Wednesday, February 19, 2020

Hydratec stock price and Graham value

SECTOR: [PASS]  Hydratec is a small conglomerate of industrial systems and components companies. 

SALES: [FAIL] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Hydratec's sales of €208 million, based on 2018 sales estimates, just fails 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. Hydratec's current ratio €85m/€78m of 1,1 is too low.

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 Hydratec is €30 million, while the net current assets are €7 million. Hydratec 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. Hydratec's earnings per share have increased by 150% since 2006. 

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. Hydratec's E/P of 8% (using last years Earnings) 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. Hydratec has a Graham number of (15 x €6 EPS x 1,5 x €43 Book Value) = €77 

Dividend: €2,7/€69 = 4% 

Conclusion: Hydratec is growing organically and through acquiring companies partly by selling shares, debt is increasing. Business in 2018 was especially good. 69 EUR is sensible price at which to buy.

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