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French stocks part 2: Installux SA (FR0000060451) – Boring is the new sexy
Installux is a small French Company which according to Bloomberg:
manufactures and distributes aluminum and steel components used in carpentry, locksmithing and building. The Company also refurbishes office buildings and factories.
Traditional valuation numbers show that the stock is relatively cheap and conservatively financed:
Market Cap 44 mn EUR
P/B 0.81
P/S 0.4
P/E 7.8 (Trailing 2011)
Div. Yield 5.5%
So far so gut, however, EV/EBITDA is at a sensational 2x EV/EBITDA
This is due to the fact that the company has around 46 EUR per share in net liquidity. Unfortunately, the 2011 report is not yet available, but some preliminary figures can already be accessed for instance here.
If we adjust the P/E for cash we would get a corresponding lower PE of around 5.2 for 2011.
A company with a valuation at 2 x EV/EBITDA and a P/E of 5 needs to have some kind of serious problem. However if you look at Installux, it is hard to find problems. Let’s look at historical numbers:
| EPS | NI Margin | ROE | ROIC | |
|---|---|---|---|---|
| 1999 | 10.2 | 5.5% | 16.7% | 15.9% |
| 2000 | 13.4 | 6.2% | 19.1% | 18.7% |
| 2001 | 14.1 | 6.3% | 18.4% | 15.5% |
| 2002 | 10.4 | 4.6% | 12.7% | 13.0% |
| 2003 | 12.4 | 4.7% | 13.8% | 14.9% |
| 2004 | 17.5 | 5.6% | 17.7% | 15.5% |
| 2005 | 18.5 | 6.6% | 16.6% | 15.0% |
| 2006 | 19.8 | 6.4% | 15.4% | 14.6% |
| 2007 | 18.8 | 5.6% | 13.3% | 13.2% |
| 2008 | 17.9 | 5.4% | 11.9% | 11.8% |
| 2009 | 15.1 | 4.7% | 9.5% | 10.2% |
| 2010 | 21.8 | 6.4% | 12.6% | 19.6% |
| 2011 | 17.9 | 4.9% | #DIV/0! |
What we can see here is a generally growing profit (with some minor hiccups), an unspectacular but very stable Net margin between 4.7% and 6.4% and Mid teen ROEs and ROICs.
The business is highly cash generative. Despite the growth achieved, over the last 13 years, on average 12-13 EUR free cashflow per share have been generated. Around half of that has been paid out as dividends, the other half has accumulated on the balance sheet (in 1999 Installux still had a tiny amount of net debt).
Also the balance sheet is cleaner as clean, no goodwill, no pension liabilities and no operating leases as far as I could see.
So let’s stop here and summarize:
We have a consistently growing and profitable business with very low volatility, attractive ROE and ROIC and a valuation of 2x EV/EBITDA and 5x P/E adjusted for cash (7.8 unadjusted) which produces a large amount of free cashflow despite growing nicely over the years.
Let’s have a quick look at the business:
Installux is processing aluminium, i.e. shaping and forming and coloring it to be used in shops, for windows etc. Interestingly, despite the fluctuation in aluminium prices, they seem to be able to pass on price changes relatively quickly.
Their clients are mostly “corporates” like building contractors etc., they run a small retail segment which however doesn’t seem to be very profitable at the moment (Roche Habitat).
A Net margin of 4-6% is Ok, but does not indicate a big moat. The relatively high returns on equity and invested capital seem to be the result of a relatively low fixed asset base required to run the business.
So the business seems to be nothing special, but produces double digit returns on invested capital which is quite good and is not really cyclical.
In the last 13 years, Installux roughly doubled its sales and profits, so one could not say that this is a shrinking or dying business either.
Management
The current CEO Christian Canty seems to be in charge since 1987 and has bought the company according to the company history website in 1991. They made small acquisitions along the way but nothing spectacular. He is 65 years old and might not continue forever. However his son, Christophe age 38 seems to be already working in the company as a director.
He holds 50% plus some shares and has been buying smaller amounts of shares for instance in 2010 (1500 shares according to the annual report).
I haven’t found a disclosure how much he pays himself, but with a total of +12 mn salaries for all 450 employees, there is not a lot of space for a large CEO salary. Additionally they don’t issue any options or new shares to directors.
It is interesting to read Canty’s “press communication” which seems to be issued in irregular intervals. Another one can be found here.
It becomes clear how cautious he approaches exports and how hands-on he comments on the loss of his smallest division, Roch Habitats. One gets the impression that the “boss” is in control of things.
I also didn’t find any hint that any improper transactions etc. have been made between the CEO as majority owner and the company.
So why is the stock so cheap ?
Some possible reasons are:
– no investor relations at all, on their homepage you neither find a share price nor a link to the annual reports or quarterly news. This is the first time that I see a company homepage of a listed stock which basically denies the existence of its share….
– no trading volume. On a “good” day, 100 shares are being traded. prices jump around a lot between auctions.
– small free float: The CEO Christian Canty owns 50% of the shares and three 5% packages of French institutions are disclosed in the 2010 annual report. No international shareholders as far as I could see.
– even on Bloomberg, you cannot find links to recent news, reports etc. Also the historical numbers are screwed up. In their historical earnings database they show a profit per share of 175 EUR in 2004 per share instead of 17,50 EUR.
– Installux generates more than 95% of sales in France. if France goes into deep recession, it will be hard to compensate for Installux
Valuation
With a stock like Installux, one can take a rather simple approach. As we have seen, the business is cash generative. So if we assume that they just continue to produce around 5.5 mn profit a year and discount this with 10%, we would get a valuation of 55 mn EUR. Plus the 14 mn cash on hand would make a conservative “no growth” valuation of around 230 EUR per share.
Of course we do not have something like a “catalyst” here, on the other hand at least based on historical volatility, a 10% discount rate might even be too high.
Another way to look at this would be: At the moment one can buy Installux at ~80% of book value. The earn 15% on Assets ex cash so one is buying at close to 20% effective ROE (ex cash) which is really really good !!!!
Share price
The stock price looks pretty boring:
Nevertheless, Installux has easily outperformed the CAC 40 even before dividends.
So let’s stop here and summarize:
+ Installux is a very conservatively financed company with a profitable growing business which doesn’t need a lot of assets to run
+ current valuation seems very cheap and neither takes into account the cash on hand nor the relatively high ROCEs and low volatility
+ a very conservative valuation approach would imply at least 50% upside in a no growth scenario
+ if Installux would continue growing at approx. historical growth rates, the stock should be much more expensive.
– however no catalyst in sight other than a slowly growing dividend which might help in the long run. So this is for the patient investor.
For the portfolio will start to accumulate shares at my usual rules (max 25% of daily volume).
Appendix: Others sources from the web for Installux:
– relatively good blog post 2 years ago on a French value blog which doesn’t seem to be active any more. He concludes that the stock is very solid and extremely cheap.
– from time to time there are posts in the boursorama forum. Th few people who discuss the stock seem to come to the same conclusion
– “Worlreginfo” seems to be the best source for Installux company filings
AIRE KgAA – 10% Buy back tender offer at EUR 14
As one of the readers commented yesterday, one of my special situation investment, real estate investment company AIRE KgAA issued a 10% buy back tender offer yesterday after close.
This is of course good news in general, as this was one of the catalyst events I was looking for.
Based on my initial investment thesis from Decemeber 2010, we are currently at the “mid case” scenario.
However I have some isues with this tender offer:
1) Why was it launches just before the publication of the annual report ? Normally, the annual report came out always on the last day of April. Do they want to fix the price now because there is unexpected good news (e.g. a written off project came back to life) ?
2) In my opinion, there was some serious INSIDER TRADING going on. This is the only explanation for the strange rise of the stock against the general market) in the last few days:
The insider aspect really worries me, as this could also go into the other direction. So my current reaction is to start to exit the position from today, even if this is what AIRE KgAA or its major shareholders are trying to achieve.
The tender offer itself is an “Odd lot” type of offer, with the “odd lot” being 100 shares which will be accepted 100%, above 100% there will be only a partial repurchase based on the total amount tendered.
IVG Convertible – follow up & quick balance sheet analysis
After my post from Friday, I got a lot of comments.
One major argument is that the non-payment of the interest is a signal of weakness on IVG’s side and that this will negatively impact IVG’s ability to conduct business and get capital in the future. Here I strongly disaggree. First of all, after the 100 mn plus loss in 2011, everyone should know already that IVG is in a relatively weak or distressed position anyway.
Both, for shareholders which had to come up with additional money and didn’t get dividends for the last few years, as well as for senior holders, it would have been a really bad sign if IVG would have continued paying the hybrid coupon. It should be pretty clear that IVG might need more equity capital in the future as well as more senior funding,so it doesn’t make sense to offend those two groups. However it is extremely unrealistic that IVG is able to issue hybrid capital or another unsecured senior bond at any point in the near future.
So from my point of view this move has increased IVG’s credibility with equity holders and senior creditors.
Most of the commnets were right to the extent that my assumption of IVG not going bankrupt in the nect two years is maybe not an overly convincing investment case if one cannot quantify the downside scenario (bankruptcy).
So let’s look into the annual report 2011 to get a feeling about the potential liquidation value of IVG.
IVG’s business activities can be divided into 4 areas:
1. Own real estate
IVG owns a potfolio of around 3.8 bn of real estate. They show 227 mn net rent income which translates into a 6.0% yield on assets. The portfolio is 87% Germany based with a large share located in the booming Munich and Hamburg regions.
6.0% yield sounds like a relatively reasonable yield for German prime office real estate. Maybe 7% would be more conservative.
2. Real estate developement
This is of course the “problem child”, generating ALL the losses for IVG. Developement assets are booked under “inventory” and amount to 1.0 bn EUR. Here I would take a 50% haircut to reflect the risk of the largest developement project, the “Squaire” project in Frankfurt.
3. Oil & Gas caverns
This is the “crown jewel” of IVG. Few people know this, but IVG used to be a Government owned company (“Industrie Verwaltungsgesellschaft”) and was IPOed in 1993. The Oil and Gas Cavern business is a remainder of the old “Industrial Administration” business. Basically IVG has the license to develope and build underground storage caverns for oil and more important for natural gas in Germany.
As one can imagine, with the nuclear energy exit, natural gas storage is a big issue.
Without a 1.4 bn sale of caverns in 2008 into a special fund, IVG would have been most likely bankrupt by then. As a consequence of the sale, IVG now is obliged to sell most of the caverns which they currently develop into the fund. However as they manage the fund themselves, they are of course in a relatively good position to realize a fair price for them. Additionally they earn some nice management fees from the cavern fund.
Current book values of Caverns (at cost) are 770 mn EUR, IVG estimates the market value being 325 mn EUR higher. As a conservative approach I would only take 50% of the markup into my valuation.
4. Third party property fund management
They have two divisions: Insittutional fund management with ~12 bn EUR under management which generated 18 mn EUR EBIT in 2011 and a private investor fund management unit which genrated -5 mn EBIT having 3 bn under management.
In my opinion, IVG could profit from the closure of the open ended Real estate funds because they never participated in this market.
I would value the third part Asset management at between 1-2% of Assets under Management, giving a valuation of 150 -300 mn or 275 mn as mid point.
Summary valuation of Assets
| 2011 | Adj. Val | Comment | |
|---|---|---|---|
| Intangibles | 251 | 0 | 100% write off |
| Inv. Property | 3,964 | 3,398 | scaled to 7% yield |
| PPE | 157 | 118 | 25% discount |
| Financial Assets | 189 | 142 | 25% discount |
| equity part | 95 | 71 | 25% discount |
| DTA | 404 | 0 | 100% write off |
| Receivables | 60 | 45 | 25% discount |
| Inventory | 1,025 | 513 | 50% discount |
| Receivables | 179 | 134 | 25% discount |
| Cash | 238 | 238 | 0% discount |
| AFS | 341 | 256 | 25% discount |
| Asset Management | 275 | 1.5% of AUM | |
| Marekt value caverns | 162.5 | 50% of disclosed adj. | |
| Total | 6,903 | 5,351 |
In this table I have applied the discussed adjustments plus 100% “write offs” on intangibles and DTAs as well as a 25% write-off on anything else than cash.
Based on this we get around 5.4 bn EUR “Net Asset” Value which should be a proxy for a liquidation value.
If wee look at the liability side, we can see that we have a total of 5.5 bn Liabilities including the convertible bond, therof 4.9 bn financial liabilites and 0.6 bn other liabilites (excluding the hybrid).
Interestingly, “only” 2.8 bn of the loans are “secured” loans. For the sake of simplicity, I assume that all other financial liabilites are “pari passu” in a liquidation.
This leads us for the following estimation of a “unsecured” recovery:
| mn EUR | |
|---|---|
| NAV | 5,351 |
| -secured | 2,764 |
| NAV for unsecured | 2,587 |
| unsecured | 2,736 |
| coverage unsecured | 94.6% |
Under my assumptions, the downside case for unsecured senior is around 95%. Howver this also means that in the case of bancruptcy, not only equity holders but also Hybrid holders get wiped out completely.
One final word to “comparable” situations, especially Pfleiderer which gets mentioned often internet boards:
The main difference to Pfleiderer is in my opnion the structure of creditors. At Pfleiderer, the banks sold the loans at large discounts to Hedgefunds. For those HEdgefunds, which maybe bought at 40-60 cents on the EUR, a quick bankruptcy is the best case, because then tehy can take possesion of the underlying assets and realize close to nominal value.
For IVG this is not true. At least to my knowledge, the IVG loans are held by banks at nominal value, so taking possesion of the underlying assets would not yield a direct profit, but would increase the required capital to be held on a bank balance sheet, which the banks cannot afford.
To cut it short: As soon as Hedgefunds enter the secured loans at a discount one has to watch out, but in a “normal” situation, going concern is in the interest of all parties (Management, Secured creditors, shareholders etc.).
Summary: In my opinion, the IVG convertible represents “good value” if my assumptions are correct. However it should (as any distressed situation in general) viewed as a risky asset. You don’t get 15% p.a. (at 79%) for nothing.
For the portfolio, I think it is an intersting diversification play, because as long as banks struggle, they will support IVG.
P.S.: Just a a funny coincidence, IVG reported today that they rented out one of their Hamburg propoerties to no one other than PRAKTIKER !!!!!
Weekly links
Interesting free kindle EBook from Greg Speicher You have to register and then (maybe) get the book…should be worth a try.
Very short Cresud presentation. Written before the YPF nationalization.
Nate from Oddball has a very good write up on Gevelot, a super cheap French small cap.
Nice post from Stephan about Greek toy retailer Jumbo (German)
Gannon on “foreign” stocks (Non US). He even mentions on of my favourite stocks which I haven’t covered in the blog yet….
Prem Watsa likes Abiti Bowater a paper company.
Good analysis of Boyd Group, a North American collision repair chain.
Quick check: Washtec AG (ISIN DE0007507501)
One reader sent me an email, asking why I don’t include new German stocks in my portfolio and recommended Washtec, the German manufacturer of car washing systems. According to his opinion, the business is not really impacted by business cycles and the stock might be cheap because of a “one time” write off last year.
As I havn’t looked at a German company for quite some time, I decided to have a “quick check” to see if it is an interesting stock and might fit into the portfolio.
If we look at last years “traditional” numbers, valuation seems Ok (apart from the loss) but not overly cheap (based on BB):
Market Cap 120 mn EUR
P/E: negativ (loss)
P/B: 1.7
P/S 0.4
EV/EBITDA 7.7
In a second step, I always look at the history. I like the 1999-2011 period because it includes 2 booms and two crises:
| EPS | BV | DVD | FCF | Net debt | ROE | ROIC | |
|---|---|---|---|---|---|---|---|
| 1999 | 0.75 | 3.32 | 0.61 | 0.62 | 4.6665 | 24.0 | 10.8799 |
| 2000 | 0.35 | 2.94 | 0.61 | 0.51 | 14.0485 | 14.3 | #N/A N/A |
| 2001 | 0.18 | 4.40 | 0.37 | 0.00 | 10.7338 | 4.8 | 3.1974 |
| 2002 | -1.54 | 2.80 | 0.08 | 1.58 | 9.2173 | -42.9 | #N/A N/A |
| 2003 | -1.98 | 0.79 | 0.08 | 0.02 | 9.1881 | -110.3 | #N/A N/A |
| 2004 | -0.35 | 0.44 | 0.00 | 2.73 | 6.5114 | -57.0 | -46.9692 |
| 2005 | 0.81 | 3.24 | 0.00 | 1.13 | 2.9122 | 35.4 | 22.6559 |
| 2006 | 0.82 | 4.06 | 0.00 | 0.50 | 3.5661 | 22.5 | 18.3614 |
| 2007 | 0.83 | 4.80 | 0.00 | 0.81 | 3.5641 | 18.7 | 14.7734 |
| 2008 | 1.03 | 5.66 | 0.00 | 1.38 | 3.3548 | 20.2 | 14.4405 |
| 2009 | 0.41 | 6.12 | 0.00 | 0.93 | 2.6462 | 7.0 | 6.2274 |
| 2010 | 0.77 | 6.75 | 0.12 | 1.44 | 1.9015 | 12.0 | 9.508 |
| 2011 | -1.04 | 5.38 | 0.31 | 0.57 | 1.7454 | -17.1 | #N/A N/A |
We can see pretty strong FCF generation, averaging 0.94 EUR a share, which is very very good.
However one can also see that
– FCF and especially earnings are relatively volatile and definitely impacted by business cycle
– only a small amount (~20% ) was paid out directly to shareholders via dividends
– the majority of the free cash flow seems to have been spent of a debt financed acquisition in 2000 and in subsequent debt repayments
They seemed to have made a relatively large capital increase in 2006 but bought back some of those shares in 2009. In their latest press release they committed to distribute at least 40% of “net results” to shareholders.
Interestingly, the company doesn’t seem to have a majority investor, which in theory should support the valuation as a potential take over might be possible.
The share is covered by 7 analysts, however only German ones so no big international coverage, with 4 buy and 3 neutral ratings, average target price is 10.82 EUR.
Looking at the chart, one can see that the past earnings volatility has shown itself in the stock price as well:
I took a quick look into the annual report 2011.
I am in no position to judge the business model, but it seems to be clear that there are big issues in the US where the seem to have totally miscalculated the market developement. Usually I try to avoid German companies with significant US operations as this usually doesn’t work out well.
Despite the “one off” issues, in general costs seem to have risen faster in 2011 than sales which might indicate only limited pricing power.
They seem to have an increasing share of service business, but the segment numbers are only shown along regions, not business lines. So I can not judge if the service business is really profitable or not.
Management compensation seems to be OK, they have only 2 board members. Bonus is linked to EPS. They don’t seem to own shares themselves nor do they have options.
Summary: My first impression would be that it is an interesting company but not screaming buy. The business still seems to be quite volatile with a big unresolved problem in the US. At current price level it is not a reversion to the mean play. Historically it is also hard to argue that the company has a moat in all of its markets based on the volatile past results.
I also don’t really like companies with periodical large “one offs”, this is usually a sign of strategy issues. Normally I only buy such companies if they are really cheap.
I would become more interested either if the valuation becomes cheaper (significantly below 6.5 x EV/EBITDA) or the US issue gets resolved pretty soon.
Argentina or how to adjust for Nationalization risk (Cresud edition)
And now to something completely different…
The story of the seizure of YPF, the Argentinian subsidiary of Repsol was on the news everywhere.
Accounting “Uber-guru” Aswath Damodaran had a great piece up yesterday about how to reflect Sovereign risk. He openly admits, not to have though too much about this issue before.
He brings up several possibilities to reflect this risk in intrinsic valuation, which are:
Option 1- Use a “higher required return or discount rate”:
Option 2: Reduce your “expected cash flows for risk of nationalization:Option 3: Deal with the nationalization risk separately from your valuation: Since it is so difficult to adjust discount rates and cash flows for nationalization risk (or any other discrete risk), here is my preferred option.
Step 1: Value the company using conventional discounted cash flow models, with no increment in the discount rate or haircutting of the cash flows. The value that you get from the model will be your “going concern” value.
Step 2: Bring in the concerns you have about nationalization into two numbers: a probability that the firm will be nationalized and the proceeds that you will get if you are nationalized.
Value of operating assets = Value of assets from DCF (1 – Probability of nationalization) + Value of assets if nationalized (Probability of nationalization)
Intuitively I would also prefer option 3).
So let’s look at a real world example: Cresud
Cresud is an Argentinian company which according to Bloomberg
purchases and leases farms in Argentina’s Pampas region, and produces agricultural products. The Company cultivates grains including wheat, corn, soybeans, and sunflowers, raises beef and dairy cattle, and produces milk.
As one of the few “pure” agricultural plays and has traded ADRs, Cresud is a favourite of some very well known value investors like Fairfax and Monish Pabrai.
Now we can see what Damodoran described in “real world action”:
One US ADR reperesents 10 Argentinian shares.
As of yesterday, the US ADRs were traded at 10.90 USD, which would be 1.09 USD per share. The Argentinian shares were traded at 6 Argentinian Pesos which translate at the current rate of 4.40 ARS/USD into a price of 1.36 USD per share. A discount of around -25% for the foreign shares compared to the local shares.
If we look at the historical spread graph, we see that with the exception of the panic in 2008, the ADRs tracked the stock pretty well, so the current divergence definitley reflects Nationalization risk.
I have no idea if Cresud is in danger of being nationalised and if it is an interesting “special situation”, but it is still interesting to see how this one will turn out.
Trying to understand momentum from a value perspective
Momentum is one the concepts I really have some difficulties with. As a traditional value investor, one would basically ignore market movements and invest purely based on intrinsic value.
However if one looks at different reasearch papers, “momentum” seems to be an important indicator. For instance Tim du Toits latest research, momentum combined with value metrics created some astonishing results for the 1999-2011 period.
Also for example this article shows based on a back test that pure momentum trading strategies can produce theoretically 10 % p.a. outperformance.
Interestingly, the mentioned AQR US momentum fund isn’t really outperforming the indeces in real life. Bloomberg shows an underperformance of this momnetaum fund against all major US indices since inception in mid 2009.
Definition & application of momentum for grwoth stocks
I have been looking around a little bit, but there seem to be different definitions for “momentum”.
The more simple approaches seem to look at a trailing time period (1M, 6M, 1Y) and define momentum either as the best performance within a certain group of stocks (i.e. low P/B) or in general relative performance agains an index.
I have found this site where they give the following advice for “momentum growth stocks”:
One of the things to spot momentum stocks is the relative strength of the stock compared to the overall market over a specific timeframe. Most momentum investors seek at a stock which has outperformed at least 90% of all stocks over the past 12 months. When major indices declines, a great momentum stock exhibit strength by holding or even exceeding their highs. When the major indices rally, momentum stocks typically lead the rally and make new highs outpacing the market.
Potential momentum stocks should show in their balance sheet that they are growing at an accelerated rate.
Another factor is the Earnings per Share growth. At least a 15% year-over-year earnings per share growth is needed to qualify a momentum stock. Stocks with accelerating rates of EPS growth over previous quarters are also considered.
In addition, a positive forecast by at least some analysts regarding the Company’s earnings in necessary for identifying momentum stocks. Further, momentum investors also looks at whether the reported earnings exceeded the analysts forecasts compared to the last quarter.
A company can’t grow its earnings faster than its Return on Equity, which is the Company’s net income divided by the number of shares held by investors, without raising cash by borrowing or selling more shares. Many companies raise cash by issuing stock or borrowing, but both alternatives reduce earnings-per-share growth. For momentum investors, a potential stock should show an ROE of 17% or better.
This simple strategy at the moment is quite succesfull. If we look at two typical “MoMo” stocks Chipotle and LuluLemon we can see this in action. The “fundamental requirements” are clearly in place like this table shows:
| EPS Growth | ROE | |||
|---|---|---|---|---|
| Chipotle | Lululemon | Chipotle | Lululemon | |
| 2007 | 67% | 292% | 14% | 41% |
| 2008 | 11% | 30% | 13% | 29% |
| 2009 | 61% | 34% | 19% | 30% |
| 2010 | 42% | 109% | 24% | 39% |
| 2011 | 19% | 49% | 23% | 37% |
As one could expect, analysts go wild for both stocks and as for any respectable US comapny, earnings are ALWAYS above (carefully guided) expectations and of copurse both shares are in the top 10% performers.
And both stocks are still in their “parabolic” phase:
However, as my two “MoMo” short positions, Netflix and Green Mountain showed, once “Momentum” dissapears, those stocks can loose 50-80% of their value in the matter of a few days or weeks:
“Fundamentally”, momentum is usually explained the following way:
The capital market is not really efficient, so positive and negative information does not transform directly into securitiy prices but this takes some time.
However, in my opnion, there is also a “psychological” component for momentum:
Many investors prefer to see an immeadiate positive feedback on an investment decision. Even for myself, I tend to look more closely to daily or even intraday price movements when I just have bought a stock. With a “positive” momentum stock, there is a very high probability that the stock continuos to climb and you see direct positive feedback (and feel like an investing genius),
With a declining stock, on a short time horizon it is very likely to see a loss directly after buying the stock (and feel like an idiot for not waiting longer).
As an “intrinsic value” investor one should not care about the short term direction of stock prices, but never the less it still takes a lot of conviction to buy into a falling or underperforming stock.
The big question for me would be: Can momentum add value to an investment process based on intrinsic value ?
Intuitively I would say that extremely negative momentum could be a warning sign for a “value trap”. On the other hand, I can also see the argument for stocks where after a long decline some fundamental changes are occuring.
One of the stocks I have been tracking for a long time is Sto AG. Sto in the 90ties was one of the typical construction related stocks. After the reunification, prices of construction and construction related stocks exploded. However in the mid 90ties the boom went bust and construction stocks suffered. In the 2000s, then Sto could participate in the boom for energy saving, multiplying its earnings sevral times.
I did a very crude check on Sto with regard to relative performance: I compared annual returns with the dax since 1992 ( I diddn’t get earlier numbers). The result is quite surprising:
| P/E | EPS | Last price | 12m change | DAX 12m Change | Delta | |
|---|---|---|---|---|---|---|
| 1992 | 11.9 | 1.51 | 17.985 | |||
| 1993 | 20.7 | 1.47 | 30.523 | 69.7% | 46.7% | 23.0% |
| 1994 | 13.2 | 2.58 | 33.901 | 11.1% | -7.1% | 18.1% |
| 1995 | 12.8 | 2.51 | 32.098 | -5.3% | 7.3% | -12.6% |
| 1996 | 18.0 | 1.83 | 32.915 | 2.5% | 27.8% | -25.2% |
| 1997 | 14.1 | 2.12 | 29.927 | -9.1% | 47.1% | -56.2% |
| 1998 | 16.8 | 1.11 | 18.618 | -37.8% | 17.7% | -55.5% |
| 1999 | 12.0 | 1.69 | 20.32 | 9.1% | 39.1% | -30.0% |
| 2000 | 13.2 | 1.39 | 18.342 | -9.7% | -7.5% | -2.2% |
| 2001 | 13.1 | 1.17 | 15.285 | -16.7% | -19.8% | 3.1% |
| 2002 | 7.6 | 1.27 | 9.71 | -36.5% | -43.9% | 7.5% |
| 2003 | 15.0 | 0.96 | 14.386 | 48.2% | 37.1% | 11.1% |
| 2004 | 10.3 | 1.46 | 14.97 | 4.1% | 7.3% | -3.3% |
| 2005 | 8.3 | 2.41 | 20.05 | 33.9% | 27.1% | 6.9% |
| 2006 | 3.9 | 7.35 | 28.591 | 42.6% | 22.0% | 20.6% |
| 2007 | 6.7 | 7.29 | 48.855 | 70.9% | 22.3% | 48.6% |
| 2008 | 5.3 | 8.05 | 42.794 | -12.4% | -40.4% | 28.0% |
| 2009 | 7.1 | 8.60 | 61.057 | 42.7% | 23.8% | 18.8% |
| 2010 | 10.3 | 8.98 | 92.17 | 51.0% | 16.1% | 34.9% |
One can clearly see that once “negative momentum” occured in 1995, four subsequent years with strong underperformance followed. Sto shareholders basically missed the whole 90ties boom.
Then again the same happened in 2006: Once Sto really started to outperform, 4 more years of outperformance followed.
Another example: KSB
When we look at the same type of crude analysis, we see a less clear picture at KSB:
| P/E | EPS | Last price | 12m change | DAX 12m Change | Delta | |
|---|---|---|---|---|---|---|
| 1992 | 10.2 | 19.32 | 196.847 | |||
| 1993 | 40.1 | 5.74 | 230.081 | 16.9% | 46.7% | -29.8% |
| 1994 | 41.8 | 4.59 | 191.734 | -16.7% | -7.1% | -9.6% |
| 1995 | #N/A N/A | -18.82 | 121.687 | -36.5% | 7.3% | -43.8% |
| 1996 | #N/A N/A | -5.71 | 123.733 | 1.7% | 27.8% | -26.1% |
| 1997 | 18.2 | 11.35 | 206.562 | 66.9% | 47.1% | 19.8% |
| 1998 | 9.5 | 17.82 | 169.238 | -18.1% | 17.7% | -35.8% |
| 1999 | 18.9 | 5.92 | 112 | -33.8% | 39.1% | -72.9% |
| 2000 | 14.2 | 5.8354 | 82.98 | -25.9% | -7.5% | -18.4% |
| 2001 | 15.0 | 5.32 | 80 | -3.6% | -19.8% | 16.2% |
| 2002 | 8.4 | 8.65 | 73.09 | -8.6% | -43.9% | 35.3% |
| 2003 | 19.4 | 7 | 136 | 86.1% | 37.1% | 49.0% |
| 2004 | 27.1 | 4.67 | 126.5 | -7.0% | 7.3% | -14.3% |
| 2005 | 25.9 | 5.85 | 151.43 | 19.7% | 27.1% | -7.4% |
| 2006 | 13.4 | 27.99 | 375 | 147.6% | 22.0% | 125.7% |
| 2007 | 10.3 | 43.86 | 450.06 | 20.0% | 22.3% | -2.3% |
| 2008 | 5.1 | 70.17 | 360 | -20.0% | -40.4% | 20.4% |
| 2009 | 6.7 | 61.32 | 409 | 13.6% | 23.8% | -10.2% |
| 2010 | 14.0 | 44.09 | 618 | 51.1% | 16.1% | 35.0% |
| 2011 | 11.0623 | 40.95 | 453 | -26.7% | -14.7% | -12.0% |
For the first 4 years, momentum would have worked but in 1997, momentum would have failed us. However in the subsequent years momentum might have worked OK, although one would have missed the big jump in 2006.
Let’s finally look at one of the “true hidden champions”, Fuchs Petrolub which I regret deeply not to have bought in the past:
| P/E | EPS | Last price | 12m change | DAX 12m Change | Delta | |
|---|---|---|---|---|---|---|
| 1992 | 23.0 | 0.10 | 2.414 | |||
| 1993 | 27.3 | 0.13 | 3.46 | 43.3% | 46.7% | -3.4% |
| 1994 | 23.3 | 0.17 | 3.848 | 11.2% | -7.1% | 18.3% |
| 1995 | 34.2 | 0.08 | 2.869 | -25.4% | 7.3% | -32.8% |
| 1996 | 21.6 | 0.14 | 3.123 | 8.9% | 27.8% | -18.9% |
| 1997 | 13.0 | 0.27 | 3.544 | 13.5% | 47.1% | -33.6% |
| 1998 | 44.6 | 0.07 | 2.92 | -17.6% | 17.7% | -35.3% |
| 1999 | 9.2 | 0.22 | 2.03 | -30.5% | 39.1% | -69.6% |
| 2000 | 8.4 | 0.234 | 1.964 | -3.3% | -7.5% | 4.3% |
| 2001 | 19.9 | 0.1089 | 2.162 | 10.1% | -19.8% | 29.9% |
| 2002 | 7.3 | 0.3207 | 2.327 | 7.6% | -43.9% | 51.6% |
| 2003 | 11.6 | 0.4152 | 4.816 | 107.0% | 37.1% | 69.9% |
| 2004 | 17.4 | 0.4919 | 8.564 | 77.8% | 7.3% | 70.5% |
| 2005 | 11.3 | 0.9394 | 10.57 | 23.4% | 27.1% | -3.6% |
| 2006 | 13.8 | 1.2413 | 17.163 | 62.4% | 22.0% | 40.4% |
| 2007 | 13.5 | 1.5517 | 20.983 | 22.3% | 22.3% | 0.0% |
| 2008 | 8.7 | 1.4867 | 12.943 | -38.3% | -40.4% | 2.1% |
| 2009 | 11.9 | 1.70 | 20.217 | 56.2% | 23.8% | 32.4% |
| 2010 | 13.7 | 2.39 | 32.9 | 62.7% | 16.1% | 46.7% |
| 2011 | 11.7637 | 2.56 | 30.115 | -8.5% | -14.7% | 6.2% |
Again we can see here longer stretches of under- and outperformance which clearly seem to imply some kind of momentum, persisting at least for some 4-5 years in this example.
Summary: Momentum is something which is is usually not connected to intrinsic value investing but with growth investing. However, some recent studies show that momentum also seems to be a factor in “value” stocks. A crude test with three examples from my long term “circle of comeptence” shows some anecdotical evidence for momentum in stock prices of “normal” companies and even “value companies”.
So this is definitely something to include in the investment process as additional aspect.
Edit: There is acutally a new Dilbert out referring to “momentum”:
Weekly links
Leucadia 2011 report
Manual of ideas Superinvestor issue
Interesting post about an Indian Mining stock (very good blog by the way if one is interested in India)
Good write up on Weir Group from Kelpie Capital
Interesting post about Hanover Food at Oddball
Tourism in Greece disappoints
Damodaran on the ugly Google stock split
Interesting post about a betting experiment at rueckzugsgut
Quick news : Piquadro SpA – Tumi IPO coming soon
I have mentioned Tumi several times as one of the major competitors of Piquadro in my small “series” about Piquadro.
Now it looks like that the Tumi IPO is finally happening . According to Bloomberg, they want to IPO on April 19th, with a quite optimistic valuation:
Demand for luxury goods is helping Doughty Hanson reduce its stake in Tumi, which it bought for $276 million eight years ago, longer than buyout firms typically hold investments. Tumi, whose backpacks retail for up to $595, is seeking a valuation of as much as 3.5 times 2011 sales, compared with the median of 0.6 times for a basket of peers, according to data compiled by Bloomberg.
I guess they are using P/S as a benchmark, because profits seem to be quite slim:
The luggage maker’s sales increased 31 percent to $330 million last year, while net income surged to $16.6 million from $104,000 in the same period, according to today’s filing. The company turned a profit for the first time in 2010 since at least 2007, the filing shows.
It is still amazing how the “pump and dump” strategy of those PE houses still work.
If we compare this to Piquadro, with multiples of 1.2 P/S and a P/E of 10, one can clearly see the impact of Anglo Saxon “financial magic”.
Piquadro itself seems to be reaching my threshold of 1.50 EUR again:
Below 1.50 EUR I will increase Piquadro to a half position (2.5%) of the portfolio, however in parallel I will increase the FTSE MIB hedge accordingly to hedge out my increasing Italian exposure.
