Analysis of Compagnie de Saint Gobain SA (SGO:PAR)

Compagnie de Saint Gobain is a French company present in 67 countries and active in the production, transformation and distribution of materials. The company is a world or European leader in several of its sectors of activity, it has 179,000 employees and its origins date back to 1665, with the "Manufacture royale de glaces de miroir".

Valuation and dividend

In these times, it is very difficult to find companies, especially big caps, that are even slightly affordable on the market. We are not going to say that Saint Gobain is currently a bargain, nevertheless it has the merit of trading at generally quite correct ratios, namely:

• 13.56 times current recurring earnings
• 24.57 times average recurring earnings
• 1.15 times the assets
• 4.02 times tangible assets
• 0.52 times sales
• 20.35 current free cash flow
• 31.47 times the average free cash flow

The very good years 2016 and in particular 2017 explain the significant difference between the current and average figures. The market does not seem to have wanted to integrate this data, which is why the price has been stationary for several years. We will see later what can explain this paradox. Note in particular the very interesting valuation from the point of view of sales, which is a very good point given the quality of this indicator. We will see here too later what explains this particularly attractive ratio compared to the others.

Let us also note that the EBITDA amounts to 9.14% of the enterprise value, which confirms that the price of Saint Gobain is quite attractive.

From a dividend point of view, it's not bad at all either, with a yield of 3.37%, always good to take in these moments of speculative madness. In addition, this generosity is still sufficiently prudent to ensure the sustainability of distributions in the future, since the dividend amounts to:

• 45,74% of current recurring profit
• 82.87% of average recurring profit
• 68.61% of current free cash flow
• 106.12% of average free cash flow

We also note here the significant divide between average and current figures. We are not totally immune to a small drop in the dividend in the event of a sharp drop in profit and FCF, but the risk is still quite measured.

It should also be noted that distributions, although generous, are growing at a senatorial pace, with only 0.95% per year over the last five years. They have not changed between 2013 and 2015. We are therefore clearly not in the category of growing dividends, but at least the board of directors manages its dividend responsibly to ensure its sustainability.

Balance sheet & result

While profits are growing over the long term and dividends are stable to very slightly increasing, the value of assets and cash reserves are following the opposite trend. Compagnie Saint Gobain is therefore managing to create wealth for its shareholders, but only on a few elements that determine this value. This may explain why the share price has been stagnating for several years.

Cash reserves, despite the long-term decline, still remain decent, with a current ratio of 1.34 (an insignificant increase compared to the previous year) and a quick ratio of 0.83 (large stocks explaining the difference between the two indicators). A priori, nothing too worrying for the French materials giant, which should not have too much trouble obtaining cash to honor its invoices. We have known since 2008 that even large companies are not immune to bankruptcy, but we will say here that the risk remains reasonable. This is confirmed by a Z-Score (Altman) of 2.1, placing Saint Gobain in the "gray" zone, i.e. no major risk of bankruptcy, but not absolute security either.

Although down very slightly, the gross margin is quite correct, at 25.5%. On the other hand, it only translates into a modest free cash flow margin of 2.56% and a net margin of only 3.84%. This difficulty in transforming turnover into profits sheds light on the differences observed in valuations, with a particularly attractive price/sales ratio compared to others.

From a profitability perspective, it's a bit of the same fight, with an ROA of 3,65% (up), a CFROA of 6,44% and an ROE of 8,48%. Not extraordinary, but improving.

Although the long-term debt ratio to assets is increasing, at 17,84%, total debt has been falling steadily for several years. The latter represents only 0.5 times equity, but would still require more than 13 years to be fully amortized using the free cash flow available. This is nevertheless explained more by the difficulty Saint Gobain encounters in generating cash than by the amount of debt as such. Indeed, the French company must invest its income quite significantly in expenditure on equipment needs.

It should also be noted that since 2014 the number of Saint Gobain shares in circulation has been constantly decreasing, which is obviously good news for shareholders, who see their share of the pie increasing.

Conclusion

Compagnie de Saint Gobain is a nice big company with a very long history. We are certainly not facing a profitability monster, but rather a more than mature company, with its qualities, but also its defects. Capital expenditures and general expenses are quite high, while the net margin is low. Profit is growing over the long term, but cash reserves are melting and the value of assets with it. Debt is under control. The stock is quite volatile, with 17.10% of relative standard deviation, and barely more "risky" than the market with a beta of 1.05.

The best thing about Saint Gobain right now is that its situation is improving, which is reflected in an F-Score (Piotroski) of seven (out of nine). This indicator not only tells us about the financial strength of a company, but also represents a fairly good predictor of its future share price performance.

With its fairly decent valuation and good dividend yield, this could tempt an income-oriented investor. As for me, I'm staying on the sidelines for now because I have some concerns about the stock market in general.