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Chandan Dubey
Chandan Dubey
Articles (150) 

Stocks to Buy on Dips: CAF.MC

December 18, 2012 | About:

Name: Construcciones y Auxiliar de Ferrocarriles

Country: Spain

Ticker: CAF

Shares: 3,428,075

Price: €352 (Dec 14)

52 week range: €332-€417

Market Cap: €1.23 billion

Revenue: €1,725 million

P/E: 9.88

Div: 2.98%

Sales growth: 16.5% (five-year)

EPS growth: 31.14%

Dividend growth: 32%

1 The Company:1.1 Business: The company manufactures railway vehicles — high speed, locomotives, regional trains, commuter trains, electric motorcars, metro unit trains, light rail trains — you name it, they manufacture it. To get a better sense of the business, look at some of the projects they have completed:

  • In 2005, they supplied 12 high speed units to Turkish Railways.
  • Quite recently, they supplied 8 units for the new metro link from New Delhi to its international airport. Each unit is made of 6 cars and each has a 25 Kv AC traction unit.
  • The company has designed or designing metro unit trains for cities around the world. For example - Barcelona, Madrid, Istanbul, New Delhi, Algiers, Hong Kong, Caracas, Sao Paulo, Santiago, Rome.

Apart from manufacturing, not surprisingly, the company also offers maintenance, overhaul and upgrades of the vehicles and the components therein.

1.2 History

The company traces its roots back to 1860 when Domingo Goitia, Martín Usabiaga and José Francisco Arana established a company whose main activity was puddling furnaces (a way to make iron and steel) and cylinder rolling. The company CAF itself was founded in 1917 with around 1,600 employees, and the main business was freight car production. A significant event happened in 1954 when CAF took over Material Móvil y Construcciones (MMC), a manufacturer of long-distance subway trains. In 1969, CAF created its R&D unit, increasing the competitiveness of the company and at the same time improving its in-house technology.

1.3 Home market

The company is based in Spain and constructs most of the equipment in Spain, then ships and assembles it where it is required. It has 11 factories in total, including one each in Brazil, the U.S. and Mexico.

The company has become a global player in construction of railway systems. In 2001, the company had sales which were half in Spain and half outside (32 million pesetas each). But in 2011 it sold €435.29 million in Spain and €1.28 billion outside.

1.4 Segments

The company divides its sales into three segments: railway, rolling stock and components, and concession. The concession business has been discontinued in 2011. So, we only need discuss the other two. The railway segments represents most of the sales. The rolling stock is mainly repair and upgrade of the vehicles.


1.5 Growth

CAF benefited from the railway investments in Spain during the 1990s. It has leveraged the strong position it enjoys in the home market to become a company with broad technical know-how and an ability to manufacture any type of rail vehicles.

It has been able to capture market worldwide and has become a major player globally. The revenue and the order backlog has grown at a very fast rate. In the last five years, the growth in revenue stands at compounded 20%.


In itself, this is no mean feat — but the order backlog has been going up quite nicely too. They are up a compounded 13%. The company has revenue of nearly €1.7 billion and a backlog of €5 billion. This is nearly three-year's worth of revenue right there.

Furthermore, as you see from the picture above, most of the growth has been in the exports. The company is getting a larger share of its business from outside Spain. It is heartening to see that it has been able to succeed in competing on the larger stage.

1.6 Profitability

The company has been able to maintain a stable operating as well as net margin (7-12%). The figures for the last five years can be seen from the chart below.


2 Financial Situation

All of the company’s debt is financed by banks. The company has a total of €242 million in loans. Let us look at the interest expense and the operating income of the company in relation to the debt.

Items (in € thousands)20112010200920082007
LT Debt242,171240,565187,577160,349161,232
Operating income164,783156,644145,27291,86986,191
Financial costs*26,6272,1021,1101,272609
Financial income9,62011,4736,28717,1358,527
Interest cover67513176143
* including interest expense

The financial cost in 2011 sticks out like an eye-sore. Sadly, the annual report of 2011 does not give clear reasons for why that is. I sent them an email and am expecting a reply. Given the LT debt has not increased too much, the cost is definitely not from interest expense.

The interest cover is more than 6 in the most recent year and has been significantly higher in the previous years. I do not see the company having any trouble paying the interest on its loan.

Following is the timeline for its loan payments.


Given an operating income which is 8 times as large, the company should not have any problems in meeting its covenants. Furthermore, there is a significant margin of safety here. Financially, I see the company to be quite strong.

3 Management

I started reading the shareholder letters from 2001. The then chairman José María Baztarrica Garijo is now chairman and CEO of the group.

The way the company has made strategic acquisitions to bring itself to the forefront of railway manufacturing gives me a lot of confidence in the management. The company has a clear goal of becoming one of the most competitive global manufacturer of railway solutions and the track record of the management is quite good. Look at the following two charts:


The board of directors received €1.3 million in compensation. There is no pension of life insurance obligation to the company. Since the senior management is part of the board of directors, their remuneration is included in the above figure. This is quite cheap. Getting such a management with such a small amount of money is a great deal. I would have liked to know as to how much each manager earned, but the annual report is short in this regard.

The management believes that the employees should have a significant stake in the company. As the company is not allowed to keep any treasury stock, they came up with a workaround. A new company/fund called Cartera Social S.A. was formed. This company would by shares of CAF and sell it to the employees at a discount. This way Cartera will make loss and it will be absorbed by CAF.

The scheme was implemented in three stages. The first began in 1994 when Cartera bought 632,000 shares of CAF at a cost of €26.9 million. The second was completed by acquiring 210,150 shares in 2005 at a cost of €14.3 million. And the third in 2007 with acquisition of 171,747 rights at €50.7 million. In total, Cartera owns 1,013,897 shares of CAF, which is equal to 29.56% of the company.

Since Cartera sold the shares to the employees at a discount, it incurred losses of €49.6 million so far. This has been recognized in full in previous years already. The majority of the rights which are not yet sold to the employees belong to the last phase in 2007. As a result of this, there is a €17.6 million asset recognized in Non-Current Financial Assets - Loans and Receivables.

The following is the list of significant shareholders of CAF.


4 Risks

I don’t see a lot of risks to be honest. There is a significant macro shift toward upgrading the existing infrastructure of many countries and cities. For example - in India the government is building new metros in Delhi, Calcutta, Bangalore and there are plans to add other towns on the list.

The company is also financially very sound. The only problem I see here is that all of the long-term debt is funded by bank loans. Banks are not a very good lenders as they might try to pull their money out if there are signs of trouble with the world economy. I am sure that CAF will have thought of such a situation but given that the LT debt is less than twice the operating income, I don’t see a lot of reason to worry about.

Obviously, if the governments start cutting on infrastructure, the company will suffer in the short term. This risk might delay the significant capital gains we are salivating for.

5 Valuation

Revenue€1.7 billion
Op income€164,783 thousand
Cap ex€30,561 thousand
FCF€134,222 thousand
Market Cap€1.23 billion

Without going into a lot of juggling with numbers, we can agree that getting such a fantastic growth along with a very good management is worth more than 9xFCF and 8.2xP/E. Paying 12xFCF should be fair for such a company. Which means that the company is undervalued in the range of 30%.

6 Conclusion

IndustryRailway engines and buggies for metros, high speed, light rail, locomotive etc.
Current price9xFCF, 8.2xP/E
Revenue Growth (5Y)16.5%
EPS Growth (5Y)31.1%
Share dilution0%
Management compensation€1.3 million, no options rewarded
LT Debt€242 million
Equity€671,370 thousand
Goodwill+Intang€30,799 thousand
FCF€134,222 thousand
Share price€352

If that did not convince you, read the article above.

I am going to buy the stock in the next few days. I will probably start a position with five shares and add from there, if the price continues to fall.

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: 4.1/5 (23 votes)


Jean-Francois Nobert
Jean-Francois Nobert - 4 years ago    Report SPAM
Good analysis, seem good , as you point the financial cost is quite an interesting issue... could be good question to ask?
Graemew - 4 years ago    Report SPAM
Hi Chandan, nice to read your write up. I have been a shareholder in CAF for a couple of years. I checked their six months accounts and found that for the six months to 30/06/12 the interest charges were 14,130 euros. This is roughly half the roughly 26,000 financial cost you mention above for 2011. So it seems that the figure of 26,000 is not an anomaly. However six months 2012 also show financial profits of 8,471 so the net interest is only 5659. This net interest is covered about 15 times by operating profit. These financial profits are the result of interest received in the Spanish money market, since the company invests excess cash in very short term government debt securities. The gearing of the company has edged up over the last couple of years and is now around 45% of equity. The shares do look a very attractive proposition to me...I have considered adding to my position...the only thing that holds me back is that there is always more risk involved in companies that always need to find new contracts to create backlog...and that there can be unforeseen circumstances which may increase costs on a project resulting in losses on that project. But maybe I should take the opportunity....while it lasts...
Cdubey - 4 years ago    Report SPAM
@Graemew: Interesting that you own the shares.

The company has around €242 million in debt. An interest expense of €14,130 thousand for 6 months is quite high ... It is 11.6% ! That cannot be the correct number. Who pays 11.6% interest rate ?

Furthermore, If you look at the figures from 2010, you can clearly see that the interest expense/financial cost has been much lower.

I have not received a reply yet. Still waiting. I will update as soon as I hear something from the investor relations.
Cdubey - 4 years ago    Report SPAM
Got a reply for the high financial expense in 2011.

-the expected recovery in the long term government) was recorded in 2011 a provision of 15,387 thousand euros under that heading.

-Also in 2011 relcionada debt enters the Brazil project causing financial expense.

Graemew - 4 years ago    Report SPAM
Chandan, Thanks very much for clarifying about the interest charges. I am quite impressed that the company replied to your email....it just goes to show that it can be well worth making an enquiry to the company in a situation like that, and the fact that the 2011 interest charges are not ''normal'' makes the situation look a lot better for CAF. As you have mentioned above, CAF now receives about 80% of its profits from outside Spain, but once the Spanish economy eventually recovers, orders in Spain should also begin to climb again. I also noted in reading one of the recent reports that the company insures against non payment when dealing with orders outside of Spain...indicating good risk management. Graeme
Cdubey - 4 years ago    Report SPAM
Looking at the HY2012 report, I see a worrying trend. The company is taking on additional debt. It's long term borrowing has increased from €242 million on Dec 31, 2011 to €340 million on Jun 30, 2012.

On the plus side they have purchased around 15 million worth of interests in their different subsidiaries

But given that all the debt is funded by banks, I worry.
Jonyk1976 premium member - 4 years ago
How do you invest in this company?

I haven't found it trading on wall-street
Cdubey - 4 years ago    Report SPAM
You will have to buy it on the european exchanges.
Cdubey - 4 years ago    Report SPAM
@Cesc: I don't see a lot of competitive advantage. They are a solid company and need to win and do there contract well. They have been doing this for at least 10-15 years and the growth has been quite good.

I will look into the tax situation. Have not thought about that yet.

By the way, I just started a position at €293 and bought 3 shares.

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