Fresenius SE & Co (ETR: FRE)

Intro

Fresenius is a global healthcare group offering products and services for dialysis, hospitals and outpatient treatment. Fresenius is split into four different segments: 1) Fresenius Medical Care is the world leader in treating people with chronic kidney failure; 2) Fresenius Helios is the largest private hospital operator in Europe; 3) Fresenius Kabi is a supplier of essential drugs, clinical nutrition products and medical devices; and 4) Fresenius Vamed plans, develops and manages healthcare facilities. A lot of segments, but it is crucial for the reader to understand at least to a certain their business.

Since its beginning in 1912, Fresenius has grown in each of its business units to a leader and generated revenues of more than €35 billion in more than 100 countries.

The largest shareholder is the Else Kröner Foundation with 26.6% of the shares and guarantees a long-term, sustainable vision.

 

Valuation

Fresenius was able to steadily increase its EPS from €2.64 in 2015 to €3.44 in 2019. In the first half year of 2020, EPS amounted to €1.56 so an EPS >€3 should be reasonable under conservative assumptions, which translates into a P/E of approx. 9.5-11x, which looks rather cheap for such a quality and growing business.

Further, under EV/EBITDA ratio, the economics look rather cheap as well: Historical EBITDA was around €6 billion and this in relation with an EV of approx. €43 billion (market capitalisation €19 billion plus net debt €24 billion) equals a low ratio of around 7x.

The strong and robust business model puts Fresenius also in the dividend champion category with this year’s raise being the 27^th consecutive dividend increase. The current dividend per share of €0.84 yields 2.4% with a rather low pay-out ratio.

 

What’s next?

Fresenius lowered its guidance for 2020 due to COVID-19 slightly, yet should still be around 2019 levels, which is proof of the resilient business model. Fresenius hasn’t been that cheap in the last six years and should under normal conditions trade above €50 per share!

 

Current Price

€34.06 per share

Walgreens Boot Alliance (NASDAQ: WBA)

Intro

Walgreens is a global leader in retail and wholesale pharmacy with a history going back to 1849. The company is present in more than 25 countries delivering to more than 250,000 pharmacies, doctors, health centers and hospitals.

Besides an impairment for its assets in the UK by approx. $2 billion, the firm has ‘survived’ COVID-19 rather well with 2% higher sales for the full year ending in August and growth of 2.3% in the last quarter compared to last year.

While it might be that the retail segment will decline over time due to online sales, Walgreens has partnered with Microsoft and Adobe on the digital front and its e-commerce business has shown strong sales growth, especially this year.

 

Valuation

Mainly as a result of the UK impairment, EPS for the last 12 months has been under pressure albeit still being decently positive. Adjusted for these negative events, the company’s adjusted EPS would have been $4.74. However, a real figure might be more in the area of $4 due to some adjustments that don’t seem to be one-off adjustments but rather recurring such as acquisition-related amortization and costs. In 2018 and 2019, EPS was $5.05 and $4.31, respectively. Walgreens is guiding for a small increase in its adjusted EPS so it is fair to say that the P/E is around 8-9.5x, which seems rather cheap for such a track record and prospects ahead.

Recently, it also raised its annual dividend rate to $1.87 per share, resulting in a dividend yield of almost 5%. This marked the 45^th consecutive year of a dividend raise and the 87^th year a dividend has been paid! It seems the dividend is fairly supported by a free cash flow generation of more than $4 a share.

 

What’s next?

Walgreens has completed more than 1 million COVID-19 tests and also launched a program for businesses, so short-term we likely hear more about this. Priority will be placed on a successful turnaround of its UK business and the implementation of a large cost management program to save annual costs in excess of $2 billion by 2022. All in all, a nice long-term story at a very decent price coupled with a more than solid dividend yield.

 

Current Price

$38.04 per share

Hunting plc (LON: HTG)

Intro

Today, I’ll write about a special situation, which is not aimed for all investors – a good old net-net stock as defined by Benjamin Graham. Hunting plc is a British supplier to the oil and gas industry and hence has a highly cyclical business: Revenues more than doubled from 2016 to 2019 while EPS grew to almost £0.44 in 2019. After the sharp decline of the oil price at the beginning of 2020, revenue declined significantly and the stock price is down from more than £9 in May 2018 to approx. £1.4 at the moment.

Although the outlook is not rosy for the industry, it might still be worth to have a look at this company from a contrarian perspective, especially taking into consideration its solid balance sheet and its ability to weather also wild storms.

 

Valuation

A net-net stock is a company whose cash plus accounts receivable plus inventories minus all liabilities is higher than its market capitalisation. So let’s look at the H1 2020 figures (all numbers in £ million):

Cash: 50

Accounts receivables (current): 174

Inventories: 331

Total Liabilities: 139

=Net: £416 million

 

This amount divided by the total number of shares results in a net-net value (or liquidation value) of £2.5 per share. Comparing this value with the current share price, a discount of 45% can be calculated. Not including other assets on the balance sheets, such as property, plant or equipment, investments or tax assets, there should be a wide enough margin of safety.

In the first half of 2020, Hunting recorded a huge impairment of more than £170 million, of which £33 million was a mark down of its inventory. While additional impairments cannot be ruled out, companies typically try to avoid to have another impairment in the near future again and hence tend to be generous with the recorded impairment.

 

What’s next?

At the end of this month, Hunting will provide a trading update, where it will be crucial to see if Hunting’s sector has recovered at least to a certain degree. With current valuation though, this is a clear ‘balance sheet’ investment and prices above £2 should be reachable again as soon as the segment’s outlook will be improving.

 

Current Price

£1.4 per share

Update Massimo Zanetti Beverage Group (BIT: MZB)

Roughly three weeks ago, the chairman and CEO, Massimo Zanetti, who indirectly holds ~68% of the company made a voluntary offer to acquire all outstanding shares for a price of €5.00 per share. While this lifted the share price from below €4 to now €5, this still doesn’t come close to the fair value we assigned to the shares. However, since the offering party already owns the majority of the shares, it seems rather unlikely that either the deal falls through or that there will be an adjustment in the offering price.

When the first blog entry was made this January, it was expected that the opposite will happen: a further sell down of the majority stake to third party investors to turn this into a ‘real’, stock market listed company. Now they will become a fully private entity again.

On the bright side, there are still many great value plays in Europe where the sale proceeds can be allocated to. New stock ideas will follow in due course.

 

Current Price

€5.00 per share