Saturday, July 21, 2018

Wessanen intrinsic value Benjamin Graham analysis


Mr. Market seems to have gotten a bit ahead of himself. The stock price of Wessanen dropped 26% yesterday, but the stock still isn't cheap.

Benjamin Graham Defensive Analysis from Chapter 14 of The Intelligent Investor:

SECTOR: [PASS] Wessanen 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. Wessanen's sales of €625 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. Wessanen's current ratio €211m/€163m of 1.3 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 meet this criterion display one of the attributes of a financially secure organization. The long-term debt for Wessanen is EUR 84 million, while the net current assets are €48 millionWessanen 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. Wessanen recently lost money and 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. Wessanen's E/P of 4% (using the current 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. Wessanen has a Graham number of (15 x €0,44 EPS x 1,5 x €3,07 Book Value) = €5,5. Today's price is: €12,8

Dividend: Wessanen paid a dividend of €0,13, which resulted in a 1% dividend yield. At the same time the company sold shares: They took money from shareholders (maybe not a bad idea if the share price is very high compared to intrinsic value).

Conclusion: Not a stock for the Graham Defensive Investor. Maybe a buy under 8 EUR.

Comments, questions or E-mails welcome: ajb@valuemachinesfund.nl

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