Tuesday, May 30, 2017

ASML intrinsic value 3% Earnings Yield

"I prefer to think in terms of the inverse of P/E, or Earnings divided by Price, sometimes known as E/P but perhaps better described as Earnings Yield. When the P/E is 20, for example, the Earnings Yield ids 1/20, or 5 percent. An investor who owns the S&P 500 index could think of it as a long-term bond comparing the Earnings Yield of this "bond" to the returns of actual bonds. When the Earnings Yield on the stock index is high, the investor sells some of his bonds and buys stocks and vice versa."

Benjamin Graham Defensive Analysis:

SECTOR: [FAIL] ASML is in the Technology 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. At that time they were not the driving force of the market as they are today. Although this methodology would avoid ASML, we will provide the rest of the analysis, as we feel times have changed.

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. ASML's sales of €6 795 million, based on 2016 sales, pass this test.

CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. ASML's current ratio €9 321m/2 055m of 4.5 passes 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 meet this criterion display one of the attributes of a financially secure organization. The long-term debt for ASML is €5 308 million, while the net current assets are €7 266 million. ASML passes 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. EPS for ASML grew 226% during the past 10 years. The company passes 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. ASML's E/P of 3% 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. ASML has a Graham number of (15 x €3,24 EPS x €23,07 Book Value) = €41


Conclusion: ASML is a profitable growing company, but the stock price has outpaced the company's per share intrinsic value. Not a buy for the Graham Defensive Investor at €120 May 2017.

Note: ASML stock holders who focus on price and earnings growth should be quite happy with the results over the past years:

2013 Results, 2 May 2014 price
2013 Results, 2 May 2014 price

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

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