Ben Temkin
7 November 2008
column
Johannesburg — YOU saw a typical dead cat bounce on the world's stock markets on Wednesday. One reason for the bounce was that investors bought undervalued shares. Part of the reason was the trading bet that Barack Obama would win the US presidential race.
The cat fell flat as traders grabbed profits and cashed in their chips. But, as I wrote yesterday, the underlying negative investment fundamental -- the as yet unquantified extent of potential banking losses -- is forcing the mass of investors to reassess share values.
This doesn't mean that Warren Buffett and Templeton head Mark Mobius were wrong in encouraging us to buy value in the market. Share-picking, however, has to be judicious.
On October 24, as an example of bear savagery, I suggested you consider how much Old Mutual's flesh had been eaten . The share price was R9,79 the day before I wrote. Its historic price:earnings ratio was a shade below 3, the earnings yield was over 35% and the dividend yield was nearly 12%.
At yesterday's close, its share price was R8,48, its price:earnings ratio was 2,45, its earnings yield was almost 41% and the dividend yield was 13,3%. My gut-feel tells me it's incredibly undervalued. The bears, however, are gnawing at its bones and, for all I know, its share price may reflect its intrinsic value.
While global banking remains in crisis, I wouldn't bet on buying Old Mutual shares now, even though they are well oversold.
There is far less conjecture in analysing Spar: a nuts-and-bolts operation that doesn't invest in assets with likely ephemeral values.
Some may recall that, when Jean and I were building the Private Investor portfolio, Spar and Pick n Pay were the two we put on the short list, because they were suppliers of consumer staples that people have to eat, even in a recession.
We opted for Pick n Pay on a narrow margin and were swayed by sentiment -- we had been shareholders for some two decades. Spar has remained on the portfolio's short list, perhaps to be bought if we decide to swap .
Spar reported a trading update last Friday and expects headline earnings for the 2008 financial year to be between 25% and 30% higher than last year. Its share price rose on the update.
As a franchising operation, most of its assets are in the inventory it holds, to distribute to its shareholders, and the assets it needs to distribute -- warehousing and transport.
The company is in an intensely competitive market. It does not, therefore, have much scope to improve its operating margin (return on sales). Over the past financial years ended September, from 2003 to 2007, its margin has been between 3,3% and 3,7%.
Its asset turn (the ratio of turnover to assets) is thus the driver of return on assets. In the financial year 2007, its asset turn, according to the return on assets managed model, was 4,33 and its return on assets was 15,32%. In 2006, the asset turn was 4,73 and the return on assets was 16,62%. The operating margins in both financial years did not vary much.
It must have been drenched in sweat this past year.
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