Monday, November 05, 2018

PostNL intrinsic value

PostNL is a difficult company to understand. (As I wrote last year when the price was still around EUR 4, now it has gone down roughly 40% :
 Mailing of letters is decreasing, but the shipment of parcels in increasing. The company is selling 2 divisions and booking a loss. It also has a negative book value. Here I have put in a positive book value of 10 cents per share and used profits of continuing business. There are also legal issues concerning competition that I don't understand.

SECTOR: [PASS] PostNL 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. PostNL's sales of €3 520 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. PostNL's current ratio €598m/€689 of 0.9 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 PostNL is €813 million, while the net current assets are - €91 million. PostNL 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. EPS for PostNL were negative within the last 5 years and Earnings per Share have decreased over the last 10 years, therefore the company fails this criterion. 

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. PostNL's E/P of 6% (using this year's estimated 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. PostNL has a Graham number of (15 x €0,3 EPS x 1,5 x €0,1 Book Value) = €0,8 and fails this test.

Dividend: 0,24/2,6 = 9% "Aim for a progressive dividend."

Apparently: "A progressive dividend policy is one where the dividend is expected to rise at least in line with increases in earnings per share. However, if earnings per share fall, the dividend will not be reduced."

Conclusion: Not a company for the Graham Defensive Investor. The dividend seems quite high, but the payout means there is less value remaining in the company itself.

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