Sunday 19 January 2014

Analysis of Stada

A German generics company

Company: Stada Arzneimittel

Business: A German generics company. They have mainly two units: Generics (66% of sales, producing and selling active pharmaceutical ingredients (APIs) of non patent protected pharmaceutical compounds) and then Branded Products (32.5% of sales, using an active substance where the patent has expired and bring that into their own mixture and sell it under their own brand. Ex. Sun Lotions etc.)

Active: Strong presence in Europe and are growing strongly in Eastern Europe and in Russia.

P/E: 26.6

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

The P/E of Stada is too high for me with 26.6 and the P/B is also outside of my circle of comfort with 2.5 which gives according to Grahams formula a no go. The earnings to sales are at 5% which is ok but the ROE is not even 10% so they are not so good at taking care of their money. The book to debt is also too low for me with a ratio of 0.4. In the last five years they have had a yearly growth of 2.2% which is only a little bit more than inflation so if their expansion is going so well in Eastern Europe and Russia then they must be loosing ground in Western Europe and from the report I read they were indeed doing that also. The motivated P/E then becomes 9 to 13 which means that Stada is highly overvalued by the market today since the P/E is more than double! They spend around 60% of their earnings on research and I guess that is needed to figure out how to produce the APIs in a more efficient and cheaper way then how the original product was made. They pay a tiny, tiny dividend of 1.3% which on the other hand only represents 35% of their earnings so at least it should be possible to keep it at that level.

Conclusion: To be honest there is not a single value here that I find to be of the slightest interest! Graham says a clear no and so do definitely I. Generics is a tough market to be in and the company looks healthy and good but it is simply traded at too high levels for a contrarian investor.

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