As is a value investor’s habit, I thought I’d share with you my quick take on 3 companies from last week’s 52 week lows from the London Stock Exchange. An interesting idea considering the current valuation of the market and last week’s volatility due to global growth and the sell off in commodities.
There’s always a fair amount of dross to go through when engaging in this exercise but clearly undesirable stocks are quickly identifiable after a bit of practice. I’ll list the companies that merit looking at in order as I come across them.
Faroe Petroleum (FPM)
This company is losing money and a quick look at the past few years shows basic EPS reported in GBP as -6.60 (2009), -13.30 (2010), 20.10 (2011) and -2.44 (2012). As per the final results via RNS shows, the positive EPS in 2011 was due to a one off exceptional gain on disposal of their interest in an oil field discovery in Norway. It appears that genuine earnings are not high on managements list of priorities.
A current ratio of 1.95 is misleading since Faroe trades well above tangible book (P/TBV 2.85) and I can’t help thinking that current management will transfer the cash into intangible assets by paying for exploration since they’ve acquired many more licences for this purpose.
Turning to the balance sheet its clear that half of its assets are already intangibles as per the last interim report and there are no notes as to what they relate to. Going back to the last annual report dated 26 April 2012 the intangible assets relate to, you guessed it, exploration and evaluation costs. How good are Faroe at exploring and evaluating profitable wells? That would be a question I would want to answer if I thought the shares showed any signs of value at this stage, which they do not.
All in all I will give it a miss at the current share price, it would need to come down at least 25% below tangible book for me to get interested in this company, especially as they are unable to register positive earnings.
Nice. A dividend paying small cap mining stock with a 3 year earnings growth of 77.61% and 5 years at 24.14% with a debt to equity ratio excluding intangibles of 0.02. Not bad. A price to net tangible asset value per share of 0.57 and a P/E ratio of 4.91. Excellent. The price has been declining (a good thing) and last reported net profit margin is 19.30%.
What sticks out like a sore thumb though is the current ratio: 0.43
I checked the preliminary results released 11 April 2013 to see if I could see why. Griffen used cash to increase its share in company with which it has a JV which has placed its balance sheet into a dangerous position. Griffin went from a current ratio of 4.45 to 0.43 in the blink of an eye. Even though the price to net tangible asset value is 0.57, the balance sheet is far too weak to represent an investment with a margin of safety. Griffen could easily belong in a portfolio of bargain basement stocks since its trading at a large enough discount to tangible book.
Morgan Advanced Materials (MGAM)
This FTSE 250 dividend paying stock caught my eye based on a low PE ratio (8.90) and a current ratio of 1.91, slight weakness here but Morgan has improved its short-term solvency for the past 5 years up from 1.27 in 2008. 3 year earnings growth of 20.72% and 5 years coming in lower at 4.60% still left me neutral on this stock.
What switched my outlook from neutral to negative was a quick look at the balance sheet: assets minus intangibles are £703.2 million. Total liabilities come to £696.5 million. With no asset backing to Morgan I’m not convinced that my cash would be safe invested in this company. The final nail in the coffin is a debt to equity ratio including intangibles is 1.78, excluding intangibles its 72.21.
From looking through last week’s 52 week lows one message comes through loud and clear: resource stocks are still taking a hammering by the market and nimble investors should insist on a strong balance sheet and a discount to that asset value to guard themselves against permanent loss.
There was one stock that caught my eye and a more detailed analysis will be sent via the Shares and Stock Markets Newsletter, an awesome free value investing service that takes investing to the next level.
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Image: London Plaza