Tuesday, June 20, 2017

Heineken: Price is what you pay, Value is what you get? Graham intrinsic value

Heineken: Price is what you pay, Value is what you get? Graham intrinsic value

SECTOR: [PASS] HEINEKEN 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. HEINEKEN's sales of €20 838 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. HEINEKEN's current ratio €8 137m/€10 243m of 0.8 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 do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for HEINEKEN is €14 049 million, while the net current assets are €-2 106 million. HEINEKEN 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. HEINEKEN's EPS growth over that period of 63% passes 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. HEINEKEN's E/P of 3% (using the average over 3 years) 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. HEINEKEN has a Graham number of (15 x €2,9 EPS x 1,5 x €23,2 Book Value) = €39 and fails this test.

Dividend: 1,38 E / 88 E = 2% 

Heineken is a Money Making Machine that turns a commodity, beer, into a strong brand. The price at the moment though seems high, comparable to the peaks of 2002 and 2007. Mr. Market seems to be pricing in a possible takeover bid, but Heineken's controlling family has said they are not interested in selling...

For analysis of more great companies, see www.beterinbeleggen.nl 

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

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