Friday, October 12, 2018

Hunter Douglas (Luxaflex) intrinsic value is above today's price

Last year, June 2017, I wrote: "Given the increasing earnings and high Return on Equity today's price of  €80 per share might not be expensive." today the share price is EUR 63,41 and the company seems like a buy. Debt has been increasing (as a result of acquisitions?), so it is not a stock for the Graham Defensive Investor.

SECTOR: [PASS] Hunter Douglas is in manufacturing (of window coverings). Technology and financial stocks were considered too risky to invest in when this methodology was published. 

[PASS]  The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Hunter Douglas' sales of €3 246 million, based on 2017 sales, passes this test.

[FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Hunter Douglas' current ratio €1 550m/€1 003m of 1,5 just fails this test.

[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 Hunter Douglas is €1 021 million, while the net current assets are €486 million. Hunter Douglas 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. 
Hunter Douglas' earnings have increased during the past 10 years by 50%.

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. Hunter Douglas' E/P of 9% (using last 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. Hunter Douglas has a Graham number of (15 x €6,1 EPS x 1,5 x €39 Book Value) = €73 

Dividend: €1.85/€63= 3% 

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