Monday, May 21, 2018

Aalberts growing exponentially (as a company should) log. vs linear scales

When you see a linear graph of anything growing by a certain percentage per year, it seems growth is increasing, whilst the rate of growth is not. Using a logarithmic scale helps to avoid drawing incorrect conclusions. Compare the 2 for Aalberts Industries below:

The buy / sell points are the same, but you can really see the 2009 opportunity best in the logarithmic graph.
Warren Buffett's partner, Charlie Munger, said Value Line logarithmic charts over a long period of time are the most valuable investing tool he can think of (Berkshire Hathaway Annual Meeting 1996-1998 somewhere). Superinvestor Peter Lynch made longterm logarithmic charts of 15x Earnings Per Share (EPS) versus share price. 
The Peter Lynch chart shows that even if you buy a wonderful company that enjoys fantastic growth after you have bought it, the stock price can sometimes be too high at the moment you bought it. An example shown below is Walmart (ticker WMT), where the stock price in 2000 was the same as the stock price 14 years later even though the earnings per share increased 600%. 

Aalberts Graham Defensive Analysis:
SECTOR: [PASS] Aalberts 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. Aalberts' sales of €2,694 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. Aalberts' current ratio €994m/€757m 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 Aalberts is €640 million, while the net current assets are €237 million. Aalberts 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. Aalberts' EPS growth over that period of 240% passes the EPS growth 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. Aalberts's E/P of 5% (using the average of last 3 years) 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. Aalberts has a Graham number of √(15 x €2,2 EPS x 1,5 x €13,7 Book Value) = €26,7

Dividend: Aalberts currently pays a dividend of 65 cents. 0,65/42 = 2%

Conclusion: A bit too much debt, price (koers) a bit too high at the moment. Start buying only if near 30 Euros.

Question: What is Aalbert's Return On Equity that allows it to grow at this rate? Answer: Around 20% from 2002-2008 and 15% between 2010 and today. You can see that in the steepness of the logarithmic line of the Graham Value, higher ROE is steeper line?

Old chart September 2012 when the price was 11 Euros, now 42 Euros...

Comments, questions or E-mails welcome:

No comments: