Thursday, July 18, 2019

A Graham perspective of HAL shares of Grandvision being sold for EUR 28 per share

In 2015 HAL Trust sold roughly 20% of its Grandivision shares for EUR 20 each when the company went public through an IPO. 4 years later it might be selling the remaining 76% of shares it holds for EUR 28 each to EssilorLuxottica.  A gain of 40% over 4 years, not including dividends. 
EUR 28 offer?
Note: As a retailer that rents stores instead of owning the real estate, GrandVision has a relatively low book value and thus Graham Number, the intrinsic value is higher than the Graham Number.

SECTOR: [PASS]  GrandVision 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. GrandVision's sales of €3 721 million, based on 2018 sales, passes 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. GrandVision's current ratio €785m/€1 197m of 0.7 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 GrandVision has fallen to €564 billion, while the net current assets are - €412 million. Improving, but GrandVision 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. GrandVision's EPS have increased by 128% in the last 6 years, GrandVision passes this test.

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. GrandVision's E/P of 3% (using this year's earnings and the EUR 28 offer) 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. GrandVision has a Graham number of (15 x €0,90 EPS x €5 Book Value) = €10 and fails this test.

Dividend: €0,33/€28 = 1% but growing:

Conclusion: Grandvision is growing through acquisitions, but growth in bottom-line results has not met investors' hopes. The offer seems like good news for HAL Trust investors.

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