Are these stocks really cheap?
The Business Times front page headline this morning was mundane enough: "Blue chips hover close to lows in jittery market". But what was written underneath in the subheading was far more interesting: "Price-earnings ratio of ST Index stocks just 11 times; some sense buying opportunities". Our contention is not that the Business Times got it wrong. By P/E ratio these stocks may be cheap - and at 11x, it is cheap! But it is not the only measurement to use. Let's investigate this further.
Price-earnings multiples measure how many years must pass for a company to earn per share what it costs per share. But while that tells us something about how much of future earnings have been priced into the stock, it tells us nothing about whether we are getting value for money. And that has to be the ultimate measurement of any purchase, including stocks. The price-book ratio does this, and according to Reuters there are lots of expensive stocks around:
If we are looking for an understanding of performance, there is another measurement better than price-earnings: Yield. It answers the question of how much we get paid to simply own the stock. According to the DBS website, you get 0.825% interest (in other words, pittance) for every S$10,000 you invest for 12 months. So, only stocks that pay more than this are of interest. And according to Reuters, the yield also leaves to be desired. High yielding stocks are often problematic ones.
There is an even better way to measure performance, and that is the price-free cash flow ratio. How much cash is the company generating per share, compared to what it costs per share. And using this measurement, there are many many stocks which come up with zero or negative numbers. In other words, they are not throwing off excess cash. But there are also some good performers:
Having now gone through this exercise, our broad sweeping statement that's not to be taken as investment advice is this: stocks are indeed historically cheap. They are not a steal, but they are at levels where one might now say, when will these stocks ever get cheaper?
Mark Laudi, who owns SIA shares.
Price-earnings multiples measure how many years must pass for a company to earn per share what it costs per share. But while that tells us something about how much of future earnings have been priced into the stock, it tells us nothing about whether we are getting value for money. And that has to be the ultimate measurement of any purchase, including stocks. The price-book ratio does this, and according to Reuters there are lots of expensive stocks around:
DBS: 1.24xEven to buy S$1 worth of value in DBS, you have to pay S$1.24 for it.
SIA: 1.25x
Jardine Cycle & Carriage: 2.1x
Comfort Delgro: 2.2x
SingTel: 2.9x
Dairy Farm: 17.8x
StarHub: 72.3x
If we are looking for an understanding of performance, there is another measurement better than price-earnings: Yield. It answers the question of how much we get paid to simply own the stock. According to the DBS website, you get 0.825% interest (in other words, pittance) for every S$10,000 you invest for 12 months. So, only stocks that pay more than this are of interest. And according to Reuters, the yield also leaves to be desired. High yielding stocks are often problematic ones.
There is an even better way to measure performance, and that is the price-free cash flow ratio. How much cash is the company generating per share, compared to what it costs per share. And using this measurement, there are many many stocks which come up with zero or negative numbers. In other words, they are not throwing off excess cash. But there are also some good performers:
UOB: 7.39 cents per shareIn short, stocks may be cheap on a P/E basis, but you have to look at other measurements to gain an accurate picture.
Jardine Matheson: 3.9 cents
Singapore Airlines: 2.57 cents
Having now gone through this exercise, our broad sweeping statement that's not to be taken as investment advice is this: stocks are indeed historically cheap. They are not a steal, but they are at levels where one might now say, when will these stocks ever get cheaper?
Mark Laudi, who owns SIA shares.
Labels: comfortdelgro, Dairy Farm, DBS, Jardine, Jardine Matheson, Singapore Airlines, SingTel, StarHub, UOB
Make Free Cashflow Reporting Mandatory
Investors following earnings season can be forgiven for being bewildered by the numbers companies throw at them. For the uninitiated, reading the Profit & Loss Accounts, the Cashflow Statement and the Balance Sheet is quite a task. The irony is that even accountants admit much of it is based on assumptions and opinions. But while all companies provide a cashflow statement, few companies actually report Free Cashflow. We think it should be mandatory.
Free cashflow (FCF) is the ultimate measure of a company's financial health because it measures how much cash the business is actually generating, after staff and all their bills have been paid and money has been reinvested into the business, in the form of new equipment, and so on. It is the money the company does not know what to do with. It shows how much money the company could potentially pay out to shareholders.
Unfortunately, not many companies report it. StarHub is one of the few. It reported earnings last night, and the number appeared on page 2 of their earnings statement. While investors can work the figure out themselves, it would be better hearing it from the companies themselves.
That's not to dismiss profit altogether. For example, it is still interesting to know that, for example, the revaluation of a property boosted profit. Presumably, this property could be borrowed against, or sold. These would bring physical cash into the company. But the problem is there are many measures of profit (Gross Profit, Profit Before/After Tax, Abnormals, and so on). Which one should investors look at? By contrast, there is only one Free Cashflow number. It cannot be massaged by property revaluations and other abnormal items.
I can understand that some companies – especially those which don't generate any free cashflow – would be reluctant. But hiding poor cash generating ability behind great paper profits doesn't really address the spirit of continuous disclosure obligations, even though it meets the letter of it. Making Free Cashflow part of the mandatory continuous disclosure obligations would ensure that investors understand straight away whether a company is worth investing in or not.
Mark Laudi
To comment on this blog, visit the Investor Central Blog.
Free cashflow (FCF) is the ultimate measure of a company's financial health because it measures how much cash the business is actually generating, after staff and all their bills have been paid and money has been reinvested into the business, in the form of new equipment, and so on. It is the money the company does not know what to do with. It shows how much money the company could potentially pay out to shareholders.
Unfortunately, not many companies report it. StarHub is one of the few. It reported earnings last night, and the number appeared on page 2 of their earnings statement. While investors can work the figure out themselves, it would be better hearing it from the companies themselves.
That's not to dismiss profit altogether. For example, it is still interesting to know that, for example, the revaluation of a property boosted profit. Presumably, this property could be borrowed against, or sold. These would bring physical cash into the company. But the problem is there are many measures of profit (Gross Profit, Profit Before/After Tax, Abnormals, and so on). Which one should investors look at? By contrast, there is only one Free Cashflow number. It cannot be massaged by property revaluations and other abnormal items.
I can understand that some companies – especially those which don't generate any free cashflow – would be reluctant. But hiding poor cash generating ability behind great paper profits doesn't really address the spirit of continuous disclosure obligations, even though it meets the letter of it. Making Free Cashflow part of the mandatory continuous disclosure obligations would ensure that investors understand straight away whether a company is worth investing in or not.
Mark Laudi
To comment on this blog, visit the Investor Central Blog.
Labels: Earnings, Free cashflow, net profit, StarHub
With StarHub's earnings, is industry consolidation inevitable?
We saw the earnings from StarHub Thursday night and while there was overall top and bottom line growth, their earnings shed some light on the operating environment in this industry here in Singapore. Competition is fierce amongst the telcos, and with mobile phone penetration floating well above 100%, the pressure on 'the big 3' telcos to come up with alternative revenue streams is immense.
Could consolidation in the industry be inevitable? IMHO, the factors are there pointing to that.
Looking at their earnings, two specific areas jumped out at me: 1) revenue growth was flat for its cable business and 2) its post-paid mobile subscriber customer based dipped. To me, those two things don't bode well at all given that cable is such a an integral part of StarHubs business in addition to mobile. With mobile still being the bread and butter of the business, their post-paid customer base seems to be on the decline somewhat as well.
After reading Starhubs earnings, you really have to ask yourself what the future holds for StarHub and who will out muscle who amongst the telcos here in Singapore.
Quite frankly, I think three major players is far too many here in Singapore. I wouldn't be surprised if you saw consolidation. SingTel without a doubt holds the top spot here in Singapore and undoubtedly will be for some time I think. But you almost wonder if M1 and SatrHub came together what the benefits would be not only for shareholders but for consumers.
Mergia mania maybe will even make its way over to Singapore, as we have seen plenty of companies in the United States come together under situations similar. The only question is, are executives thinking the same thing. Only time will tell.
Curtis Bergh
As always please see your licensed financial advisor before making any investment decisions
ArchivesCould consolidation in the industry be inevitable? IMHO, the factors are there pointing to that.
Looking at their earnings, two specific areas jumped out at me: 1) revenue growth was flat for its cable business and 2) its post-paid mobile subscriber customer based dipped. To me, those two things don't bode well at all given that cable is such a an integral part of StarHubs business in addition to mobile. With mobile still being the bread and butter of the business, their post-paid customer base seems to be on the decline somewhat as well.
After reading Starhubs earnings, you really have to ask yourself what the future holds for StarHub and who will out muscle who amongst the telcos here in Singapore.
Quite frankly, I think three major players is far too many here in Singapore. I wouldn't be surprised if you saw consolidation. SingTel without a doubt holds the top spot here in Singapore and undoubtedly will be for some time I think. But you almost wonder if M1 and SatrHub came together what the benefits would be not only for shareholders but for consumers.
Mergia mania maybe will even make its way over to Singapore, as we have seen plenty of companies in the United States come together under situations similar. The only question is, are executives thinking the same thing. Only time will tell.
Curtis Bergh
As always please see your licensed financial advisor before making any investment decisions
Labels: Singapore, StarHub, telcos in Singapore
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