dimanche 30 juin 2013

GEA : the signal or the noise ?

The title refers, of course, to the book by Nate Silver, that I'm currently reading.
The Signal and the Noise

I like the book a lot (even though the chapters about baseball are hard to follow if you don't know the game) and recommend it.

GEA has recently offered me a good opportunity to think about how to filter the signal from the noise.

The facts (as objectively as possible)
I covered the fundamentals of GEA in a previous post : here and here.

Recently GEA published its HY results (here, in French only).
Earnings are in line with the previous year.
Cash now amounts to 54 m€, for a market cap of 88 m€ (73 € last quote). 0 debt. So EV/2012 EBIT ~2, super cheap for a company with apparently strong margins in a niche market.

So I was tempted to add to my position (and I did, much higher than 73 € though).

But :
At the end of the news release, GEA announces a 57 m€ backlog, a dramatic decrease from 75 m€ last year, even though GEA says at the end of the release that new orders have been booked since, notably in export markets.

The stock started a rapid descent the next day :

I treated this as noise but the "market" apparently thinks otherwise, and it's causing me sufficient concern to revisit my decision and the process (or lack thereof) behind it.
I'll write it down here and it will be interesting to revisit here in a few months.

I guess that most of my readers will have been in a more or less situation and would like to hear their thoughts on how they treat such situations.

So, signal or noise ?

On this graph I've plotted the backlog and actual sales of GEA for the last few years.
It makes sense that backlog and sales are highly correlated.
Last time the backlog dropped around 2007, the sales did follow a few months later, although they dropped much less. And a one occurrence sample makes for poor statistics...

Hypothesis 1
Recent order book drop is a fluke; current valuation is a steal. Sellers are wrong. Buy.

Hypothesis 2
Recent order book drop is highly significant. It's an indication of a large future drop in sales. I'm the idiot for trying to "buy the dip".
After all, many recent infrastructure projects have been recently cancelled in France, not good for GEA business.

Moreover, management does not say anything about this, which shows a serious lack of communication and deserves a higher valuation discount rate.

If we correlate the order book and the sales, we could expect future sales to be around 50 m€.
It also seems possible to assume that the margin will decrease and revert to its long term mean (around 11%).

This means an EBIT of around 6 m€, so an EV/EBIT ratio of around 6, not exactly a nosebleed valuation either, and certainly not a reason to dump the shares as brutally as happened ?
At the last shareholders meeting, some shareholders tried to have a special dividend voted, but the owning family blocked this. So maybe some are considering that the large excess cash of GEA is locked out, and that it deserves an additional discount ?


I can't really make sense of this brutal drop, but I'm maybe missing something or fooling myself ? And after all value investing is not about trying to make predictions about next year earnings, but rather putting the emphasis on valuation. I think GEA is a bargain at current prices, but time will tell.

3 commentaires:

  1. Thanks for the update. As you may remember, I think that GEA's export projects command much higher margins than its French projects.

    Therefore, I think that its more significant that its export backlog stands at 22.8 million, up from 21.75 million last year.

  2. Bonjour Caque,
    excellente analyse comme toujours!
    Côté positif:
    la trésorerie nette a très fortement progressé: on est à environ 45 euros de cash net par action. Les créances clients ont été transformé en cash. La position nette de cash est même supérieur à aux capitaux propres par action.
    La marge brute a continué à progresser d'un point grâce leur approche très "radin" sur leur coût.
    Il commence à accélérer à l'étranger: contrats dans de nouveaux pays.
    Côté négatif:
    clairement le carnet de commande est une déception mais comme vous le dites: est ce ponctuel ou non? On surveillera leurs prochaines annonces.
    Une communication discrète et une allocation de capital moyenne voir médiocre (certes le dividende augmente chaque année mais c'est vrai que cette accumulation de cash devrait être redistribuée ou qu'ils annulent des titres (ce dernier point leur permettant de progressivement devenir tellement peu liquide que cela sera ressemblera à une sortie du marché implicite).
    Il faudra regarder si Exilium arrive à faire évoluer les choses car ils continuent à se renforcer.
    Merci encore pour cette très belle analyse!

  3. Great articles on GEA, thank you for this excellent work.

    Lots of stuff to like.
    90 mn mcap, 50+ mn of cash and running, long term growth market (BRICS and everybody else are building roads & tollways), decent (maybe not the best) technology, conservative management,...

    My guess is that any dip in order book/revenues in the coming quarters will be temporary. Just a guess of course.

    The treatment of the minority shareholders and the excess cash is a question mark.

    A totally (I guess) irrelevant comment for the GEA secretary/investor relations:
    I have never seen a company before that actually printed out its half year results on paper (with paper not straight in the paper tray) and then scanned it to make a PDF...... Somebody should mention PDF Creator. Strange/very strange for a technology company.