KIngfisher - Financial Stability

​Kingfisher’s shares (LSE:KGF) have fallen from 440p in 2014 to 237p. But average earnings per share over the last thirteen years have been 22.2p, giving a cyclically adjusted price earning ratio of 10.7.  Dividend yield is 5.2%.


Why has Mr Market pushed the share down so much? Here are some common justifications for dramatic share price declines, even for those companies with a history of high EPS and dividends:

• Good business gone rotten.

The business brands and models were strong in years past but have been badly damaged to the point where future earnings will be at a much lower level.
My judgement: I see the strategic positioning of Kingfisher’s main businesses as reasonably strong. True, they were hit by problems a few years ago, but, as Warren Buffett once observed of companies, these are local excisable cancers rather than needing a Pygmalion transformation. Indeed, many cancers have been excised, it seems.
The full quote related to short-term problems at GEICO and American Express which permitted Buffett to buy them when cheap: “The GEICO and American Express situations, extraordinary business franchises with a localized excisable cancer (needing, to be sure, a skilled surgeon), should be distinguished from the true “turnaround” situation in which the managers expect - and need - to pull off a corporate Pygmalion.” (1980 Letter to BH shareholders).
While I’m not saying that Kingfisher has “extraordinary franchises” it does have some strong businesses.

• Managers gone rotten.

This is the idea that the current senior managers are worse at their jobs than those who achieved good returns in the past. Certainly, there were problems of execution in the plan of “Transformation” (2016 until 2019) across the group.
The rewards realised by shifting the firm to having common product lines, new IT and operational cost savings were more limited than originally thought; while the costs of change, in terms of managerial distraction, staff redundancy and compensation, were all too evident.
The French businesses seems to have been run for short-term target numbers aimed for by pushing up prices, thus damaging the low-price consumer franchise.
But since 2019 things have been turned around by new senior managers, most notably in France.

• Rotten finances.

There might be danger in the way the business is funded.  This is the issue we’ll look at today.
Piotroski factor analysis
I’ll start by using Joseph Piotroski’s nine variables.  These, when taken as a whole, are useful to indicate whether financial distress risk has risen in the last year or so. A low score – say 3 or 4 – would suggest a deterioration in the firm’s ability to withstand shock.
The indicators fall under three headings: (1) Profitability; (2) Leverage, liquidity, and source of funds, and; (3) Operating efficiency
Profitability factors
If the firm is profitable and produces positive cash flow it has a capacity to generate funds internally.  A positive earnings trend suggests an improvement in the firm’s ability to generate positive future cash flows.

1. Positive net income before extraordinary items for the year to end January 2022? Kingfisher is profitable and has been for each of the last thirteen years. A score of one is given.
2. Positive cash flow from operations before investment in working capital? Yes (£1.16bn in 2022 and £0.98bn in 2021)), so we can add another one to the score.
3. Improvement in return on assets employed in the business from the previous year?  Net profit/beginning of year total assets:

2021: £604m/£11.3bn = 5.3%,
2022: £737m/£12.4bn = 5.9%.
Third Piotroski point.

1. Is cash flow greater than profit (so profits are not driven primarily b..........