Thursday, December 13, 2018

Wolters Kluwer intrinsic value based on Benjamin Graham Defensive analysis

Conclusion 2017: Wolters Kluwer has done much better than I would have thought a few years ago, but the stock price does not seem cheap at the moment.

Since then earnings per share have increased and the share price has gone up more than 20%.  

Over the past decade Wolters Kluwer has done very well for investors like Francisco Parames ( the "Buffett of Spain")

Graham Defensive analysis based on Chapter 14 of The Intelligent Investor:

SECTOR: [PASS]  Wolters Kluwer is an information services company. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Wolter Kluwer's sales of €4 422 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. Wolter Kluwer's current ratio €1 832m/€2 852m of 0,6 is too low.

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 Wolters Kluwer is €2 639 million, while the net current assets are - €1 020 million. Wolters Kluwer 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. Wolter Kluwer's earnings per share grew 250% over the past 10 years. 

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. Wolters Kluwer's E/P of 5% (using this years 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. Wolters Kluwer has a Graham number of (15 x €2,4 EPS x 1,5 x €7 Book Value) = €23 

Dividend: €0,85/€53 = 1,6% 

Conclusion 2018 same as 2017: The stock seems expensive today, not an investment for the Defensive Investor. 

Question: What I don't understand (and haven't really looked into) is why the share buybacks are increasing with the share price. Warren Buffett argues that buybacks should increase when the share price falls compared to intrinsic value. Wolters Kluwer announced the budget allocated to share buybacks in the 2017 Annual Report and didn't link that intention to share price or intrinsic value. The word "intrinsic" is not used anywhere in the Annual Report.

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