Friday, April 19, 2019

AMG Advanced Metallurgical Group intrinsic value and share buybacks

Graham Defensive Analysis

SECTOR: [PASS] AMG 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. AMG's sales of €1 310 million, based on 2018 sales, pass this test.

CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. AMG's current ratio €882m/€421m of 2.1 passes 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 meet this criterion display one of the attributes of a financially secure organization. The long-term debt for AMG is €556 million, while the net current assets are €461 million. AMG just 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. AMG's EPS were negative in 2013, but have increased significantly over the past 10 years.

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. AMG's E/P of 10% (using EPS in 2018 of 2,97 Euros per diluted share) passes this test.

GRAHAM NUMBER VALUE:  [FAIL]  The Price/Book ratio must also be reasonable. T   hat is the Graham number value must be greater than the market price. AMG has a Graham number of √(15 x €2,8 EPS x 1,5 x €10,2 Book Value) = €25

Dividend has increased: €0,50/29,4 = 2 %

Share buyback: AMG is buying back EUR 100m of shares. That is 3,4m shares at the current price. After that the number of shares outstanding would be 31m-3,4m= 27,6m If earnings are the same in 2019 then Earnings per Share will increase to EUR 3,4 per share. A share value at a reasonable multiple 15 x EUR 3,4  could be EUR 51,- per share. 

Book value is currently Equity EUR 320m/31,4m shares = EUR 10,2. After share buyback EUR 320m - EUR 100m = EUR 220m / 27,6m shares =  EUR 8 book value per share (a 20% decrease). 

New Graham Value after share buybacks: Square Root (15 x 3,4 EPS x 1,5 X 8 Book Value) = EUR 24,7 (pretty much unchanged).

Conclusion: AMG seems like a better buy at the moment than in 2018 when the price was above 50 EUR per share. The buy backs will increase Earnings per Share but not have much effect in the Graham Value, because book value per share decreases when you buy back shares when the share price is above book value (which is now also happening at Berkshire Hathaway).

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