Tuesday, May 16, 2017

Wolters Kluwer's increasing intrinsic value

SECTOR: [PASS]  Wolters Kluwer  is an information services company. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Wolter Kluwer's sales of €4 297 million, based on 2016 sales, passes 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. Wolter Kluwer's current ratio €2 451m/€3 175m of 0,8 is too low.

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 Wolters Kluwer is €2 984 million, while the net current assets are - €724 million. Wolters Kluwer 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. Wolter Kluwer's earnings per share grew 60% over the past 10 years. 

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. Wolter Kluwer's E/P of 4% (using this years estimated 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. Wolter Kluwer has a Graham number of (15 x €1,6 EPS x 1,5 x €9 Book Value) = €18 

Dividend: €0,8/€40 = 2% 

Graham Number and price graph from 2013:

Conclusion: Wolters Kluwer has done much better than I would have thought a few years ago, but the stock price does not seem cheap at the moment.

See www.beterinbeleggen.nl for valuation of great companies.

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

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