Thursday, March 02, 2017

Koninklijke Philips intrinsic value Ben Graham valuation

SECTOR: [PASS] Philips is 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. Philips' sales of €24,300 million, based on 2012 sales, pass 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. Philips' current ratio €14,075m/€9,793 of 1.4 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 do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Philips is €5,400 million, while the net current assets are €4,282 million. Philips 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. EPS for Philips were negative within the last 5 years (2008, 2011) and therefore the company fails this criterion. 

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. Philips' P/E of 19 (using the current PE) fails this test.

PRICE/BOOK RATIO: [FAIL]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Phlilps has a book value of €13,57 and fails this test.

Diagram from 2013:

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