Tuesday, May 30, 2017

Aperam valuation using Benjamin Graham Defensive Analysis

SECTOR: [PASS] Aperam 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. Aperam's sales of €4,265 million, based on 2016 sales, pass this test.

CURRENT RATIO: [PASS] [FAIL]  The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Aperam's current ratio €997m/€517m of 1.9 just 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 Aperam is €448 million, while the net current assets are €480 million. Aperam 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. EPS for Aperam were negative within the last 5 years and therefore the company fails this criterion.

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. APERAM's  E/P of  6% (using last year's 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. Aperam has a Graham number of (22,5 x €1,2 EPS x €21 Book Value) = €40,6

Conclusion: Buy if price goes under 35. Based on the 2013 graph (below), a Graham Defensive Investor would not have invested. A missed opportunity.

2012 results, 6 Feb. 2013 Market price

See www.beterinbeleggen.nl for analysis of great companies.

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

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