Wednesday, May 24, 2017

Ahold Delhaize valuation based on Benjamin Graham number

Ahold merged with Delhaize and book value per share has increased from 7 to more than 12 Euros per share leading to an increase in the Graham value per share. Note that much of that increase is intangible.

SECTOR: [PASS] AHOLD 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. AHOLD's sales of €50 000 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. AHOLD's current ratio €9 977m/€10 673m of 0,9 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 AHOLD is  €8 000 (was 4,526 million before the merger), while the net current assets are minus €696 million. AHOLD fails 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. AHOLD's EPS growth of 72% over that period passes the EPS growth test.

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. AHOLD's E/P of 5% (using the 3 year average Earnings) fails this test.

Graham Number value: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. AHOLD has a Graham number of (15 x €0,95 EPS x 1,5 x €12,50 Book Value) = €16,3

Dividend: 0,57 / 20,1 = 3%

Ahold Delhaize is a company where the price increased before the Graham Number. I missed this opportunity. This is last year's graph:

Comments, questions or E-mails welcome:

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