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Looking for value in CAC40

April 28, 2012 | About:
Chandan Dubey

Chandan Dubey

97 followers
To find good opportunities, one needs to look far and wide. To get myself more acquainted with the businesses around the world I have decided to start with France.

The blue-chip French companies are accumulated in the index CAC40. I plan to look at a few companies in every article and see if there is a mouth watering opportunity somewhere.

If we do find something interesting, I will dig deeper and see if it might become a good investment with sufficient margin of safety. We will pass one ideas that give us a fair value without a good margin of safety, say 50%.

Vallourec SA (EPA:VK) Vallourec S.A. is a French group of companies specialised in hot rolled seamless steel tubes, expandable tubular technology, automotive parts and stainless steel. The shares are down nearly 45% since a year before.

The company has sales of around €6b (not much variation in the last 5 years), and net margin of 8%. The debt is around €2b and debt/equity is 0.43. The TBV is €33.49 per share. For a P/E of 10, one will pay around €4.8b as a fair value (calculated using sales, net margin and P/E). Looking at the price, the company has market cap of €5.67b and hence is expensive for my taste.

Given that the company is in a cyclical industry I am quite confident with my appraisal here and I feel that the company does not offer a sufficient margin of safety. Pass.

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Veolia Environment (EPA:VIE) Veolia Environnement S.A. is a multinational French company with activities in four main service and utility areas traditionally managed by public authorities - water supply and water management, waste management, energy and transport services. The shares are down nearly 50% since a year before.

Veolia’s net margin has been quite bad. In the last 10 years it has managed to eke out an average net margin of 1%. The highest has been 2.84%. This is also a very capital intensive industry. But the company has managed to be FCF positive in 8 out of the last 10 years. The company had FCF of €686m in 2011 and this seems like a lower end of the spectrum. The company has a staggering €21b in debt and €6b in cash. The debt has been creeping up and even though the company is not on the brink of bankruptcy, the high debt to equity ratio of nearly 3 gives me pause. Veolia has been trying to divest away from some of its non-core businesses and looks very cheap at a market cap of €5.77b.

There are a few very strong points against investing in Veolia, which we need to consider. Veolia operates in an industry that is highly regulated. There are significant governmental and legal risks. I also do not like the fact that they pay their high dividend (€0.7 per share, 6.3% for 2011) in either cash or shares. They trumpet the fact that 58% of the shareholders opted for shares as a good thing and claim that this shows that shareholders like the share and the company. Given the situation of the company, I would understand if they did not pay any dividend for a while. They either do not understand what they are doing or they are trying to appease the shareholders by being a bit dishonest. Either way it does not put the management in a positive light. Pass.

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Vinci (EPA:DG) Vinci is a French concessions and construction company. Vinci is world’s largest construction company by revenues. The shares are down nearly 20% since a year before.

The company has €21b in debt and nearly €8b in cash. The FCF has been improving and at the moment stands at €2b. Since 2007 the dividend has grown at a nearly 3% per year and now stands at €1.77 per share (in 2011). The company had a consistent net margin of around 3-5% in the last 10 years and has never been in loss. It has also improved its EPS year after year since 2002. The revenue, dividend, cash, and assets have all been going up consistently since 2007 at least.

How much would I conservatively estimate the value of Vinci ? Assuming a 10 multiple of FCF, adding cash and subtracting debt gives us a figure of €7b. Using the sales figure of €37b, net margin of 5% and P/E of 10 gives us a value of €18b. Subtracting debt and adding cash gives us €7b again. Amazingly both these methods gives us the same value (just a side note). So, the company is conservatively worth €7b.

The current market cap of the company is €20b. The EPS is €3.49, and the dividend as you know is €1.77. The current price of €35 per share looks about fairly valued if we do not look at the staggering debt of nearly €13b. Looking at the whole picture, I see the company to be fairly valued or maybe a bit cheap. You must pay something for the good management and a consistent performance. But, it does not qualify as a mouth-watering opportunity though. On watchlist.

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About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.9/5 (22 votes)

Comments

Cornelius Chan
Cornelius Chan - 2 years ago
May I ask what your prospective holding time is for your stocks? Are you buying during periods of economic contraction and selling during periods of economic expansion? Or are you planning on holding stocks until you need cash in retirement? My best guess is you have a mixed strategy of buy & hold for the non-cyclicals and preset buy/sell triggers for the cyclicals.

Specific example: Vallourec, the steel company. I am guessing should it fall in price, thereby creating a margin of safety, you will buy irrespective of whether or not it is in a cyclical industry. Is this correct?

By the way, I like where you are going with this inaugural series of articles. I am waiting with my pencil, paper & popcorn for more. ;-)

cdubey
Cdubey premium member - 2 years ago
> My best guess is you have a mixed strategy of buy & hold for the non-cyclicals

> and preset buy/sell triggers for the cyclicals.

Quite correct. I will be happy to hold if the company does not become quite over-valued for non-cyclicals like ABB for example.

I have not researched Vallourec in detail because it is not cheap at the moment. I will need to look at the management and get an idea about the business before buying in. Everything else being great, a sufficient margin of safety will result in an investment. Although, I must say, at the moment I will probably add to one of my existing positions than begin a new one at a comparable margin of safety.

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