Magic Sixes: Follow up Iren SpA

In November, I had a quick look at Iren SpA, an Italian company which would have qualified as a “Magic Sixes” company.

My summary was the following:

For me, the combination of a large debt pile, negative free cashflows and a significant portion of non-tangible book value makes Iren SpA more or less uninvestible. Based on the pure financials without any further analysis there doens’t seem to exist any Margin of Safety despite qualifying as “Magic Sixes” stock. For the time being, Iren will not be analyzed further as there seem to be more attractive “targets”.

Yesterday, Iren SpA announced that due to “one off effects”, they will actually show a loss for 2011 and the dividend is cut down to 1 cent per share.

The stock now is down almost 50% from when I wrote the post:

Interestingly, by just looking at “momentum” one would have come to the same conclusion. Both in absolute terms and relative terms, the stock started underperforming from October.

Or maybe “momentum” for low P/B Stocks (and magic sixes) maybe is a shortcut to detect weak balance sheets ? I don’t know but something to keep in mind.

Nevertheless, I will keep Iren SpA on my radar screen in order to learn more about the Italian market. In theory Iren would be a prime take over target.


  • iren now 0,92 €. some guys missed value AND opportunity.

  • IREN Group: the Board
    of Directors approves
    the results at
    31 December 2012.

    Revenues of 4,327.8 million euros (+22.9%)

    Gross Operating Profit (Ebitda)
    of 629.6 million euros (+6.3%)

    Operating Profit (Ebit) of
    340.9 million euros (+10.5%)

    Net Profit of 152.6 million euros

    Net financial debt of 2,555 million euro
    s, in reduction of 98 million euros
    compared to 31 December 2011

    Dividend proposal to the shareholders’
    meeting stands at 0.0523 euro per

  • IREN performed. Asset change. Update unavoidable.
    solid business, entry barriers.

  • i would also add ACEA SPA and A2A to my strong buy list, along with a weak buy on HERA.

  • IREN SPA is involved in the industries of waste collection, water, sewage, electricity, garbage incineration, street lighting. The local councils are shareholders in the company. There is a fair chance this company will merge with either A2A SPA or ACEA SPA.

    I hold a position in IRE, and I believe this is a very strong stock. 4x forward earnings, a historic yield of 20%. I say go for it.

  • “In theory Iren would be a prime take over target.”

    In most countries that’s correct, but in Italy the chances of a take-over are slim if not non existent. Not only Iren is majority-owned by local municipalities (and by statute private investors are limited to 5%…), but these local utilities are too important from a political point of view (mostly negative: they are used to increase private clienteles and power over local decision-making).

    Conclusion: do not see the possibility of success of a take-over by a competitor. Maybe a merger with a similar entity, but those are not usually done to benefit minority shareholders.

    • Matteo,

      thank you for your comment. Indeed, take overs are very rare in Italy and for utilities even more unlikely.

      I wonder if in the medium term something will change. However, the Edison SpA example shows that takeovers are maybe not impossible.

      In any case I would not touch Iren at the moment.


  • There we go!

    Interestingly, Piotroski does not consider the absolute level of debt, profitability etc..
    He just says: “if all goes in the right direction, it cannot be that bad”.

    I would, however, adjust my reasoning when the absolute level of a metric is very good/bad.

  • “There still might be the occassional negative momentum stock which really gets cheaper and cheaper and more attractive.”

    – sure!

    I would express it that way: a low P/B stock with bad momentum can be a value trap- a low P/B stock with great momentum is unlikely to be a value trap.

    Does that make sense?


    • Yes, makes a lot of sense. Although I would add at least some sort of balance sheet quality.

      So a low P/B stock with a bad balance sheet and negative momentum is most likely a value trap

      A low P/B stock with a good balance sheet is somewhere in between

      A low P/B stock with good momentum and a good balance sheet might be a very good invetsment.

  • Jan,

    yes I know. But backtesting is one thing and really understanding historical movements are different in my opinion.

    There still might be the occassional negative momentum stock which really gets cheaper and cheaper and more attractive.

    I am not giving up yet 😉


  • “>o maybe “momentum” for low P/B Stocks (and magic sixes) maybe is a shortcut to detect weak balance sheets ? I don’t know but something to keep in mind.”

    Statistical (price) momentum as well as fundamental momentum have a highly significant predictive utility when separating winning from losing low P/B stocks. Take the Piotroski study as an example-> it shows this effect very well.

Leave a Reply

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

You are commenting using your 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 )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.