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:
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.
|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|
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.
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.