Monday, 29 July 2013

Analysis of Trelleborg

My brother, who every now and then drop in to read my blog, had a small request about my contrarian analysis. He wanted to see ROE (Return on Equity) also. So for that reason I have now started to implement that. If any of you out there have similar requests then please just notify me and I will see if I can implement it or not. The reason for a negative response will be either time based or it will be based on that I think it will be too far from the contrarian analysis that I prefer to look at. I will notify you either way. As an example the ROE that I calculate is not based on an average value but from the last financial year which is to decrease the time needed for the analysis. Personally I do not believe that a deeper analysis will automatically lead to a better decision making. At least my experience as CEO in my company has not indicated that to be the case for me but you might deal with it differently and I always recommend each and every one of you to make your own analysis. I might make mistakes and to invest based on that is unacceptable.

Secondly my brother brought up the classical issue with when to sell a stock. He is currently in the very fortunate position of having an almost six-bagger (5.7) and are therefore wondering if he should sell it or not. I therefore made a very quick analysis of it and sent the reply to him and now I finally had the time to expand on that and make the more, for me, "proper" analysis.

Very recently there was an article published about the company based on their half year report. They claim that one should stay "neutral" meaning keep but do not buy more of the stock. I disagree. The full article can be read here and it is in Swedish.

My recommendation is to sell and to invest the money into a new value based company which there still seems to be a fair amount of around even today. If you have a different opinion then please leave a comment so that it can be discussed.

Analysis starts

A Swedish rubber and polymer company

Company: Trelleborg

Business: A Swedish company that are a world leader in engineered polymer solutions that seal, damp and protect critical applications in demanding environments. The Trelleborg Group comprises five business areas: Trelleborg Coated Systems, Trelleborg Industrial Solutions , Trelleborg Offshore & Construction , Trelleborg Sealing Solutions and Trelleborg Wheel Systems.  

Active: They are globally active but 56% of their sales are from Western Europe with a very matured market (8% only). 20% sales comes from the US with a growth rate of 48% and 24% sales comes form the rest of the world with a growth rate of 105%.

P/E: 18.1

containing values of P/E, P/B, ROE as well as dividend

The P/E of Trelleborg is high with 18.1 and to me what is even worse is the very high P/B of 2.6. This leads to that for Graham it is definitely not a buy. The earnings to sales seems to be reasonable with 8% and the ROE is pretty ok also with almost 15%. The book to debt is very good with a ratio of 1.1. However the growth in the last five years has been negative with -4.2% (so who gets the increased growth rate they mentioned?). The motivated P/E for Trelleborg ends up around 8 to 9 which means that with their current P/E of 18.1 they are highly overvalued. The fact that they have a lower P/E then their competitors matters very little to me.

Conclusion: I would recommend to sell Trelleborg. Their earnings just does not live up to the value of the stock and I doubt that they will double their earnings any time soon to become more fairly valued on the market again. The thing here is though... you never know when things start to happen. A stock can continue to go up much higher to crazy levels of P/E before they normalize again.

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