Anglo American plc (ADR) (NASDAQOTH:AAUKY)

CAPS Rating: 2 out of 5

Involved in the gold mining industry and the coal mining industry. Anglo American provides administrative and technical services to finance and operating client companies. Other interests include diamond mining and real estate services.

Recs

6
Player Avatar notzia (71.14) Submitted: 6/22/2009 2:31:50 PM : Outperform Start Price: $12.19 AAUKY Score: -121.04

There is merger buzz (XSRAY would like to merge with AAUK as equals), but AAUK views itself as having better quality assets and that their Brazilian assets are undervalued, and is likely to demand a premium in order to make a merger happen. However, AAUK has other considerations that make this worth of a buy recommendation.

First, of course, is that it is a play on gold. For the reasons related to this, I defer to TMFSinchiruna whose blog entries detail the argument for owning gold and gold mining companies now.

Second, the stock is inexpensive from a value perspective. The following is based on a price of $13.61.

The EPS has generally been growing since 2000; the compounded annual growth (CAGR) has been 22%. The return on equity (ROE) has exceeded 15% for the last three years, and while the free cash flow has not always been positive, at least it has not been negative (when rounded to the nearest thousand).

Before I look at the valuations, I look at three indicators of financial safety. For this stock, two of the three are reasonable. The Altman Z is 3.13; below 1.8 is risky, above 3 is the safe range. The Piotroski F is 5; 2 or below indicates caution, while 8 or 9 indicates that the stock is expected to rise within the next year. The weak spot was the Sloan accrual, which is 0.09; 5 or higher is high risk, while -5 or lower is excellent. Since the Sloan was not exclusionary, I looked elsewhere for additional information – Reuters gave AAUK outperforms for most management effectiveness measures but underperforms for most financial strength measures. Looking the specific measures, AAUK was near the top for all of the management effectiveness measures, but distributed from top to bottom with the financial strength measures – I felt that the weakness in financial strength could be overcome with a combination of improving commodity prices and the quality of management.

I use more than one valuation method to gauge intrinsic value; the first three all provide a substantial margin of safety (MOS). The first three are standards in the valuation literature. The estimate based on Graham’s formula was $78 (82% MOS). The Earnings Power Value (value of the firm) was estimated, on a per share bases, to be $35 (61% MOS). The Discounted Cash Flow estimate valued the stock at $48 (72% MOS).

The last two were based on a spreadsheet found on the AAII website; these are designed to mimic Buffett’s valuation methodology. One is based on projecting EPS growth 10 years into the future based on past EPS growth; I discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings (including dividends when applicable) return of 15%. Based on this method the target purchase needs to be below $19, and at the current price there is a 28% MOS

The second is based on estimating EPS growth through the sustainable growth rate. The per-share projected book value is estimated by taking the previous year’s book value, adding EPS and subtracting dividends (when applicable). The projected EPS is estimated by multiplying the projected book value by the average Return on Equity, and the projected dividend is estimated by multiplying the projected EPS by the average payout ratio. I then discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings return of 15%. Based on this method the target purchase needs to be below $22, and at the current price there is an 37% MOS.

To ascertain that the price is attractive to me, I take one more thing into consideration. At the current price, would I expect an immediate 15% return on my investment (ROI) based on earnings and dividends? In this, the EPS represents about 20% of the share price by itself, so the 3.2% dividend yield is gravy. However, had the dividend been needed to achieve the desired 15%, I would have discounted it to some degree because there is a low to moderate risk that the dividend may be cut. This risk is assessed by evaluating several factors (Current Price, Current Yield, Current Payout Factor, Gross Margin, Operating Margin, Financial Leverage, EPS Growth). Based on this assessment, there is a low (most recent fiscal year) to moderate (TTM) risk that the dividend may be cut. In this process, I give greater weight to a TTM assessment and less weight to the most recent fiscal year.

Based on fundamentals, indicators of safety, and valuation, AAUK rates to be a good investment. Bear in mind that the Sloan accrual was positive, pointing to a potential problem that should be satisfied when doing your own due diligence. Essentially, the amount of cash from operations was smaller than the net profit, but not so much as to set off an automatic disqualification. In other words, when you see lots of noncash items on a company's earnings statement, stay away.

Report this Post 2 Replies
Member Avatar MegaEurope (< 20) Submitted: 7/23/2010 2:39:13 PM
Recs: 0

"In this, the EPS represents about 20% of the share price by itself, so the 3.2% dividend yield is gravy. However, had the dividend been needed to achieve the desired 15%, I would have discounted it to some degree because there is a low to moderate risk that the dividend may be cut."

Seems like you are discounting the wrong thing. In most cases it is more likely that earnings will fall than that the dividend will be cut.

Member Avatar cajun1958 (30.10) Submitted: 7/23/2013 2:11:52 PM
Recs: 0

This stock is a good pick on its merits. It has a hand in many businesses and is somewhat obscure to Americans and
little hard to analyze which in turn ends up making it underpriced. As well as gold, patinum and diamonds, Anglo is also into coal mining for export which could become important if India & China stop burning low grade Indionesian coal as they are supposed to in China's case. Add to this rare industrial metals, fertiliziers, years of experience in the business and a good financial picture and it should be higher priced. The dividend might be cut seems to have already been factored into the low price & P/E. THX

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