Sunday, June 28, 2009

Multi bagger recommendation - JMC Projects.

Today, anything even remotely connected to infrastructure is a hot pick on the bourses. So if there is a company which is into construction of highways, power projects, urban and rural infrastructure, airports, ports, railway terminals and has also posted a good performance, would surely have investors flocking to the stock like hot cakes. And rightly so. JMC Projects has been on a hot trail since the day it announced its financial performance for the year and quarter ended 31st March 2009.

For the fourth quarter ended 31st March 2009, the net sales rose 18.22% to Rs 366.28 crore on a YoY. Net profit jumped up by a smart 70% at Rs 16.30 crore. For FY09, the company posted a 44% rise in net sales at Rs 1319.29 crore. Net profit was up 20% at Rs 36.76 crore.

The biggest strength of the company is that it is a subsidiary of Kalpataru Power which holds 53% stake. This has given major synergistic advantages to the company. It is expected that given the impetus to power, both the companies would be jointly bidding for the power transmission projects on BOT model

JMC’s strength is civil construction and with already having bagged Govt orders, it is expected to benefit from the forthcoming Budget where allocations for urban infra is expected to go up further. JMC is planning to enter the BOT space especially the roads segment and this is also expected to add on hugely to the bottomlines in the coming years.

Another unique strength of the company is that is procures all its raw material from its 100% subsidiary - JMC Mining and Quarrying which makes raw material required by the construction industry. This in-house procurement saves the company from untoward cost escalations. Business for JMC is growing is expanding rapidly which is evident from the plans to expand the capacity of the subsidiary by 50%.

The company had on 29 January 2009 said it would raise Rs 40 crore through issue of equity shares on rights basis. The ratio and the issue price will be decided before the opening of the issue.

The stock hit a 52-week high of Rs 234 on 5th June 2008 and a 52-week low of Rs 45 on 27th January 2009. A month ago, the stock was languishing at Rs 78 and after the UPA Government got elected and the frenzy for infra stocks begun, this stock has surged over two times and based on the expected performance in FY10, a lot more steam seems to be left in the stock.

Promoter’s stake is 55.64%, institutional holding is 14.60% and bodies corporate hold 4.42%, leaving a floating stock of 25.34%. The company's current equity is Rs 18.14 crore. Face value per share is Rs 10. EPS for FY09 is at a very healthy Rs 20.26, giving a reasonable PE of 9.

At the current price of Rs 157.05, the stock is a prime pick with an eye on the future. Given the thrust on infra, the stock holds immense potential and can give excellent returns over the next 12-15 months.


* Companies must be delisted only if the promoters hike their stake to 90 percent,or acquire at least 50 percent through a share purchase offer aimed at giving the shareholders an exit opportunity.
* Non-promoter shareholders' votes in favour of the delisting proposal should beat least two times the number of votes cast against it by them.
* Prohibited companies to use the funds gathered directly or indirectly to finance purchase of shares to facilitate an exit opportunity for the shareholders.
* A company is not allowed to delist within 3 years of issuing buy-back offer or a preferential allotment of equity.
* Promoters of the company cannot seek listing for 10 years from the date of delisting. Under the earlier guidelines, the companies could apply for relisting of shares on stock exchanges after two years of cooling period.
* The delisting offer should initiate within 55 working days from the date of the public announcement.
* In a special provision for small firms, SEBI said shares of acompany withup to Rs 10 million paid-up capital could be delisted from all exchanges, if the stock did not trade for one year. A company can be de-listed if it had 300 or less public shareholders and the paid-upvalue of these shares was not more than Rs 1 billion.

Saturday, June 27, 2009

Why the P/E Ratio can be Dangerous.

I have no doubt that the most widely used valuation tool by individual investors is the price-to-earnings ratio (P/E). Unfortunately, it may also be the most dangerous tool, because it's so misunderstood. Today, I'll talk (well, type) a little about what the P/E's problems are and how you can overcome them.
What it is
On the surface, this is a very simple and informative ratio -- a company's stock price divided by its last 12 months of earnings per share. So we can look and see that Monsanto earned $4.10 per share over the past year. At today's price around $81.30, its P/E ratio is $81.30 / $4.10 = 20. You might also hear the hip Wall Street crowd say "Monsanto has a multiple of 20" -- because it sounds so cool.
Because you obviously want more earnings for every dollar you invest, a lower P/E is considered more attractive. After all, you'd rather be paying $40.65 per share for Monsanto's $4.10 in earnings (P/E = 10) than $81.30 (P/E = 20), right?
Yes, absolutely -- why wouldn't you want to pay less for the exact same earnings stream? The same principle also applies when comparing different businesses, as long as they are equal in all other respects.
What it isn't
Of course, things are never equal in the investing world (you didn't need me to tell you that), and this is where problems creep in. It's also why the P/E ratio should never be the only tool you use to value a business, for several reasons. Let's look at three of them.
1. Forward to the future
A glance at most any financial data provider tells us that Cisco Systems (Nasdaq: CSCO) is trading at a P/E of 16. Juniper Networks (Nasdaq: JNPR) has a multiple of 31. So Cisco must be a better value, right?
Well … maybe. It's rare to find two businesses that are exactly alike, and these two certainly have their differences. Also, analysts estimate Juniper will grow earnings about 18% annually over the next five years, while Cisco is only projected to grow at around 10% per year. So there you run into a big problem with the P/E -- it's a short-sighted, usually backward-looking tool. If one company is able to double its earnings in a few short years while another remains stagnant, the former could be a much better value despite a higher multiple. Yet you wouldn't know it from the single-snapshot picture the P/E provides.
The "forward P/E" published by some sources is a better tool, because it uses the next year's estimated earnings for the "E" part of the equation, instead of the previous year's earnings. But that still provides only a very limited snapshot. This chart illustrates just how tough it is to get a handle on this simple ratio.
Company Estimated 2-Year Growth Rate Trailing P/E Forward P/E*
Apollo Group (Nasdaq: APOL) 69% 16 15
USEC (NYSE: USU) 91% 17 15
Visa (NYSE: V) 49% 41 20 (Nasdaq: BIDU) 77% 65 44
Data provided by Capital IQ, a division of Standard & Poor's. *Using next 12 months' earnings estimate.
The first two companies look like bargains compared to their growth rates, but you should question just how likely they are to achieve this future growth. The second two appear expensive looking backward, but much more reasonable looking forward. But how much growth will there be after the next couple of years? So many variables!
2. Focus on fundamentals
As the previous example shows, the P/E becomes more useful if you can get a grasp on just how much in earnings a company will be able to achieve over the coming years. But in order to do this, you'll need to study the underlying business and understand its margins, scalability, competitive position within the industry, etc. This fundamental analysis goes a long way toward putting the P/E in its proper perspective.
3. The fiction of accounting
Another problem comes in defining "earnings," the denominator in our equation. Like Donald Trump's hair color, it isn't always what it seems. In fact, unlike Donald's hair, it's so easy to massage and manipulate the earnings number that it's a wonder the Street still hangs on every penny. While one company may report a largely honest number, its competitor may be padding the EPS in order to "meet estimates." In the end, stuff like that usually catches up to these companies -- and, in turn, their shareholders.
My story
The best way to think about the P/E ratio reinforces what Motley Fool co-founders Tom and David Gardner tell members of their Stock Advisor investing service: You must understand that you're buying a business when you buy a stock. I'd heard that often enough, but it took a real-life example to drive the point home.
Several years ago, a friend and I considered buying a sporting goods store. It was a family-run business, with virtually no debt -- or cash -- on the balance sheet. The owner wanted $100,000 for it.
What's the most important thing you'd want to know if you'd been in our situation? Right: how much money we could reasonably expect to earn over the next few years. We didn't care about the fiction of accounting earnings (point No. 3 above) -- we wanted to know how much in real cash profits the business could pull in.
If it were $10,000 per year, we'd be getting the company at a P/E of 10 ($100,000 / $10,000 = 10). If it were $5,000, that's a much less attractive multiple of 20.
We dived into the fundamental analysis to figure out the real earning power of the company (point No. 2). The short story is, we thought we could make the business much more efficient (improving the margins), but future revenue and earnings growth (point No. 1) seemed very limited due to several well-financed competitors in the area.
In assessing whether this was a smart purchase, we used the three points to come up with our decision. In the end, we passed on the purchase because the P/E we calculated was over 20. Using that number hand-in-hand with our analysis, we knew it would have taken too long for us to even recoup our original investment. But the exercise itself was a lesson I'll never forget.
The lesson
Using P/E as a standalone valuation tool could cost you big-time. Isolating on any single metric, for that matter, is a recipe for disaster.
When David recommended (Nasdaq: AMZN) in September 2002, he acknowledged that its P/E of 75 carried risks. But his fundamental analysis convinced him the company deserved that multiple, and the stock is up more than 400% since.