Wednesday, April 11, 2018

Advanced Metallurgical Group AMG intrinsic value

In the past year the stock price of AMG seems to have followed the price of lithium.

For most people in previews decades, lithium was either a treatment for brain disorders or a (related) song by Nirvana. 
Today, more and more people also know lithium-ion batteries, because of the proliferation of mobile devices such as smartphones, tablets and the expected growth in electric vehicles.
Below is the 2017-2018 Lithium price.
In the past few weeks the price has dipped down to around $12 000 per metric ton?, a level a bit higher that at the beginnning of 2017.

AMG went public in 2007 for 24 Euros and the price went up to 29 Euros on the first day and increased to 50 Euros within a year, allowing its biggest shareholder to sell at attractive prices: http://www.telegraaf.nl/dft/bedrijven/amg/20543290/__Grootaandeelhouder_AMG_verkoopt_miljoenen_aandelen__.html

Currently the company is firing on all cylinders, so in hindsight 2016's share price was not as expensive as I thought. 

Lithium mine and plants: Revenue? 180 000 metric tons @$800 (lithium concentrate not carbonate) per ton = $144m extra sales in 2018&2019, sales in 2017 $1060m. Expected increase is about 14% of sales.

Graham Defensive Analysis

SECTOR: [PASS] AMG 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. AMG's sales of €1 060 million, based on 2017 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. AMG's current ratio €527m/€305m of 1.7 almost 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 meet this criterion display one of the attributes of a financially secure organization. The long-term debt for AMG is €368 million, while the net current assets are €222 million. AMG fails this test.

LONG-TERM EPS GROWTH: [FAIL] 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. AMG's EPS were negative in 2013, AMG fails this 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. AMG's E/P of 5,9% (using an estimate of increased EPS in 2018 of 2,2 Euros per diluted share) 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. AMG has a Graham number of √(15 x €2 EPS x 1,5 x €9,43 Book Value) = €22

Dividend: €0,28/37 = 1 %

Conclusion: AMG is not a stock for the Defensive Investor, but the intrinsic value has been increasing.

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

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