Core Value – Westag and Getalit: Reversion to the mean ?

wug3Another of my “core value” holdings is Westag und Getalit, a German based manufacturer of building materials and suplies. Mostly, they produce doors, panels and other wood products.

When we started the portfolio, we chose Westag because it was a “cheap” stock (single digit P/E) with almost no debt.

The “classic” valuation indicators still look cheap:

P/E: 9.8
P/B: 1.0
P/S: 0.48
EV/EBITDA 3.8
Tangible Book ~100% of book value
Net cash per share 3.71 EUR
Dividend yield 5.2%
Market cap ~100 mn EUR

The company is majority owned by Synthalit AG, which to my knowledge is the holding company of the founding family.

So Westag looks like on of the rock solid stocks I am normally liek very much. Westag is also particulary intersting, because the company did not make any acquisitions etc for a long time. So one can look at the history of the company on a like-for–like basis.

TRAIL_12M_EPS SALES_PER_SH PROF_MARGIN TRAIL_12M_OPER_MARGIN PE_RATIO EV_TO_T12M_EBITDA FREE_CASH_FLOW_PER_SH
1988 0.479 32.0384 1.50% 3.87% #N/A N/A #N/A N/A #N/A N/A
1989 0.484 32.2883 1.50% 4.03% #N/A N/A #N/A N/A #N/A N/A
1990 1.031 31.1692 3.31% 7.23% #N/A N/A #N/A N/A #N/A N/A
1991 0.998 33.3402 2.99% 6.99% 14.39 #N/A N/A #N/A N/A
1992 1.221 33.8629 3.61% 8.03% 10.92 #N/A N/A #N/A N/A
1993 1.485 30.6482 4.85% 8.32% 11.90 #N/A N/A #N/A N/A
1994 1.609 33.6736 4.78% 8.90% 11.54 #N/A N/A #N/A N/A
1995 1.591 34.8445 4.57% 8.85% 9.64 #N/A N/A #N/A N/A
1996 1.278 32.3802 3.95% 7.84% 11.42 #N/A N/A #N/A N/A
1997 1.382 34.01 4.06% 8.41% 13.66 #N/A N/A #N/A N/A
1998 1.242 34.3301 3.62% 7.32% 14.21 3.7751 -0.51
1999 1.284 35.0144 3.67% 5.18% 9.35 3.2167 0.1046
2000 0.80 34.409 2.34% 2.96% 11.8046 2.5953 1.35
2001 0.41 33.3983 1.24% 1.85% 15.942 2.7413 -1.9924
2002 0.28 28.6636 0.97% 0.70% 11.7857 1.1411 1.1281
2003 0.31 28.5844 1.10% 1.79% 19.3548 1.3847 0.1545
2004 1.01 29.3929 3.44% 5.27% 7.8734 1.338 #N/A N/A
2005 0.94 30.319 3.01% 4.55% 10.2979 2.1989 0.9105
2006 2.08 35.5585 6.06% 6.64% 8.1875 3.6272 0.3829
2007 1.67 40.7041 4.23% 6.92% 10.2695 3.4381 2.1843
2008 1.89 40.7718 4.77% 6.51% 6.2169 2.5081 0.1703
2009 1.84 36.2243 5.22% 7.12% 8.462 3.2296 1.8633
2010 1.86 37.8717 4.92% 6.73% 9.8172 3.6493 1.3007
 
avg     3.46% 5.91% 11.35 2.68 0.59

One caveat: When looking at historical numbers of a German company, one should keep in mind that accounting rules changed from German GAAP to IFRS.

So coming back to the historical numbers: One can clearly see that Westag is definitely not a growth company. Sales increased in total only 18% over 22 years, so in real terms they are actually shrinking quite significantly.

Profitability reflects the history of the whole sector (building and related) since the reunification in 1990. In the wake of the real estate boom following the reunification, margins and sales peaked in 1995 before slumping for almost 8 years. Then finally business picked up again some years ago, supported most likely by the current boom in German residential real estate.

However if we look at the company, we can summarize the following:

– Westag is a cyclical company. They never showed any losses, however profits are linked strongly to German domestic developement (exports ~20% of sales)
– in real terms, sales did shrink significantly over time, they didn’t manage to grow outside Germany or to gain additional market share domestically
– current profitability is significantly above historical average profitablity

One of the things I am always check with cyclical stocks if the following:

What would be the fair value of the stock, if we assume average profitablity and average P/E ratios based on current sales ?

The simple “formula” would be as follows:

Current sales per share x average margin x average P/E

For Westag this would result in 3.46%*37.87 EUR x 11.35= 14.89 EUR per share. Compared with the current share price of ~ 18 EUR and including net cash of 3-4 EUR we can see thath Westag seems to be fairly valued from this point of view without a lot of upside left.

If we look at the long term chart (unfortunately I don’t know any public site with charts longer then 10 years), the current price is definitely atthe upper end of the range for the last 20 years.

Unlike WMF (Coffee makers) AS Creation (Russia) and Sto (energy saving), I don’t see any “hidden story” here, any kind of “catalyst event” also seems quite unlikely.

On the psoitive side, they started in 2010 to do share buy backs, however this will not fundemantely change anything.

So for the time being, all we have is a currently relaitvely cheap cyclical stock, operating above historcial profitability with long term negative grwoth rates in real terms. Despite the current favourable environment in German real estate, I have no evidence that Westag will be able to maintain this level of profitablity especially if thing in German real estate go south.

Summary: For a cyclical stock, Westag is too expensive if one believes in reversion to the mean. For a cyclical stock, I prefer having the upside of a company which operates at levels below historical averages like Buzzi. As no special situation or catalyst event is likely, Westag will move on the sell list and will be sold down from today on.

9 comments

  • Good comment on Westag and Getalit from Ennismore Funds in their current monthly report:

    http://www.ennismorefunds.com/documents/OEIC/Newsletters/2011/NL%20OEIC%20Dec%2011.pdf

    • thank you for the link. I would argue that this is the standard analysis (cheap, good dividend etc.), but nothing specific.

      For me the fact that prices could not be raised in time with cost is a big warning sign.

      mmi

  • Great article. Thanks a lot.

    I think it is a rock solid story. No debt. Cash on hand. Strong cash flows between 16 and 20 million each year. Nice dividend yield. no loss.
    Of cource, I agree the growth at the top line is not really sexy. They need a better strategy for the european markets, but is it really a sell with a PE ratio of 7 ?

    • Tim,

      I don’t know how you calculate a P/E of 7 for Westag. 2010 EPS was 1.86, Trailing 12 month is 1.85 EUR per share.

      So we talk about a P/E of 9-10 which for a cyclical stock at the top range of its historical profitablity is quite exepensive.

      MMI

  • I agree to both of you, also in Hamburg area there is an increasing number of scrapping old houses and building new ones – only from what I can see, no information about “hard” figures from statistics.

    BR
    best_choice

  • Thanks mmi,
    Westag is also in my portfolio, I think the main potential “story” is continued strong (residential) building activity in Germany due to a trend towards “Betongold” (i.e. investments in tangible values). Personally I think this trend might continue a bit longer but clearly that is not a hard fact but more a matter of belief and might be biased by my home area Munich, where residential construction activity shown no signs of weakness yet.

    woodpecker

    • woodpecker,

      yes, agreed, the German “betongold” boom could continue. However one should be carefull, if one actually sees residential construction activity slowing in the Munich area, than it might be too late anyway.

      MMI

  • stefan,,thanks for the link.

    mmi

  • Thank you for that analysis. Your conclusions are similar to mine. I like Westag, because it is a relatively predictable stock, but the current price should be approximately fair.

    For free charts above 10 years you should check http://www.ariva.de, the chart of Westag there goes back to 1990, at least if you choose Dusseldorf Stock Exchange.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s