Tuesday, October 09, 2018

HAL Trust stock price and Graham Number

The long-term correlation between share price and Graham Number Value (the geometric average of 15 x Earnings per Share and 1,5 x Book Value) often surprises me. In this case of HAL Holding / Trust the price also follows Net Asset Value (which I have used as a proxy for book value). HAL is complex because it is a holding, "earnings" are connected to stock price swings. Net Asset Value depends on whether a (partially) owned company is private or public. It is possible that HAL Trust's Net Asset Value could increase if Coolblue has an IPO. Here are 3 different "intrinsic values" for Grandvision before and after its IPO: Dutch: https://sinaas.blogspot.com/2017/06/intrinsieke-waarde-is-vaak-niet-wat.html 

Benjamin Graham Defensive analysis:

SECTOR: [PASS]  HAL 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. HAL's sales of €5 609 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. HAL's current ratio €4 987m/€2 878m of 1.6 just passes 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 HAL is decreasing, currently, €3 457 million, while the net current assets are € 662 million. HAL 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. HAL's earnings fluctuate with stock prices and are now the same as ten years ago.

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. HAL's E/P of 4% (using this years Earnings) fails 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. HAL has a Graham number of (15 x €7,7 EPS x 1,5 x €150 Book Value) = €146 

Dividend: Is a bit strange, it is 4% and determined by the share price in December..

Conclusion: No definitive conclusion at the moment.

Do you speak Dutch? If so please opt-in at www.valuemachinesfund.nl Thanks in advance! Comments, questions or E-mails welcome: ajb@valuemachinesfund.nl

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