Tuesday, July 07, 2020

SBM Offshore stock price and estimated Benjamin Graham value

In the long-term, renewable energy sources could be a threat.

Note: I (still) don't understand the numbers "directional" vs IFRS and reporting in $s for a Euro stock.

SECTOR: [PASS]  SBM 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. SBM's sales of €3 391 million, based on 2019 sales, pass this test. Sales have increased considerably lately.

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. SBM's current ratio $2 3123m/$1 488m of 1.4 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 SBM has decreased and is now €3 662 million, while the net current assets are €635 million. SBM 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. SBM's EPS were negative in 2011, 2012 and 2017, therefore, SBM fails this test.

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. SBM's E/P of 7% (using a mix of the average of 3 years and last year's 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. SBM has a Graham number of (15 x €1,1 EPS x 1,5 x €11 Book Value) = €16

Dividend= €0,75/€13,4 = 5,6%

SBM Offshore is not a company for the Graham Defensive investor, the results are too unpredictable. 

Note in July 2020: Return on Equity and Capital employed is low at SBM. Warren Buffett's partner Charlie Munger wrote about this: 

“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns.

If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount.
Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”

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