As I mentioned in my intro post I am looking to learn and broaden my investment horizons, identifying value stocks with view to growth, taking a deeper look at financials, and expanding further into foreign markets.
I’m looking at the Canadian stock CPH, a pharmaceutical company. It’s earnings come from both Canada and the US. It has a tiny debt to equity ratio, an EBIT margin of 59.9% and a 26.5% ROIC. In 2023 Gross Income was $21.162M with a NET Income of $20.383M. Cash holdings have increased by over 38% 2022 to 2023 and assets by over 26%. Its PE is less than 16 and it closed at about CAD$12.63. It doesn’t pay a dividend, which I am not a fan of, but like I said, exploring other methods.
Morningstar rates it as overvalued at that price, reckons fair value is around CAD$10. Seems to me that its cash flow, ROE and sizeable margins make it a decent prospect even at the current price. With the CAD falling like the AUD its US earnings should make for bigger CAD margins. Also the gap between prices of small caps and blue chip stocks have never been bigger in Canada, so a reversion to mean might indicate an increase in smallcap values.
Appreciate any thoughts.
G'day Tom, thought I'd take a quick look. My first port of call when looking at a new / unknown company is always Simply Wall St. I have a subscription and it's the quickest way to get a read of things. Obviously 59% profit margins are wonderful.. but I note they were more than 150% in the Sep 23 quarter.. I'm a good Accountant, but I'm not that good... We'd need to go back to previous earnings reports to find out why.. More importantly, to the question of value, I note they did about $30m in Revenue 10 years ago which is ~roughly where they sit today.. So lack of growth is an open question and would certainly justify a low PE Ratio...
But what obviously stands out below is Free Cash Flow of US$(67)m??
Thought I'd take a quick look at the Balance Sheet.. for a company with very healthy profit margins that doesn't pay dividends where does the cash go?
And why did they go from Net cash of US$50m a quarter ago to $40m in debt now?
Turns out they did an acquisition... So I went and took a look at the most recent quarterly report..
At this point I have to be honest my knowledge of the industry and in these products is very limited. If you have specific knowledge feel free to elaborate why this acquisition will be the catalyst to future growth, which could definitely lead to a re-rating at some point. In my experience, as someone who used to run an M&A team, Revenue Synergies (i.e. selling complementary products into a newly acquired customer base) are the easiest to plug into a spreadsheet, to pump up a DCF valuation, but the hardest to make happen in real life. Unlike cost synergies which are much easier to control if you have a backbone. So I have no idea if it's a good acquisition or not.
I note insiders hold 42% of the company which is wonderful.. they have a lot of skin in the game. But I also note part of the consideration for the acquisition was to issue shares at C$8.91 which they were trading at last July.
Not sure I answered your question...
Cheers
JM