Quick analysis: Klöckner & Co SE (ISIN DE000KC01000)

First of all thanks to all the readers who send me interesting investment cases, I really appreciate this, especially if you already include some “homework”.

One reader recommende to me to look at Kloeckner and Co SE, the German steel trading company as this might be a cheap investment.

Traditional Value metrics indeed look Ok but not overly cheap:

P/B 0.55
P/S 0.1
P/E is 120
EV/EBITDA 7.3

If we look at historical numbers, we can clearly see that Klöckner is a very cyclical company:

EPS EBITDA p.Share Sales p. share FCF ROE
2006 3.50 6.69 93.80 -0.10 44.98
2007 2.26 5.78 106.38 -0.51 18.43
2008 6.75 10.11 114.44 1.71 43.53
2009 -3.29 -1.33 67.30 8.92 -17.31
2010 1.07 3.20 71.22 -0.48 6.51
2011 0.14 2.34 83.13 -1.14 0.75

As Kloeckner was Ipo’ed in 2006, we only have data for one cycle. I would in general prefer for cyclical stocks being able to look at 1999-2011 data including the 2001-2003 period to have two cycles to analyze.

If we look at a “6 year historical” P/E, this would be around 7-8 x average earnings which would be OK, but not overly cheap. Compared with Buzzi for instance, which trades at 3x average earnings over the last 10 years, Klöckner looks relatively expensive.

A few other things which I Didn’t really like at a first galnce :

– share count increased dramatically (doubled) because of 2 capital increases in 2008 and 2011

– in the 6 years since IPO, they managed only 3 times to pay a small dividend

– their business is very capital intensive for a trading operation. The cannot finance their inventory through payables from supppliers but they finance it through capitzal market debt and bank loans, which is very risky in my opinion

– recent acquisition in the US (never a good sign for a German company)

EDIT:

VERY NEGATIVE: The CEO even managed to increase his salary in 2011 despite the very disappointing 2011 results and the dilutive capital increase. This does not look like an “alignment” of interest between shareholders and CEO.

Positive aspect:

+ does not have a controlling shareholder

A quick view at the chart doesn’t show a very nice picture either:

Summary: As a contraririan “reversion to the mean” play, Klöckner is relatively expensice, compared to Buzzi for example. The business model itself seems to be very risky, especially the financing of invetory thorugh capital market debt. So for the protfolio, Kloeckner is not an interesting candidate, as there are in my opnion better value alternatives in the “contrarian” stock segment.

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