Friday, January 31, 2020

Signifiy: Stock Price versus Value. `Like taking a dog for a walk.´

My colleague Hendrik Oude Nijhuis likes to say: "Think of a stock's Price and Intrinsic Value in terms of taking an excitable dog for a walk on a long leash. Sometimes the dog walks in front of you, sometimes behind you, but eventually, you both arrive at your destination at the same time."

Signify is a textbook example:  This was the Benjamin Graham Defensive chart last year in October 2018:


And this is the same chart today, January 31st 2020:


Stock Price has increased by 50% (EUR 20 to EUR 30) even though the Value has increased by much less.

Benjamin Graham Defensive Analysis

SECTOR: [PASS] Philips Lighting 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. Philips Lighting's sales of €6 200 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. Philips Lighting's current ratio €3 174m/€2 155 of 1.5 fails this 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 (and provisions) for Philips Lighting is €2 236 million, while the net current assets are €1 019 million. Philips Lighting fails this test.

LONG-TERM EPS GROWTH: [FAIL] [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. Philips Lighting as an independent company has insufficient history for this criterion. Sales were decreasing, not a good sign. 

Earnings Yield: PASS] The inverse of the Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be sufficiently high, which this methodology states is greater than 6,5%. Stocks with high Earning Yields are more defensive by nature. Philips Lighting's Earnings Yield of 7% (using the current Earnings and Share Price) fails this test.

GRAHAM NUMBER:  [PASS] [FAIL]  The Graham number value must be greater than the market price. Phlilps Lighting has a Graham Number of  Square Root ( 1,5 x €18 Book Value x 15 x €2 Earnings per Share) = € 29 and is similar to the price.

Dividend: EUR 1,35 / 30,3 = 4%

Conclusion: Signify seems fairly priced today. 

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