Tuesday, June 13, 2017

HAL Trust intrinsic Value and Price go hand in hand

The long-term correlation between share price and Graham Number Value (the geometric average of 15 x Earnings per Share and 1,5 x Book Value) often surprises me. Here is the chart I just updated for HAL Trust:

Note that dividend payments are not included in the chart above. Total shareholder returns have been even greater than this.  Total shareholder return including dividends has been around 18% a year.  (he Dutch Buffett: Hal Trust Outperformed Berkshire Hathaway Past Quarter Century https://seekingalpha.com/article/2806905-the-dutch-buffett-hal-trust-outperformed-berkshire-hathaway-past-quarter-century )

SECTOR: [PASS]  HAL 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. HAL's sales of €8 800 million, based on 2016 sales, passes 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. HAL's current ratio €5 487m/€2 768m of 2.0 just passes 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 HAL is decreasing, currently €3 948 million, while the net current assets are €2 719 million. HAL 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. HAL's earnings have increased 70% over the past ten years.

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. HAL's E/P of 6% (using this years 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. HAL has a Graham number of (15 x €10 EPS x 1,5 x €170 Book Value) = €196 

Dividend: Is a bit strange, it is 4% and determined by the share price in December..

Conclusion: HAL Trust has increased in value considerably over the past years especially, but the stock is not as cheap as it has been in the past, when compared to Earnings per Share. The book value increased after GrandVision went public at the beginning of 2015. 

Note: "The Company’s strategy is focused on acquiring and holding significant shareholdings in companies, with the objective of increasing long-term shareholders’ value." They seem to be very good at this.

See: www.beterinbeleggen.nl for more in depth, qualitative analysis of "good" companies.

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

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