Sunday, March 05, 2017

Philips Lighting intrinsic value ? Buy under 20 Euros

Philips Lighting is a recent spin-off from Philips selling old fashioned incandescent lights ("last man standing") and modern LEDs.

SECTOR: [PASS] Philips Lighting 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 Lighting's sales of €7 115 million, based on 2016 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 Lighting's current ratio €3 660m/€2 113 of 1.7 almost 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 Philips Lighting is €1 409 million, while the net current assets are €1 547 million. Philips Lighting passes this test.

LONG-TERM EPS GROWTH: [FAIL] [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. Philips Lighting as an independent company has insufficient history for this criterion. 

Earnings Yield: [FAIL]  The inverse of 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 sufficiently high, which this methodology states is greater than 6,5%. Stocks with high Earning Yields are more defensive by nature. Philips Lighting's Earnings Yield of 5% (using the current Earnings and Share Price) fails this test.

GRAHAM NUMBER: [FAIL]  The Graham number value must be greater than the market price. Phlilps Lighting has a Graham Number of  Square Root ( 1,5 x €18 Book Value x 15 x 1,26 Earnings per Share) = € 22,6 and fails this test since the price has increased after the IPO.

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