Tuesday, October 16, 2018

ING Bank intrinsic value, is Mr. Market too negative?

In 2018 ING agreed to pay a fine to the Dutch government as a settlement regarding shortcomings in the execution of customer due diligence policies to prevent financial-economic crime at ING Netherlands. The fine was EUR 775m but the damage to reputation and time spent will probably cost the bank much more. To put the fine into perspective yearly profit is around EUR 5 000m and equity is EUR 50 000m.  


ING is in the Financial sector, which is one sector that this methodology avoids. Technology and financial stocks are considered too risky to invest in. 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. ING's sales of €17 773 million, based on 2017 sales, pass this test.

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. ING 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 ING haven't increased in the last 10 years the company fails this criterion. 

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. ING's E/P of 9% using earning per share estimate of €1.

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. ING has a Graham number of (15 x €1,1 EPS x 1,5 x €12,6 Book Value) = €18

Conclusion: Now at a stock price of EUR 10,8 seems like a good time to buy ING.

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