Bouygues again: How deep does one have to dig into Telco, sell side analysts & comparable Eiffage SA
So to conclude my “Bouygues week”, a final post about the company.
In my recent post about Bouygues, a commentator said if I can’t correctly project future profitability levels for the French mobile phone market, then investing into Bouygues is not a good idea.
As I call myself a fundamental investor, I have to admit that I do not have any extra knowledge about the french mobile market at the moment.
The idea behind the Bouygues investment clearly is a relatively simple “sum of parts” analysis, where I didn’t go as much into details as I did for example for my Asian Bamboo short.
However this is not only laziness, but also part of my investment experience and philosophy.
If I look at Bloomberg, I can see that 25 full time sell side analysts are covering Bouygues. Those 25 full time professionals who produce detailed 50 pages or more research reports including estimated margins for many future years. Interestingly, those 25 professionals produce 7 buy ratings, 10 holds and 8 sells, with price targets from 16 EUR to 30 EUR, all issued within 4 weeks of time.
Just for fun, look at the ratings in the past 4 weeks:
|Firm Name||Analyst||Action||Recommendation||Tgt Px||Period(Months)||Date|
|Societe Generale||THIERRY COTA||M||hold||19||12||10/10/12|
|Kepler Capital Markets||JOSEP PUJAL||M||buy||30||10/10/12|
|Deutsche Bank||CHARLES VERLE||M||hold||24.1||12||10/03/12|
|Goldman Sachs||HUGH I MCCAFFREY||M||Buy/Neutral||30.1||24||09/28/12|
|Oddo & Cie||VINCENT MAULAY||M||reduce||19||09/28/12|
|Exane BNP Paribas||ANTOINE PRADAYROL||M||neutral||22||09/28/12|
|Jefferies||JEREMY A DELLIS||D||underperform||17||12||09/25/12|
|Makor Capital||ALBERT SAPORTA||M||buy||30||09/19/12|
|Credit Suisse||JAKOB BLUESTONE||M||underperform||19||09/13/12|
|CM – CIC Securities(ESN)||JEAN-MICHEL KOSTER||M||sell||16||12||09/10/12|
|Raymond James||STEPHANE BEYAZIAN||M||underperform||23||12||09/07/12|
Add to this another 50 or 100 buy side analysts who closely follow the stock as well as all French corporate raiders, than one might wonder: How much value can I add with my own detailed analysis ?
It is also interesting to see, that from the buyside, almost all analysts are specialised TelCo guys, only 2 or 3 are infrastructure analysts.
The specialised sell side analysts might do a deep dive into Bouygues Telecom might not understand the “beauty” of the other businesses. The result of this is that typical sell side guys are then applying a conglomerate discount because they only understand part of the company. Interestingly the few infrastructure guys have higher price targets on average than the TelCo guys.
Someone with a broader horizon might add value here because the value of the conglomerate might be only partly effected by the troubled subsectors.
I think for Bouygues, the paradox at the moment is the following:
The price of the share is driven completely by the developement in the telco subsidiary, however the intrinsic value of the company depends to more than 50% on the construction/road sector.
One additional thought: As a value investor, I only invest when a company is cheap at current sales, margins etc.I do explicitly not pay for future sales or margin increases. However one has to make sure that the current level is sustainable.
In order to assess the sustainability of the current level, I usually check three aspects:
– is the balance sheet solid ?
– are earnings at or below historic avergaes ?
– is the business subject to terminal decline risk ?
For Bouygues, the answers are YES, YES, NO which is is my “margin of safety”. I would be more concerned for instance with a fixed line TelCo carrier or a traditional coal fired utility.
Comparable Eiffage SA (ISIN FR0000130452)
Interestingly, Bouygues itself lists Eiffage SA as a competitor especially in the road building business (Colas SA). Eiffage looks like a smaller version of the “core” Bouygues business, construction and road building plus concessions, 90% of the business is done in France.
Eiffage shows OK ROEs (high single digits in the last few years), however they are highly leveraged and returns on Assets are quite low. Nevertheless the market values this company at around 8 x EV/EBITDA, most likely because it is a “pure play”. Compared to this, my valuation of around 4 x EV/EBITDA for Colas and 7 for Bouygues construction looks quite conservative,
If we would value those 2 businesses at the Eiffage Ev/EBITDA, the fair value of the Bouygues share would jump from ~32 EUR to 39 EUR per share.