Saturday, May 13, 2017

TomTom intrinsic value based on Benjamin Graham's book The Intelligent Investor

SECTOR: [FAIL] TomTom is in the Technology sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published. 

SALES: [PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. TomTom's sales of €987 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. TomTom's current ratio €376m/€327m of 1.1 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 TomTom is €214 million, while the net current assets are €49 million. TomTom 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. TomTom made losses in 2008 and 2011 and therefore 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. TomTom's E/P of 1% (using the past 3 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. TomTom has a Graham number of (22,5 x €0,1 EPS x €3,76 Book Value) = €2,6

Note: If you had bought at 2013 when the diagram below was made (which suggested there was no margin of safety, your return would be 300%. Cconclusion is still, sell now at 9,5 Euros. 

Comments, questions or E-mails welcome:

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