Thursday, December 26, 2019

Core Labs share price follows earnings downwards

In September 2018 I wrote: "The stock price has varied less than earnings." The stock price was EUR 94 at that time and has since fallen to EUR 40. 

SECTOR: [PASS]  Core Labs is a decades-old oilfield services company. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Core Lab's sales of $700 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. Core Lab's current ratio $231m/$120m of 1,9 is pretty good.

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 Core Labs is $297 million, while the net current assets are $111 million. Core Labs 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. Core Lab's earnings have not increased much over the past ten years due to the fall in Earnings recently.

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. Core Lab's E/P of 6% (using this year's estimated Earnings) fails this test.

"Peter Lynch" value: [FAIL]  The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Core Labs has a Peter Lynch number of 15 x $2,2 EPS is roughly €33 

Dividend: €2/€40 = 5%   
Conlcusion: Could be a buy if stock dips under EUR 35.

No comments: