Wednesday, November 25, 2020

Ahold Delhaize Graham Defensive Value

After the Ahold Delhaize merger Amazon bought Whole Foods supermarkets in the US and investors dumped Ahold Delhaize shares. Hendrik Oude Nijhuis ( and co-founder of ValueMachines Fund) wrote in VEB Magazine in March 2018 that investors (Mr. Market) were (was) overreacting. Since then the company's Value has increased and the Price of the stock has increased even more quickly closing the gap between the two. (But I missed the boat = opportunity cost).

SCTOR: [PASS] AHOLD 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. AHOLD's sales of €66 260 million, based on 2019 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. AHOLD's current ratio €9 570m/€12 590m of 0,8 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 AHOLD is  €14 180, while the net current assets are minus €3 020 million. AHOLD 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. AHOLD's EPS growth of 160% over that period passes the EPS growth 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. AHOLD's E/P of 7.5% 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. AHOLD has a Graham number of (15 x €1,7 EPS x 1,5 x €12.6 Book Value) = €22,-

Dividend: 0,76 / 23,4 = 3% The company is also buying back EUR 1b of EUR 24,4b in market cap = 4% So you could argue current Return of Capital is 7% per year. 

Conclusion November 2020: Price seems reasonable. 

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