Price/Earnings multiples of major companies in the past (1998) and now

Since quite a while I have been reading a book about security valuation: “Security Analyses on Wall Street: a comprehensive guide to today’s valuation methods” by J.C. Hooke. While the content is quite outdated now, it still provides a good overview and some insight. After all methods didn’t change too much.

However there was a table with P/E multiples from several major companies, many of which today still exist. Since some analysts often emphasis the historical cheapness when comparing historical to today’s multiples.

Name	1998	31.05.2012	%
Coca-Cola	43	20	47%
Procter&Gamble	24	19	79%
Sara Lee	19	35	184%
Cadbury-Schweppes	14	aquired by Kraft
Grand Metropolitan	15	merged with guiness to Diageo (23 P/E)
Kirin	35	143	409%
Unilever	18	17	94%
LVMH	25	19	76%
Nestle	18	15	83%

Of course this is only a little snapshot, however we can see that for most companies this is true, however not on a very big scale (except coca-cola).

Direct agro investments: Tonkens Agrar

Recently there were reports in the media again (here or here) about investments in agricultural products. The timing is quite strange, since prices declined recently quite a lot (????), however I started to look into such investments since some time.

Such articles usually are about investments into commodities via (leveraged) certificates, options or futures. Since I only have very basic knowledge about such derivates and in my opinion its pure gambling with a potential total loss.

However there is also the other option, investing directly into an agro company via equity, becoming a shareholder. Here I want to focus on “straight/pure” agro companies, and not such as fertilizer producers, etc. As a guess those companies should probably have higher margins however.

In Germany there are as of my knowledge two publically listed companies, being directly involved in producing and harvesting crops as their primary business.
Those companies are KTG LINK and TA LINK.

Here; in this post I want to focus on Tonkens Agrar (TA), since KTG is a main player in this field and it already receives a lot of coverage. A comparison of the two companies would be favorable and might follow at a later point.

Tonkens is listed since their IPO in 2010, placing 1.432 mio. Shares for 23,75 apiece, quickly follow by a secondary offering, being less successful (issued only 0,227M of 0,358M shares allowed, 18,9 EUR each). TA has fields of 2.900 ha in East-Germany, leased to a great extend (73%), some worked on as a service provider (20%) and only 7% owned. Cultivated are onions, potatoes, wheat, corn, oil fruits and plants for animal food. They only use conventional ways of production, no organic food or such.

For this analysis I have data from 2009-2011, no quarterly/half year reports are being given, only a short statement for the half year. Business year ends on the 30th of June each year. The renewables segment only exists since 2011.

As can be seen, revenues and corresponding EBIT is far from proportional (f.e. storage 2011) and EBIT is much more volatile than revenue. In the AR I have not been able to find any information about this revenue peak in storage 2011, what I find a bit strange. Might be an indication for unused capacities in the previous years, which now were being offered on break-even price. It will be interesting to see whether this was a one-time item.

ROA	-4,9%	5,3%	-2,0%
ROE	-12,4%	22,7%	-9,4%
EBIT Margin	-5,8%	22,4%	1,1%
Profit Margin	-7,8%	11,2%	-3,4%

Earnings are very volatile as well, 2011: (1.711), 2010: 1.462, 2009: (468). Since they are often negative and TA is accounting after IFRS, IAS 41 (biological assets) is a full fair value standard, we often have ([at least short-term] non-cash) fair value changes distorting the earnings. A look at cash-flows might help us in getting a clearer image:

CF from op	2.439	-             596	208
CF from inv	-         5.249	-         1.969	-           2.030
FCF	-         2.810	-         2.565	-           1.822

CF from operation itself is often positive, what is a good signal. Investment is clearly a big point here; however cash has been raised exactly for this purpose, so that’s alright.

CapEx	6.107	2.426	3.518
Net CapEx	4.874	1.456	2.679
CapEmp	20.942	14.116	11.911
ROCE by EBIT	-6,0%	20,7%	1,3%

I tried to compile investments made in 2011, what I guess has been bought are mostly additions, some of the expenses are probably falling into 2010: 1MWp PV plant; 0,5 MWp biogas plant starting operation in Dec 2011 for 2-2,5 Mio EUR; Storage system; potato peeling machine. About the biogas plant management has been writing since 2009, and it took them around two years for one plant, that is quite slow, also not a single explanation has been given. In general stake-/shareholder-communication is very bad, despite opposite announcements made. This business year there was one statement regarding the half year AND …….

TA is trying to get away from pure agriculture more into processing food and creating energy, since those are higher margin operations and might reduce volatility.

In my opinion an investment in TA is a very risky one; success heavily depends on their investment strategy, the annual report for the current year should provide more information about cash-flows and if their operational business is at least self-carrying. At the end of business year 2011 (June 2011), there still was 5,2M cash left, so still quite some money to invest.

Using classic valuation multiples here is difficult, since in 2011 even EBITDA was negative.

price 28.05.2012	9,55
P/B	1,14
beak even P/B	8,35
P/E	0,0
MaCap	15.843
Enterprise Value	17.735

Working-capital management is astonishingly quite good, although featuring a declining trend.

DPO	119,2	160,1	137,6
DRO	53,8	81,8	67,2
DPO-DRO	65,5	78,3	70,4

If anybody should feel inclined to invest, I would advise to wait a bit longer, since the holing period for pre-IPO shareholders should run out in the coming months.

All in all we could see how difficult it is to earn money with basic planting and harvesting of crops, despite EU/German subsidies. The shift towards energy production and food processing clearly shows this. If the move towards higher margin business will succeed, TA might become a less volatile, more profit company, however right now an investment is quite risky in my opinion.

OPAP: Greece and privatization of state owned companies

This is a somewhat more abstract post about the announced privatizations of Greek state owned shares in listed companies.

I’m not a big fan of privatizations, especially when some of the companies are true cash-cows, however this is something that really strikes me and I think those are good examples for current problems.

If privatizations have to be done, they should be done right, i.e. maximizing the potential income from the selling. Now let’s come to the way it’s done in reality.

The plan of privatizing assets was officially introduced in mid-2011, with a goal of 50 billion Euros in revenues from asset sales until 2015, starting with 5 billion in 2011. A plan which was already back then heavily doubted by the public.
Now it’s Mai 2012 and the sale of OPAP (gambling) and Hellenic Petroleum is delayed until the new elected government.

So let’s calculate a bit: One year ago OPAP was traded at 13,38 EUR, HePetro at 7,13 EUR, yesterday it was 4,40 EUR and 5,06 EUR, respectively.

We will continue with OPAP only:

-27/01/2012: Government transferred 29% of all OPAP shares to the Hellenic Asset Development Fund based on a law dating 27.10.2011.
-This are a total of 92.510.000 shares transferred to the fund in order to be sold.
-Which were then expected to be (partially) offered in March.
-Until now nothing happened, sell-offs are on ice until new elected government gives new directions

I put my calculations into this graphic:

 

So up to now there is more than half a billion loss thanks to this slowly process and this is only ONE company, out of several (plus all the other non-listed assets).

And further losses are to be expected; the biggest institutional investor left the ship, selling off his shares.

Percentage calculation with German "financial" paper Handelsblatt

So this is what i saw today, an article about how to save during holidays with the clever selection of credit cards (stupid topic on itself).
But please dont underestimated the savings potential connected with such a choice, as our experts from Handelsblatt explain and calculate:

10.000 and 1/2 percent savings are 1.000 or 2.000 Euros savings in total. Amazing!

Seriously this is an online article and one could say you get what you pay for, however I still think that some kind of quality standard should be maintained. Sometimes it's better to not publish something in my opinion.
Quality has been on the run since a while now, most of their articles online I don't take serious anymore. On top of that they have those image slideshows (every 5th image advertising) which is just ridiculous.

First follow up up on BMW Common – preferred stock spread

Since it seems like there is some interest in this topic by my readership (and by myself), I decided to keep track of the development.

Since the data of my first post on BMW is itself older than the date of the text published, I have 2 months covered with the newer dataset.

This is the development since March the 16^th:

 

As we can observed, the spread between both declined considerably during the last few days mainly because of a steeper decline of the common shares, however historically speaking the spread was quite high during the months covered here and considerably higher than average.

Median one year spread changed from 48,31% to 50,96%, i.e. and increase by 2,65%, quite a lot.

On the last day spread was at 47,91%, thereby laying under the 1 year historical, but still over the 2 years (46,83%) and the 9 year median spread (39,58%).

So those two last months might have been a very good time to buy into the preferreds.

HB trading contest - week one (t=0)

As I already wrote here in my blog, the Handelsblatt stock trading contest starts today.

So I thought I will disclose my positions here and bring out an update each week, which will be more or less detailed depending on the analyzing tool that comes with the program.

This is my current portfolio, week one, Monday, t=0:

Long:    -JPM (bombed out after announcement of 2 Mio losses due to failed hedging)

-Südzucker (low beta stock, sugar, fruits and convenience food. Solid investment, however                 no big growth expected here)

-LYXOR ETF MSCI GREECE

-K+S AG 

-Rio Tinto PLC

All positions except Südzucker are very volatile stocks, Rio Tinto and less K+S are very cyclical enterprises, the Greece index is a speculation on improving political situations down there. The portfolio is very aggressive, something I definitely would not do with real money, but since the time horizon is only 3 months and there is a lot of competition I think its better to go high risk and take the potential losses than making a safe 2 percent, which won’t even win you a flower pot.

Sadly the online platform does not include a lot of functions, the searching function basically just a mask where you enter the security code number, not even a simple search by name is possible. User friendly is different

Also I tried to buy several stocks which however were not available. One of the transactions I wanted to try was a 1 BMW3 (preferred) long, 1 BMW short. However BMW 3 is not available. Several other stocks I tried as well.

Broker comdirect: Offer of trading during holiday via OTC

Today i received an offer from my online broker, comdirect.

Their special promotion was that now clients can also trade during certain holidays using the live trading function. This is basically OTC trading with another financial institution. Often that done is with institutes such as Commerzbank, Lang&Schwarz or Tradegate.

Now im not saying that this function is bad, on the contrary it can be extremely useful and I used it time and again.

However I advise to caution in certain situations:

                -Trading in the after-hours, when normal exchanges are closed.

                -Even more so for those “holiday specials”

                -Illiquid securities

One can observe a rising bid-ask spread as soon as regular stock exchanges close, especially when there is only one institution offering an OTC exchange.

Usually I favor OTC when the stocks are primarily traded on foreign exchanges (outside of Germany) but still highly liquid.

Let’s look at Vivendi SA for example:

LiveTrading                     Geld      Brief      Datum                    Zeit   Gestellte Kurse

LT Commerzbank            12,669   12,726   11.05.12               22:01     3.395

LT Tradegate                   12,705   12,754   11.05.12               21:59     153

LT Lang & Schw..           12,569   12,685   13.05.12               19:03     27

Börse                     Aktuell     Datum                  Zeit       Tages.-Vol.     Anzahl Kurse

Xetra                      12,72     11.05.12               17:13     193.239,27          25

Frankfurt                 12,75     11.05.12               18:24     212.268,49          16

Stuttgart                  12,66     11.05.12               19:58     78.011,95            8

NYSE Euronext      12,78     11.05.12               17:36     --                         10.901

So as we can see, on LT Commerzbank in total 3.395 quotes were offered, which is quite a lot when compared to the home exchange Euronext with 10.901 prices and even more so when compared with the generally most active German exchange XETRA with only 25.

So when trading this stock on XETRA one would probably get a unfavorable quote, while with OTC I get a decent priced quote with less transaction costs (no foreign exchange, less cost than a traditional German exchange).

All in all a good and handy feature, however don’t forget to check quotes and spreads with OTC trading as well.

Check-up on KHD Humbold Wedag AG

Last year I already did a quick check on KHD (here, German), a cologne-based company engaged in building cement plants around the globe.

Now the cement industry is a highly cyclical one, this is most likely reflected on the share price.

I put together a quick overview of the major financial data:

In Mio EUR	2011	2010	2009
Revenue	234,58	286,89	360,30
Amortization/Depreciation	1,68	1,25	1,09
EBIT	17,62	24,95	49,71
Net profit	13,51	15,80	37,17
Goodwill	5,16	2,13	2,13
Total Equity	233,53	148,56	169,73
Non-current Liab	53,07	49,16	46,22
Current Liab	145,32	215,62	213,94
Cash and equiv, unrestr.	287,68	293,06	225,84
Cash restricted	12,64	13,73	661,00
Debt/Equity ratio	22,7%	33,1%	27,2%
Cash to assets	67%	71%	53%

Here I want to highlight a few points:

-De facto debt-free, non-current liabilities are mainly provisions, pensions (with 20M quite high, however old and discontinued program) and deferred tax

-Hugh pile of cash 67% of all assets consisted of pure cash

-Low goodwill, which is good in my opinion, since chance of failure (-impairment-) is often significant

-Steady declining revenue/EBIT/profit, see following performance ratios:

in Mio EUR		2011		2010		2009
EBIT Margin	7,5%		8,7%		13,8%
Profit Margin	5,8%		5,5%		10,3%
Effec. Group tax rate	34,7%		39,3%		30,7%
ROCE by EBIT	6,1%		12,6%		23,0%
ROCE by NOPAT	4,7%		8,0%		17,2%
Capital turnover	81,8%		145,1%		166,8%
CapEmp	286,599		197,714		215,951
CapEx	2,70		2,37		0,73
Net CapEx	1,03		1,13		-0,36
Asset turnover	54,3%		69,4%		83,8%
ROA	3,1%		3,8%		8,6%
ROE	5,8%		10,6%		21,9%

As we can see, all performance indicators decline. It’s doubtful that even cost of capital could have been earned in 2011.

2009 figues in general seem very strong, considering the industry KHD is operating in. However, until March 2010 KHD was part of a Canadian holding, which also operated in the mining business (now: Terra Nova Royalty Corporation). Cost structure before early 2010 might not be that accurate, esp. in overhead.

Let’s have a look at the cash flows:

in Mio EUR		2011		2010		2009
CF from op	-65,79		50,48		-4,46
CF from inv	-4,25		66,32		21,29
FCF	-70,04		116,79		16,83
CF from fin	81,36		-63,16		5,39
Change in cash	11,32		53,63		22,21

-Fin CF 2011: In 2011 there was a equity offering, during which a Chinese government-owned company acquired a 20% stake

-Neg. FCF 2011:

-Structure of receivables: +4 Mio to total of 7 Mio Allowances on trade receivables (mainly for “North Africa, Middle East, India”)

-Actually utilized allowances was 0,5 Mio in 2011 and 0,2 Mio in 2010, so might be very prudent approach and the political turmoil.

-Non impaired, more than 60 days overdue: +3,7 Mio to total of 10 M, thereof 4 Mio more than 120 days.

-High outflows for Income tax paid (-33Mio) and this is something I can’t quite understand. The income statement showed a 7,2 Mio income tax expense, the balance sheet a reduction of -17 Mio income tax liabilities related to a tax audit for the period of 2005-2007, so maybe cash outflow was for this. Other that would only make up for 24,2 Mio.

Now let’s have a look at the market valuation (current price: 5,3 EUR, 11/05/2012)

P/B	1,13
P/E	19,5
MarCap	263,4
Enterprise Value	28,8
EV/EBIT	1,6
EV/EBITDA	1,5

As expected Enterprise value multiples are extremely low, due to high cash assets (which get deducted [EV=MaCap + Debt - Cash]). I used only unrestricted cash for the multiples.

Positive: 

-Cash, market capitalization is lower than unrestricted cash, at 5,8 EUR/stock there is breaking-                     even.

             -If economic conditions pick up, margins might improve

             -World-wide operations, diversified

Negative:

-Cash:   Might be wasted in stupid acquisitions. There is an article talking about a major acquisition of 75 Mio (here). However, he wants to used the cash “slowly”

Also pressure on management for effective use of assets is low (comfortable cash buffer, no debt investors, no big activist investor, however 2 smaller ones [5,7% IAT Reinsurance Group; 5% Sterling Strategic Value]).

                -Weak and declining performance in earnings/return indicators

                -Income tax expanses I outlined above (maybe I just don’t understand or miss something)

                -Strongly cyclical industry.

All in all a difficult decision, soon the Q1 2012 results will be published, this might help in decision making.




UPDATE1:  As I just saw on KHD's Invester Relation Page they postponed on the 27/04/2012 the annual general meeting to an undisclosed date due to "an agenda item which has not been decided upon yet".
This sounds very interesting, might be an opportunity (buyout offer?), but as well bad news.
I wonder...