Tuesday, February 11, 2020

Randstad Benjamin Graham Defensive Analysis

This is the current analysis using the criteria from Chapter 14 Defensive Investing from "The Intelligent Investor":

Note: Graham talked about Earnings in The Intelligent Investor, Randstad seems to be focussed on Free Cash Flow and Gross Margins currently.  Dividends (not included in the graph above) have increased significantly and are now 8% of the share price. 

SECTOR: [PASS]  Randstad 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. Randstad's sales of €23,676 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. Randstad's current ratio €5 066m/€4 994m of 1.0 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 Randstad is €691 million (and decreasing), while the net current assets are €72 million. Randstad 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. Randstad's EPS growth was 90% over the past 10 years, Randstad fails this test.

Earnings Yield: [FAIL]  [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. Randstad's E/P of 6,5% (using the last 3 years Earnings) passes 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. Randstad has a Graham number of (15 x €3,5 EPS x €24,4 Book Value) = €44 

Dividend: €4,32/€52 = 8%

Frits Goldschmeding owns 32% of the 183 million shares, so he will receive EUR 4,32 x 183m x 0,32 = EUR 252m in dividend payouts this year. 

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