Monday, January 20, 2020

Neways Electronics intrinsic value estimate based on Benjamin Graham Defensive Investor model.


Value Investing theory:

Neways practice: Buy?


Value8 run by Peter-Paul de Vries just bought 5% of Neways. Was that a good idea? 

SECTOR: [PASS]  Neways is in electronic manufacturing services (EMS) 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. Neways' sales of €500 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. Neways' current ratio €198m/€150m of 1.3 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] 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 Neways is €37 million, while the net current assets are €48 millionNeways passes 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. Neways made a loss in 2012 but both profit and book value has increased considerably since then.

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. Neways' E/P of 8% (using the average of last 3 years earnings and an estimate for 2019) passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Neways has a Graham number of (15 x €0,9 EPS x 1,5 x €8,5 Book Value) = €13 and PASSES this test.

DIVIDEND €0,48/€9,3 = 5%

Conclusion: Neways seems like a good buy and I can understand the thinking at Value8.

Note 2018 at EUR 10: VDL owns 26% of the shares and might do a buyout if the share price goes low enough? A number of Dutch stocks seem cheap at the moment.

Note 2019 (jan 2020): VDL increased its ownership up to 28%. Having VDL has an owner could help improve operational excellence...on the other they are also a customer?

See: www.beterinbeleggen.nl for more in depth, qualitative analysis of "good" companies.

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