Wednesday, December 01, 2021

ForFarmers share-buyback effect FFARM and Graham Defensive Analysis

Back of the envelope share-buyback math:

Equity = EUR 353 / 95 million shares = EUR 3,9 book value per share

Earnings per share EUR 0,2? per share. Cash almost EUR 50m 

Now @ EUR 3,80 per share buying EUR 50 million back. 

Does not effect book value per share or earnings in total significantly. 

Shares outstanding decrease by EUR 50 million spent / EUR 3,80 per share = 13m fewer
Shares outstanding falls to 82m 

Earnings per share increase 95m/83m = 14% 
Expenditures on dividends go down by EUR 13m shares x 0,3 EUR per share = EUR 3,9m a year. 
Rough Graham Defensive Analysis

SECTOR: [PASS]  ForFarmers is in the animal feed sector. Technology and financial stocks were considered too risky to invest in when this methodology was published. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. ForFarmers' estimated sales of €2 600 million, based on 2021 H1 sales, pass this test.

[FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. ForFarmers' current ratio €388m/€321m of 1.2  fails this test.

 [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 ForFarmers is €132 million, while the net current assets are €67 million. ForFarmers failes this test.

 [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. ForFarmers' earnings haven't increased much since 2013.

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. ForFarmers' E/P of 7% (using the average of 3 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. ForFarmers has a Graham number of (15 x €0,3 EPS x 1,5 x €3,9 Book Value) = €5,1

Dividend: €0.3/€3,9 = 8% 

Conclusion: 1/12/2021 ForFarmers seems cheaply priced today at €3,9 especially considering the share-buyback program and dividend yield. 

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