Thursday, May 18, 2017

ABN AMRO intrinsic value update

SECTOR: FAIL ABN AMRO is in the Financial sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published even decades ago. Several of Graham's criteria, like the Current Ratio and Debt to Current Assets, do not apply to financial companies. As a result, the company will not be able to pass this methodology, although we will include the remainder of the analysis for informational purposes.

SALES: PASS The investor must select companies of "adequate size". This includes companies with annual sales greater than 260 million Euros. ABN AMRO's Operating Income of  8 588 million, based on 2016 figures , 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. ABN AMRO is a financial stock so the current ratio analysis cannot be applied and this criterion cannot be evaluated.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: FAIL Long term debt must not exceed net current assets. Companies that meet this criterion display one of the attributes of a financially secure organization. ABN AMRO is a financial stock so this variable is not applicable and this criterion cannot be evaluated.

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 ABN AMRO are not available for more than 3 years and therefore the company fails this criterion.

P/E RATIO: PASS 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. ABN AMRO's P/E of 11,5 passes this test.

PRICE/BOOK RATIO: PASS The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. ABN AMRO's Price/Book ratio is 1.2, while the P/E is 11,5ABN AMRO passes the Price/Book test. Graham Number is 29,9 Euros.

DIVIDEND: ABN AMRO pays a dividend of 0,84/23 = 3,7%.

Conclusion april 13th 2016 at 19 Euros: "ABN AMRO doesn't seem expensive at this price." After the Brexit vote the price fell to 14,10 Euros, which was a good buying opportunity.

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