A Comparison of Four Listed Companies
One of Benjamin Graham’s teaching method was to do case studies which he would examined the financial and operating data as part of his lectures and in his books. Often, he would compared companies and discussed with his students which company was a better investment and discussed on the reasons why it was. Sometimes he even made it more interesting by comparing the same business but at a different time frame, without informing the students beforehand. So his students was like the blind men touching different part of the same elephant.
In The Intelligent Investor, chapter 13, he presented security analysis of 4 companies from the NYSE. Following this tradition, I like to do the same for 4 listed companies in the local stock market and using same criteria in reviewing. Also to make it interesting, I will not disclose the name of the companies and their market capitalization at this time. So that this will not influence you in valuing these companies.
Some basic info:
- The 4 companies are from different industries as shown.
- All the 4 companies market cap are less than $1b.
- The financials data shown are in S$m.
- The table shows a few figures of the 4 companies’ 2018 operations, and also the past 5 years reported earnings. Certain key ratios related to their performance are also presented.
A has negative earnings for the past 5 years while the other 3 have all positive earnings. For the total 5 years earnings, C is almost doubled of B and D is also almost doubled of C.
B & C have high Return on Equity, ROE > 15%. B has impressive gross and net margins which is usually an indication of comparative strength, ie strong moat. C & D net margins are in the single-digit. This can indicate that they don’t have strong competitive advantage over their competitors and they might face difficult to raise price without losing market share. But they are not extremely low and quite typical for most profitable companies.
A losses are getting from bad to worse. For the other 3 companies, we can observe a poor year in 2016 where the earnings dropped by a moderate 20-30%. C & D recovered well in 2017 and looked to be back on track with their 2018 results.
Over the 3 years, 2016-2018, B & C has solid >20% earning growth and D is still impressive with almost 15%. If look at past 5 years, only D has maintained the same rate. However, I need to point out that this depends greatly on the year that we select as the starting point. It can be misleading if we start with a year with low earning and then some moderate growth afterward might be magnified to huge numbers.
4) Financial Position
A & B current ratio are below 2 which can mean they might face problem to meet short-term financial obligations, while C & D shouldn’t have any issue looking at the cash in their books.
B, C & D are almost debt free. A is carrying huge debts in the balance sheet and with losses for many years, they will face with problems in paying back their debt and also if they need to raise needed cash. D has a large working capital and they are holding a relatively large amount of cash. This can mean that they are not very capital efficient in managing their asset.
Obviously, A will not be able to pay any dividend for the 5 years looking at their poor earning record.
While B has only started paying dividends from 2017, C & D have history of continuance without interruption for > 10 years. D current dividend yield of 6.9% is almost double of the STI ETF index fund.
So based on these data, what would be the fair valuations of these 4 companies, ie how much are you willing to pay for them if you are buying the entire company, $50m, $100m, $250m? Try it as an exercise and present how you derive the numbers with the methods you used. When I will disclose the company and their market cap, you can compare if they are undervalued or overvalued based on your calculation.
Edit 9 June - One mistake - The Gross, Ops, and Net Margins shown in the table are based on the TTM (Trailing 12 months) and not 2018 result margin.