Texas Instruments CFO to Home Depot Co-Founder: "Your margins are too low to be able to make any money."

This part of a series linked to how to make money in a theoretically impossible manner in retail: see also ( http://sinaas.blogspot.com/2018/05/brenninkmeijers-profiting-from-insight.html )

Home Depot has been a great investment since it went public: https://www.valuewalk.com/2016/07/companies-that-beat-warren-buffett/ but not everybody believed in it when Ken Langone was raising money to start the company. In his autobiography "I love Capitalism", Langone explains.

Cash flowing at Home Depot checkouts

"Bernie Marcus' revolutionary idea for a new chain of home-improvement stores sounded great ... In Bernie and Arthur's vision, the new stores' huge size, wide inventory, and low prices would produce $7 to $9 million in annual sales per store (Handy Dan stores averaged $3 million in sales per annum), at gross profit margins of 29 to 31 percent (the industry standard was 42 to 47 percent). Sheer sales volume would compensate for the lower profit margins.
And not just volume. The salespeople in the stores wouldn't only be there to operate cash registers. They would be highly trained in home repair and home improvement, ready to answer all questions and guide customers through any project, small or large." Langone  continues: "I calculated that the initial stage would take a couple million dollars in venture capital... I needed a contrarian with a couple million dollars lying around.
Who else but Ross Perot?" (Langone had helped with Perot's EDS IPO).

Ross Perot entrepreneur & candidate

Langone: "I took Bernie down to EDS's Dallas headquarters to meet Ross, and the initial meeting went well...Ross sat there behind his big desk, all ears...So far, so good. Except for Bryan Smith, who from the jump was the sceptic in the room. He was a very nuts-and-bolts guy who simply didn't believe that -- no matter how great the new stores' service and product selection and sales volume -- Bernie and Arthur could make a go of it on a 27 percent gross margin (markup), when the industry standard was 44 percent. No matter how hard I insisted that service and selection and store size were certain to create big sales volumes, Bryan Smith kept shaking his head. 
At the end of the meeting, Langone spoke to Perot: " "Look, Ross," I said. "We're all thinking about where we are. Bryan's clearly got reservations about the deal. Why don't we all think this over for a couple of weeks, and we'll come back and see where we are."
"Okay, " Ross said, "If you want to come back, come back."
We knew we wouldn't be coming back. As we waited for the elevator outside Perot's office, Arthur was despondent. "Oh, my God, what are going to do, what are we going to do?" he said. "We haven't got any money!"
"Arthur, here's what we are going to do," I said. "I'm going to go out and raise the two million bucks. You guys are going to get 45 percent instead of the 25; the investors are going to get 50, and I'll get 5."
Arthur looked amazed. "Hell, that's a much better deal than we would've had with Perot," he said.
"Yes, Arthur," I said. "In the retail business, when you can't sell something, you guys mark it down. In my business, when you can't sell something you mark it up."

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

Air France KLM Graham Defensive analysis

2017 Conclusion: Too difficult pile. 2018 still too difficult, but it remains a Frech ariline. AF KLM is probably not a good long-term investment. The company seems to need to sell more and more shares to keep its planes aloft.

SECTOR: [PASS] AF 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. AF's sales of €25 800 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. AF's current ratio of €9 051m/€11 045m of 0.8 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 AF is €10 348 million, while the net current assets are €-1 994 million. AF 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. EPS for AF were negative in many of the past years and therefore the company fails this criterion.

E/P RATIO:  [FAIL]  The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. AF's Earnings Yield is 17% this year and has made a loss over the past 3 years.

GRAHAM NUMBER VALUE: [PASS]  [FAIL]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price and is at 8 Euros. 

NO DIVIDEND and selling lots of shares.

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

AFC Ajax and Invesco, not a bad investment

Last year I wrote about Invesco owning Ajax shares. The Value of Ajax seemed to be higher than the Price and both have increased since then: http://sinaas.blogspot.com/2017/05/ajax-football-club-intrinsic-value.html

I don't know how Ajax will do financially this year or next. Here is the Benjamin Graham Defensive analysis.  The price seems very reasonable:

Last year Ajax paid out a dividend of 24 cents per share, which surprised me a little. I thought they would spend profits on trying to win more games instead of returning capital to shareholders.

Here a simple Graham analysis:

SECTOR: [PASS]  AJAX is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES:[FAIL] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. AJAX's sales of €118 million, based on 2017 sales, fails 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. AJAX's current ratio €148m/€72m of 2.1 passes the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] 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 AJAX is €15 million, while the net current assets are €76 million. AJAX passes 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. AJAX made a small loss in 2015  and thus fails the test.

Earnings Yield: [PASS] 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. AJAX's E/P of 11% (using the average of 3 years Earnings) passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. AJAX has a Graham number of √(15 x €1,5 EPS x 1,5 x €8,6 Book Value) = €17 

Dividend 2017/2017 24 cents/12 = 2%

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

Ahold Delhaize overcomes Amazon + Whole Foods jitters

Ahold merged with Delhaize and value per share has increased from 7 to more than 12 Euros per share leading to an increase in the Graham value per share. After the Ahold Delhaize merger Amazon bought Whole Foods supermarkets in the US and investors dumped Ahold Delhaize shares. Hendrik Oude Nijhuis (www.beterinbeleggen.nl and co-founder of ValueMachines Fund) wrote in VEB Magazine in March 2018 that investors (Mr. Market) were (was) overreacting. Since then the company's Value has increased and the Price of the stock has increased even more quickly closing the gap between the two. (But I missed the boat = opportunity cost).

SCTOR: [PASS] AHOLD 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. AHOLD's sales of €63 000 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. AHOLD's current ratio €9 970m/€10 305m of 1,0 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 AHOLD is  €8 400 (was 4,526 million before the merger), while the net current assets are minus €335 million. AHOLD 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. AHOLD's EPS growth of 160% over that period passes the EPS growth test.

Earnings Yield:  [PASS] 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. AHOLD's E/P of 6,5% just passes 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. AHOLD has a Graham number of √(15 x €1,4 EPS x 1,5 x €11,55 Book Value) = €18,9

Dividend: 0,63 / 20,45 = 3%

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

Aegon: intrinsic Value much higher than Price ?

AEGON has an annual report of 393 pages and a Market Cap of 11 billion Euros. Berkshire Hathaway (run by Warren Buffett) has a Market  Cap of 472 billion $ and an Annual Report of 124 pages....  Management at Aegon intends to return 2,1 billion Euros in a few years, that is 20% of the market cap...  Aegon seems cheap, but I don't understand it. I wonder why they don't buy back more shares (at this low price) rather than increasing dividends? 

SECTOR: FAIL AEGON is in the Financial 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 even decades ago. Several of Graham's criteria, like the Current Ratio and Debt to Current Assets, do not apply to financial companies. As a result, the company will not be able to pass this methodology, although we will include the remainder of the analysis for informational purposes.

SALES: PASS The investor must select companies of "adequate size". This includes companies with annual sales greater than 260 million Euros. AEGON's revenue of  32 973 million, based on 2017 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. AEGON is a financial stock so the current ratio analysis cannot be applied and this criterion cannot be evaluated.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: FAIL Long-term debt must not exceed net current assets. Companies that meet this criterion display one of the attributes of a financially secure organization. AEGON is a financial stock so this variable is not applicable and this criterion cannot be evaluated.

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. EPS for AEGON were negative in 2015 and thus fails this test.

EARNINGS YIELD: PASS 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. AEGON's E/P of 13% passes this test.

Graham Number value: PASS The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. AEGON has a Graham number of √(15 x €0,8 EPS x €11,9 Book Value) = €14,7

DIVIDEND: AEGON pays an increasing dividend of 0,27/5,43 = 5%.

Conclusion: Aegon seems cheap, but is outside my circle of competence. 

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

ASML ratio between intrinsic (Graham) Value vs Price over the years

Famed investor Peter Lynch said: "In business, competition is never as healthy as total domination." He might have liked ASML.

For a few years, I have been following ASML and often thought the price was too high based on this type of chart comparing Price and Graham value. It seems like the difference is getting bigger and bigger.

Peter Lynch made charts, comparing stock Price over a number of years with the growth in (15 times) Earnings per share. An important aspect of his charts is that they were logarithmic, which puts a certain annual percentage of growth in a clearer perspective, it also shows that differences are different than they seem. Below you can see that the share was relatively much more expensive in 2007 than during the Price dip in 2016 to 75 Euros. Above the 2016 price seems relatively expensive compared to the 2007 high point...

Benjamin Graham Defensive Analysis:

SECTOR: [FAIL] ASML 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. At that time they were not the driving force of the market as they are today. Although this methodology would avoid ASML, we will provide the rest of the analysis, as we feel times have changed.

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. ASML's sales of €9 053 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. ASML's current ratio €9 096m/3 132m of 2.9 passes the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] 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 ASML is €4 700 million, while the net current assets are €5 964 million. ASML passes 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. EPS for ASML grew 256% during the past 10 years. The company passes this criterion.

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. ASML's E/P of 3% 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. ASML has a Graham number of √(15 x €4,9 EPS x €23,36 Book Value) = €51

DIVIDEND 1,4/175 = 1%

Conclusion: ASML is a profitable growing company, but the stock price has outpaced the company's per share intrinsic value. 

Note: ASML stock holders who focus on price and earnings growth should be quite happy with the results over the past years:

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

Adyen: interesting stock price... not a Graham Defensive Stock at the moment.

Ayden went public in June 2018. The old shareholders who sold a little over 10% of their shares received 240 Euros, if I understand correctly. The first price normal share buyers were able to pay was 400 Euros, the institutions that were able to buy before opening, were able to pocket the difference?

The Price is very different than what a Benjamin Graham Defensive Investor might be willing to pay.

At Earnings per Sahe of roughly 5 Euros? The company is selling at a Price / Earnings ratio of over 80. Profits must increase by over 500% in the near future to justify the current price that "Mr. Market" is asking.

The company itself seems fantastic, great growth and a good balance sheet.

Sales: 1 500 million Euros in 2018?

Current Ratio: 1,3  , Long Term Debt is lower than Net Current Assets.

Dividend: Adyen intends to retain any profits to expand the growth and development of Adyen's business and, therefore, does not anticipate paying dividends to its Shareholders in the foreseeable future.

Chances are 240 Euros is nearer intrinsic value than today Price of 411 Euros? Time will tell.

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

Accell Group NL0009767532 price has dipped back towards intrinsic value

Conclusion May 2017: Accell's stock price has had a good run. There is a chance it might be bought for around 33 Euros, but I would sell above 30.

Last year it looked like a good idea to sell Accell http://sinaas.blogspot.com/2017/05/accell-group-aex-accel-nl0009767532.html if you didn't sell, you saw the share price dip by almost 50%. Profits were also down in 2017 due to problems and taxes in the US, so (Graham) Value has also gone down.

Graham Defensive analysis based on The Intelligent Investor book Chapter 14:

SECTOR: [PASS] Accell 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. Acell's sales of €1 068 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. Accell's current ratio €507m/€280m of 1.8 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] 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 Accell is €126 million, while the net current assets are €227 million. Accell passes 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. Accell's Earnings per Share have not grown over the past ten years due to the expensive takeover of Raleigh North America.

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. Accell's E/P of 6% (using an estimate of next year's 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. Accell has a Graham number of √(22,5 x €0,94 EPS x €10,90 Book Value) = €15,3. Today's price is: €19,-

Dividend: Accell pays a dividend of roughly €0,50, which is 3%

Conclusion: "Too difficult pile", if the price drops below 15 Euros a buy. Shareholders will be unhappy that management did not accept Pon's offer of 33 Euros last year. Will another lower offer now be acceptable?

See: www.beterinbeleggen.nl for analysis of quality companies.

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

Lucas Bols: Price is now lower than intrinsic Value

3-10-2018

SECTOR: [PASS]  Lucas Bols is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [FAIL] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Lucas Bols' sales of €92 million, based on 2017 sales, fails this test.

CURRENT RATIO:  [PASS] [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Lucas Bols' current ratio €42m/€20m of 1.7 just 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 Lucas Bols is €156 million, while the net

current assets are €22 million. Lucas Bols fails this test.

LONG-TERM EPS GROWTH: [PASS] [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. Lucas Bols' EPS growth over that period is a number we don't have because the IPO was in 2015.

EARNINGS YIELD:  [PASS] 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. Lucas Bols' E/P of 10% (using last year's earnings) passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Lucas Bols has a Graham number of √(15 x €1,6 EPS x 1,5 x €15 Book Value) = €21,4 and passes this test.

DIVIDEND €0,60/€15.9 = 4%

Conclusion: Lucas Bols seems fairly priced just above €15,90. There is a margin of safety at the moment.

See: www.beterinbeleggen.nl for more in depth, qualitative analysis of "good" companies.

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