Monday, October 08, 2018

Fugro: Benjamin Graham Defensive analysis

In his book "The Intelligent Investor" Warren Buffett's teacher, Benjamin Graham, said a Defensive Investor should only invest in profitable companies. If the company is making a loss its "Graham Number" (geometric average of 15x Earnings and 1,5 x Book) will trend towards zero. In reality, Fugro's stock price might be reasonable today. The company recently predicted: "After three years of sharp revenue decline Fugro expects revenue growth on a comparable basis, an improved EBIT margin and positive cash flow from operating activities after investments."

SECTOR: [PASS]  Fugro 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. Fugro's sales of €1 529 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. Fugro's current ratio €819m/€465m of 1.8 is good, but 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 Fugro is €756 million, while the net current assets are €354 million. Fugro 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. Fugro's EPS have been negative over the past years, Fugro 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. Fugro's E/P of 0,0% (using the average of last 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. Fugro has a Graham number of (1,5 x €0,01 EPS x €8.7 Book Value) = €1 and fails this test.

Conclusion: The offshore oil industry is picking up in 2018, but Fugro is not a stock for the Defensive Investor. It belongs on the "too difficult pile". 

Do you speak Dutch? If so please opt-in at Thanks in advance! Comments, questions or E-mails welcome:

No comments: