About Value Investing
Among the many number of strategies conceptualized for stock selection, over the past few years, Value Investing is among the most popular and successful way of stock selection. This investment style is basically based on finding stock which is available at a cheaper price than its intrinsic value.
Value investors seeks to buy stock companies that are undervalued in the market. The basic concept behind value investing is buying stocks which are fundamentally very strong and is priced lower in the market due to some external factors. Value investing primarily emphasises on the business of the company and its fundamentals rather than external factors that may influence stock’s price in the short term. Value investors generally rely on fundamentals of the company and do not follow the herd mentality.
Key parameters in value investing:
Low price-to-earnings ratio: P/E ratio helps a person to define whether the stock is cheap or not. It guides us to know whether the particular stock is undervalued or overvalued compared to its peers. Generally, stock with a comparatively low P/E multiple is considered undervalued.
Low price to book ratio: P/B ratio is nothing but, current market price divided by book value per share. The book value per share is total assets minus its liabilities divided by total number of shares. It can also be defined at the value obtained by dividing shareholders’ equity by the number of shares outstanding. Stock with lower book value is considered cheap and good for value investing.
Free Cash Flow of the Firm: Free cash flow is generally the cash left with the company after capital expenditures (for maintaining the current level of productive capacity) and its operating expenses. This shows how efficiently the company is producing cash and whether it still has cash for its future expansion. If a company has cash, it will use it for paying dividends, capex for expansions, repaying debt etc.
Debt-to-equity: Debt-to-equity ratio shows the proportion of debt and equity in their balance sheet. Generally, a company with low D/E is preferred as it will have low debt and hence low interest costs, but it is not a hard and fast rule. Some sector specific companies have a higher D/E ratio, for example, construction companies, as they have more capital requirements. So, we must look at the industry D/E and peer D/E and compare it with that of the company.
EPS: Last but not the least, EPS is Earning per share and is calculated by dividing profit after tax by total number of shares outstanding. It is a very important ratio as it tells about how much each share is earning from the company’s bottom line. Higher the EPS, the better is the company.
We take a look at 3 stocks which have delivered strong returns in the prior years.
About the company: Webjet Limited (ASX: WEB) is one of the top online travel agency (OTA) operational in New Zealand and Australia. Webjet allows customers to book the best suitable flight deals in the whole world. The current market capitalisation of WEB stood at A$ 1.66 billion on 11th September 2019.
Good financial performance: Company reported a very strong set of numbers for FY19, with revenue growing by 26% to $366.4 million. Company’s EBITDA grew by 43% to $124.6 million. The company had targeted a cash conversion of 95%-110% for FY19. Company’s adjusted cash conversion stood at 98% for FY19 due to improvement in working capital management. By acquiring Jac Travel and Destinations of the World (DOTW), the company now owns the largest business across bookings, TTV (Total Transaction Value) and EBITDA. Given the headwinds of tight domestic market in FY19, Webjet Online Travel Agency’s TTV and EBITDA margins improved significantly and were 10.9% and 40.4% respectively.
Strong financial health of the company: Company has a strong balance sheet with cash and cash equivalents of $211.4 million in its balance sheet. Company’s Net debt to EBITDA ratio is 0.19x which is significantly higher than previous year’s ratio which was -0.48x. return on Equity of the company is 15.0% and Return on Invested Capital is 17.5% which is quite healthy.
Good dividend yield: The company has a dividend yield of 1.8% as per ASX. The company has declared a dividend of 13.5 cents, which brings the total dividend to 22.0 cents. It is up by 10% as compared to previous year’s dividend.
Outlook: Company has an extensive plan till FY22 for its growth. Company is expecting to increase its revenue/TTV by 8%, costs/TTV by 4% and EBITDA/TTV by 4%. This will make its EBITDA margin at 50% (currently 34%). Costs are expected to grow at a lower rate than revenue, driven by improvement of IT platforms and Rezchain, company’s blockchain solution.
Stock performance: Currently, the company is trading at a P/E multiple of 26.04x as per ASX. The stock has performed very well in the previous years and has given more than 7x return in the last ten years. On a short-term basis, in the previous six months WEB has given a negative return of 16.61%.
Lovisa Holdings Limited
About the company: Lovisa Holdings Limited (ASX: LOV) is into the business of retail sale of fashion jewellery and accessories. Currently it has about 404 stores located in various countries across the globe, including 36 franchise stores. The current market capitalisation of LOV stood at A$ 1.34 billion on 11th September 2019.
Financial performance of the company: FY19 was a good year for LOV. Company’s revenue increased by 15.3% to $250.3 million due to increase in store rollout. The company protected its gross margins through the year, increasing by 50 bps to 80.5%. Europe and USA region saw a major growth in revenues up by 105.1% and 1,146.8% respectively, due to store additions. Cost of doing business (CODB) has increased a little due to increase in store addition. In FY18, it was around 53% and in FY19 it is 56%.
Financial health of the company: The cash from operating activities before interest and tax was $66.7 million and the company had a cash conversion of 107%. The company has a strong balance sheet with cash lying around $11.2 million with the company.
Modest dividend yield: The company has a dividend yield of 2.6% as per ASX. The company has paid a final dividend of 15.0 cents up from 14 cents in the previous year, making the full year dividend to 33.0 cents, a 6-cent increase as compared to previous year.
Outlook for FY20: The company is focused on store addition in and expects to increase the number of stores in FY20. 14 new stores are added already since the end of the financial year, making the total number of stores to 404. Company will continue to invest in support structures, particularly in the USA, to support growth in store network and will help in expanding its business.
Stock performance: Currently, the company is trading at a P/E multiple of 36.110x as per ASX. The stock has performed very well in the previous years and has given more than 25% return in the last year. On a short-term basis, in the previous six months LOV has given a positive return of 32.39%.
Collection House Limited
About the company: Collection House Limited (ASX: CLH) is an industry expert in the receivables management services. Company’s main clients are organisations and individuals that cover the entire credit management cycle and beyond. The current market capitalisation of CLH stood at A$ 172.01 million on 11th September 2019.
Financial performance of the company: For FY 19, the company reported a total revenue of $161.1 million up by 12% on the corresponding period of prior year. Company’s NPAT was up by 17.5% to $30.7 million. The PDL cash Collection segment showed a good growth in this year with an upside of 7.0% to $135.7 million. However, the Collection Services Revenue declined by 2.1% to $67.6 million. EPS was up by 16.0% to 22.3 cents due to strong growth in revenue.
Good Dividend yield: The company has a dividend yield of 6.64% as per ASX. Company declared a final dividend of 4.1 cents per share, making the full year dividend to 8.2 cents per share.
Outlook for FY20: Company has guided a cash collection in the range of $145 million to $155 million up by 16% from the levels of FY19.
Stock performance: Currently, the company is trading at a P/E multiple of 5.5400x as per ASX. The stock has performed very well in the past years and has given more than 80% return in the last ten years. On a short-term basis, in the previous three months CLH has given a negative return of 0.4%.
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