Wednesday, May 16, 2018

Royal DSM showing up in Graham Defensive stock screens due to abnormal profit?

DSM has recently been increasing Earnings per Share, Price has led the way. In 2017 it sold Patheon and booked a profit of €10 per share and an increase in book value. Without that sale, profit would have been €4, so that is the number used here. The €10 number is used for stock screens, so DSM has shown up as a Graham Defensive stock.

SECTOR: [PASS] DSM 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. DSM's sales of €8 632 million, based on 2017 sales, pass 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. DSM's current ratio €5 432m/€2 228m of 2.4 passes 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 meet this criterion display one of the attributes of a financially secure organization. The long-term debt for DSM is €3 509 million, while the net current assets are $3 204 million. DSM just 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. DSM's EPS growth of 50% passes 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. DSM's E/P of 6% (using last years earnings) 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. DSM has a Graham number of (22,5 x €4,4 EPS x €40 Book Value) = €65 and fails this test.

Dividend: DSM pays a dividend of 1,85/88 = 2%

Conclusion: There is no easy conclusion to be made here. I didn't predict the good results over the past years. 


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