Sunday, September 21, 2008

Value In Action: H Paulin

H. Paulin (TSE: PAP.A) is a company that manufactures construction quality fasteners such as bolts and screws. In April 2005, the stock traded at $37.50 per share and paid a 50 cent yearly dividend. At that time, the company had a market cap of around $40 million dollars and had a price to book ratio of 0.93.

The operating margins of the company during the last business cycle looked healthy. In fact, the company had no operating losses in any of the five years prior to and including 2004. The operating margins were also very stable with an average operating margin of 5.9% and a standard deviation of 0.6% for the five years ending Dec 2004. The financial leverage seemed moderate as the company had a debt/capital of 41% which included the impact of operating leases. H. Paulin in 2005, is another example of value in action.

The asset quality looked pretty good as there were no goodwill or intangibles items on the books and $68M of the $85M of assets were current assets primarily comprised of accounts receivable and inventory. A 143 days inventory didn’t seem unreasonable given that the company's products should have a long shelf life and probably don’t get design changes all that often (how often do nuts and bolts get design changes?).

Using the value investing methodology taught by George Athanassakos, I estimated the intrinsic value of the business to be worth $56.75 per share by the end of 2004, with both the earnings power and asset values above $55 per share! With a market price of $37.50 per share in April 2005, you could have bought the stock at a 34% discount to this intrinsic value at that time!

How would investors who bought the stock in April 2005 have fared one year later? Well, including dividends, investors would have seen the stock price appreciate to $54.75 per share and had they elected to sell, would have ended up with a 47.3% gain in one year. Not a bad pay day for reading some annual reports and staying disciplined to require an adequate margin of safety. Incidentally, this stock would also have met all of Brandes’ criteria for finding value in April 2005, as discussed here.

Today, this stock may be a bargain again, as we've discussed here.

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