways' E/P of 4% (using average of last 3 years earnings) fails 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. Neways has a Graham number of (15 x €0,4 EPS x 1,5 x €7 Book Value) = €8,4 and fails this test.

DIVIDEND €0,25/€10 = 2,5%

Conclusion: Neways seems priced just above intrinsic value. No margin of safety at the moment. The price was better a few months ago when the Add Value Fund bought stock. 

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

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

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