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:
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.
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.
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
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.
2022: £737m/£12.4bn = 5.9%.
Third Piotroski point.
I'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk
investing is about making the right decisions, not many decisions.