Sunday, May 28, 2017

Arcadis: profiting from Mr. Market's mood swings

Last year in January, when Arcadis had a stock price of 15,20 Euro, I wrote it would be a good time to buy. This year in January I bought some Arcadis at 12 Euros and sold last week for 16. 

2003, 2005, 2009, 2012, 2016 and today? were/is the moment(s) to buy Arcadis stock. At the moment debt is a bit high and the Earnings Yield is low compared to what Graham recommended for Defensive investors.

Here's the math/analysis:

SECTOR: [PASS] Arcadis 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. Arcadis's sales of €3 333 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. Arcadis's current ratio €1 511m/€967m of 1.6 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 meet this criterion display one of the attributes of a financially secure organization. The long-term debt for Arcadis is €782 million, while the net current assets are €544 millionArcadis 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. Companies with this type of growth tend to be financially secure and have proven themselves over time. Arcadis's EPS growth over that period of 3% fails 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. Acardis's E/P of 5% (using the current Earnings) fails this test.

Graham Number value: [PASS]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Aracadis has a Graham number of (15 x €1 EPS x 1,5 x €11,9 Book Value) = €18,8. Today's price is: €16

Dividend: Arcadis pays a dividend of €0,43, which results in a 3% dividend yield.

Conclusion: The stock price determined by Mr. Market swings up and down much more than the intrinsic value of Arcadis. As Benjamin Graham, the father of value investing explained: "true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public."

See for in-depth analysis of quality companies.

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