Tuesday, April 23, 2019

Arcadis intrinsic value and little margin of safety today

I just came across a piece of technical analysis saying the stock price of Arcadis should go up towards 20 Euros, implying you should buy? https://www.bullup.nl/arcadis-heeft-top-nog-niet-bereikt/

That would seem risky to me. The time to buy was a few months ago when Arcadis was trading just above 10 Euros (but a lot of other stocks were cheap too. In 2018 Arcadis booked a loss of EUR 53m at a subsidiary in Brazil, I haven't quite registered that in the Graham Value which could be lower than EUR 14,90.

SECTOR: [PASS] Arcadis 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. Arcadis's sales of €3 261 million, based on 2018 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. Arcadis's current ratio €1 475m/€1 243m of 1.2 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 meet this criterion display one of the attributes of a financially secure organization. The long-term debt for Arcadis is €521 million, while the net current assets are €232 millionArcadis 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. Companies with this type of growth tend to be financially secure and have proven themselves over time. Arcadis's lack of EPS growth over that period fails the EPS growth test and it booked a loss in 2018.

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. Acardis's E/P of 6% (using my estimate of current 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. Aracadis has a Graham number of (15 x €0,9 EPS x 1,5 x €10,1 Book Value) = €14,6. Today's price is: €17,6

Dividend: Arcadis paid a dividend of €0,47, which resulted in a 2,7% dividend yield.

Conclusion 2018 and 2019: The stock price determined by Mr. Market swings up and down much more than the intrinsic value of Arcadis. As Benjamin Graham, the father of value investing explained: "true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public."

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