zaterdag 5 augustus 2017

Outokumpu Oyj

Outokumpu is a global leader in stainless steel and is executing a large-scale transformation in its operations with a target to return to the sustainable profitability. Following the merger with the German steel conglomerate Inoxum in 2013, Outokumpu has consolidated its production capacity in Europe, established a strong foothold in the Americas, and decisively implemented cost efficiency measures and saving programs in order to lower the overall cost level of the company. As a result, today Outokumpu is a global leader in stainless steel with a unique global production set-up.
Outokumpu strategy focuses on areas, where the company aims to further increase its operational efficiency to make the most of the Group’s assets and leverage its strengths to differentiate from competitors. In order to leverage its strong presence in the most attractive key markets, Outokumpu builds on its strong legacy in quality, innovation, and technical expertise, and systematically improves delivery performance and customer relationships in order to provide the best customer experience in the industry.

Dutchman Roeland Baan became the CEO on January 1st, 2016 and is working to improve safety, decrease debt and cut costs (including the number of employees). His efforts seem to be paying off.

SECTOR: [PASS] Outokumpu is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Outokumpu's sales of €5 700 million, based on 2016 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Outokumpu's current ratio €2 483m/€1 942m of 1.3 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL]  For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Outokumpu is €1 502 million, while the net current assets are €541 million. Outokumpu fails this test.

LONG-TERM EPS GROWTH: [FAIL]  Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Outokumpu made a loss from 2008 through 2014. Outokumpu fails this test.

Earnings Yield: [PASS] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Outokumpu's E/P (using the current 2017 profits)  are €1,2/€7,56 =16% and passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Outokumpu has a Graham number of (15 x €1,2 EPS x €6,21 Book Value) = €12,95

Conclusion: Outokumpu does not seem expensive, but is not a Graham Defensive Investment. The question is partly, how much faith do you have in the new CEO Roeland Baan? Here he is discussing 2017 Q2 results: 

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