Tuesday, October 23, 2018

Kendrion intrinsic value, Mr. Market was a bit too optimistic?

Kendrion's motto is "We magnetize the world", the majority of their sales is to the automotive sector, but they don't seem to make (magnets for) electric motors?

SECTOR: [FAIL]  Kendrion is in the Technology 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. Kendrion's sales of €462 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. Kendrion current ratio €144m/€104m of 1,4 just fails 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 organisation. 
Kendrion has Net Current Assets of €40 million and long-term debt of €105 million. 

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 
Kendrion's earnings haven't increased 30% in the last 10 years, therefore the company fails this criterion. 

[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. Kendrion's E/P of 6% using earning per share of the past 3 years 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. Kendrion has a Graham number of (15 x €1,4 EPS x 1,5 x €13.4 Book Value) = €21

Dividend:  €0,87 / €25,8 = 3%

Conclusion: Kendrion has been cutting costs to improve profits in the long term. The price seems reasonable here. Not a stock for the Graham Defensive Investor.

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