Wednesday, June 07, 2017

Hunter Douglas revised Benjamin Graham Number valuation

2016 results and Book Value per share at Hunter Douglas were higher than I expected. I also made a mistake in the 2015 figures. I wrote: Book Value €22,6 and Earnings per Share €3,3, which were actually €28,1 and €4,04 ...  

My conclusion: "Hunter Douglas has a strong balance sheet and seems like a good pick for the Defensive Investor but only if the price drops to under €41." was incorrect.  

Previous chart:
Incorrect October 2016
Revised chart:

Given the increasing earnings and high Return on Equity today's price of  €80 per share might not be expensive.

Graham Defensive analysis:

SECTOR: [PASS] Hunter Douglas is in manufacturing (of window coverings). Technology and financial stocks were considered too risky to invest in when this methodology was published. 

[PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Hunter Douglas' sales of €2 836 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. 
Hunter Douglas' current ratio €1 438m/€656m of 2,2 passes this test.

[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 Hunter Douglas is €642 million, while the net current assets are €486 million. Hunter Douglas 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. 
Hunter Douglas' earnings have increased during the past 10 years by 50%.

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. Hunter Douglas' E/P of 7% (using last years Earnings) 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. Hunter Douglas has a Graham number of (15 x €5,3 EPS x 1,5 x €37 Book Value) = €66 

Dividend: €1.5/€80= 2% 

Comments, questions or E-mails welcome:

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