I usually avoid companies with a net profit margin of less than 5%. And yet, I did not hesitate for a second to invest in Also after discovering its many qualities.
Founded in 1984, Also is a Lucerne-based distribution and logistics company active in the fields of information technology and consumer electronics.
It is actually nothing more than a intermediate between suppliers (e.g. HP) and resellers (e.g. Mediamarkt). A boring and not at all sexy business area... in short, exactly what I like when I am looking for new investments!
Also is the third largest European IT distributor behind its competitors Tech Data and Ingram Micro. The company, which counts among its customers Swisscom, Sunrise, Fnac and Mediamarkt, is present in fifteen countries.
It markets products and services from more than 525 suppliers, including well-known brands such as Acer, Apple, Canon, Cisco, Epson, Fujitsu, HP, Intel, Lenovo, LG, Microsoft, Netgear, Philips, Samsung, Symantec and Xerox.
The company distributes around 40,000 devices per day and is also increasingly focusing on sales via the Cloud (as is the case, for example, with Microsoft's Office range).
Revenue and net profit increased by 11% in 2017... a seventh record in a row! From 2011 to 2017, the turnover increased from 7.6 to 9.9 billion (+30%). In the same period, the profit jumped from 33 to 103 million, a much more than proportional growth of 212%!!!
It must be said that since Gustavo Möller-Hergt took office as CEO in 2012, priority was clearly placed on profitability rather than volume.
Another interesting fact: Also was controlled by elevator and escalator manufacturer Schindler until early 2017. Following Schindler's exit, the free float increased from around 20% in 2016 to 48% today, making the shares much more liquid.
The company has EUR 291,300 of equity and EUR 235 million of cash (at the end of 2017), which is more than sufficient for a capital-light business.
The dividend yield of 2.2% is rather modest, but this weakness is largely offset by a very reasonable payout ratio of 33% as well as the meteoric rise in dividend in recent years: It has in fact gone from 0.70 fr in 2011 to 2.75 fr in 2017, an increase of almost 300%!!!
The dividend (not taxed because taken from capital reserves) has just been increased by 22%.
The stock is currently trading at 124.20 francs, corresponding to a PER 2018 estimated at 13This valuation appears optically very low, but it is partly explained by the weakness of the net profit margin.
Conclusion
Also's transformation in recent years is bearing fruit, resulting in strong growth and (although the profit margin is still relatively low) a marked improvement in profitability.
Also is becoming a service provider rather than a simple reseller of computer equipment. The valuation is correct and the stock still has significant growth potential in my opinion. I expect higher prices and dividends in the medium to long term.
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Thanks dividinde for this analysis.
It's also a title that often comes up in some of my screeners and that I almost bought recently.
From a valuation point of view, I find it quite correct compared to profits, but expensive compared to tangibles (at the same time it is a bit normal for a company of this type) and also expensive compared to FCF. On the other hand it is very cheap compared to sales which is obviously a very good point.
EBITDA is 9% of enterprise value, not too bad.
Regarding the dividend, as you point out, it is average, but is growing very quickly and is well covered not only by profits, but also by FCF, whether we take current results or even the average of the last five years. Thanks to the regularity of profits and FCF over the long term, Also manages not only to ensure the payment of the dividend, but even to make it grow substantially, despite margins that are admittedly very low (and falling).
Regarding debt, the situation is good compared to equity (ratio 0.58), but the long-term debt ratio is increasing and still represents 14.9% of assets. It would take six and a half years to repay all the debt using FCF. It is not dramatic, but not ideal either.
An interesting aspect of Also is its very low beta, of only 0.48. This can be good for a portfolio in these times.
Also note low capital expenditure, increasing goodwill and good profitability as you pointed out.
In short, it is a solid company, which is not ready to go bankrupt, which is confirmed by a Z-score (Altman) of 5.7. The F-Score (Piotroski) is a little less good nevertheless (5), in particular because of the long-term debt ratio, a slight drop in profitability (ROA) and a slight drop in gross margin.
Like you, I find that the stock is correctly valued compared to current fundamentals. It may, however, be slightly overvalued compared to the average profits of the last five years (which have indeed increased significantly). We know the unfortunately inconsistent nature of the latter, so it is quite possible that Also's will also fall in the future, at least for a certain time.
So interesting title, which I personally keep under the microscope, but not yet purchased. It must be said that I am generally a little skeptical also about the Swiss market as a whole at the moment (too expensive and bad trend).
Thank you Jerome for this additional information. It is true that the debt is quite high, particularly in relation to the free cash flow (FCF).
On the other hand, I don't see why you say that margins are falling. Indeed, although they remain low, both the gross and net profit margins have constantly increased over the last few years.
For example, the net profit margin (NPM) increased from 0.43% in 2011 to 1.04% in 2017. Even if it remains a low value, the margin has still more than doubled!
Gross margin decrease between 2017 and 2016, right?
Yes, that's right, but I always look at the trend over several years without giving too much importance to a single accounting year.
It must also be said that between 2016 and 2017 the turnover increased very sharply (13.4%), which can also explain why the gross profit did not quite manage to keep up.
Thank you both for this very enriching analysis.
Can you enlighten me on some of the questions I have following this reading?
1/ below what level is a title correctly valued?
– compared to its profits
– compared to tangibles
– compared to FCF
– in relation to its sales
2/ from when can I consider that the dividend is well covered?
– compared to profits
– by report to FCF
3/ for debt, below what percentage of assets is the situation “ideal”?
4/ finally, which good book should I read to progress in this type of value investment?
I read the 9 articles on valuation indicators but I did not find all the answers
thanks in advance
Nuno
@Nuno
It is difficult to give you a general answer to all your questions, as the situation differs so much from one sector of activity and from one company to another.
For example, a P/E of 20 is cheap for EMS Chemie, while a P/E of 15 is too expensive for Adecco. A % of equity of 30% is correct for a telecom, while a value below 50% can be problematic for an industrial, etc.
You will find some ideas in this series of articles:
https://www.dividendes.ch/2017/05/identifier-des-actions-suisses-de-qualite-et-les-valoriser-16/
On the book side, you can start with the timeless "Intelligent Investor" by Benjamin Graham, it's a very good basis even if some passages are quite indigestible:
http://www.fxf1.com/english-books/The%20Intelligent%20Investor%20-%20BENJAMIN%20GRAHAM.pdf
I also quite like:
http://assets.stockopedia.com/ebooks/dividend-stocks/published/dividend-stocks.pdf
I agree with dividinde, it is difficult to give "turnkey" answers. Nevertheless, we can apply some rules of prudence, on the principle of the "safety margin" dear to Graham.
1/ below what level is a title correctly valued?
– in relation to its profits: this is by far not the most relevant indicator, but let’s say 15
– in relation to tangibles: 1.5. If one is particularly conservative, as I am, one even refers to tangible assets only.
– compared to FCF: 15
– compared to its sales: 1.5
2/ from when can I consider that the dividend is well covered?
– compared to profits: distribution ratio lower than 70%
– in relation to FCF: same (but we can be slightly more tolerant with FCF which is more reliable than profit)
It also depends on the sector of activity. When we enter more cyclical areas, we will have to bet on a much lower distribution ratio, like smaller than 50%.
3/ for debt, below what percentage of assets is the situation “ideal”?
A debt to equity ratio of 0.8 is generally ok, however I prefer to look at how this debt is covered by cash flow. If the average FCF is greater than 1/5 of the total debt it is good because the company would be able to pay off its debt in just five years.
4/ finally, which good book should I read to progress in this type of value investment?
https://www.dividendes.ch/lectures/
Thank you both for your answers.
My pleasure:-)
I liquidated half of my position in Also @190.40 today, which had become too expensive for my taste. The released funds were directly invested in Glarner Kantonalbank @29.60, which seems to me to be an interesting investment at this price.
Nice move bro!
Closing today of the remainder of my Also @226 shares. Half of the proceeds from the sale are reinvested in Emmi @818, the other half in Barry Callebaut @1860.
Nice shot!