Tuesday, June 06, 2017

Flow Traders Benjamin Graham Value and Price starting to converge

The past quarter Q1 2017 the price changes on the stock market were quite low (low "VIX") which led to lower profits for Flow Traders. Theoretically earnings should improve in the future. I don't understand their business or competitive advantage versus other companies.

SECTOR: [???] Flow Traders provides liquidity for ETP Exchange Traded Products. It went public in 2015 at a price of around €35, the price climbed to €50 and now has dropped below the IPO level. I  am not an expert and don't know how much of an "arms race' in technology is involved.

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Flow Traders' sales of €355  million, based on 2016 sales, 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. Flow Trader's current ratio €1 155m/€3 126m of 0,4 is quite low and fails this 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 Flow Trader's is €2 393 million, while the net current assets are - €1 971 million. Flow Traders 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. Flow Trader's long term results are difficult to determine because of its corporate history and recent IPO. 

Earnings Yield:  [PASS]  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. Flow Trader's E/P of 7,7% (using last year's Earnings and taking growth into account) passes 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. Flow Trader's has a Graham number of (15 x €1,9 EPS x 1,5 x €5,8 Book Value) = €16 

Dividend: €1.25/€25 = 5%  (Flow Trader's dividend varies. It pays out 50% of profit as dividend).

Conclusion: Flow Traders seems to be creating value and is a better buy near €25 than at €50, but is not a stock for the Defensive Investor. One issue that may be risky is the increasing amount of debt on the balance sheet. 

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

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