Get started
Analysis of the PEG ratio and income yieldIn this idea I’ll be covering two valuation metrics the PEG ratio and the income yield here is the PEG ratio: The PEG ratio (price earnings growth ratio): This is another very popular ratio and it is calculated by dividing the share price by the product of the eps and the annualised eps growth rate. There are many different types of PEG ratios, and the annual eps growth rate can be over the course of a different number of years, it could be for 1 year, or even 10 or more. However, it is most common to find the annual eps growth rate over the past 5 years. It is also worth noting that you can have a forward PEG ratio, just like you can have a forward P/E ratio, however, I would prefer to use past earnings as they have actually materialised and therefore are more reliable. The main advantage of the PEG ratio is that it will tell you how much you will be paying for the earnings over time, so whilst a company may look expansive on a P/E ratio now, if it is quickly growing over time the P/E ratio will be looking smaller and smaller and may even be considered cheap when it was once expensive. A PEG scored 1 is considered average and the lower the PEG score, the better, you are paying less for the total earnings. Unlike the P/E ratio, you can more comfortably compare the PEG ratio across different sectors as the sectors with more growth potential will have that more priced in with the PEG ratio. However, whilst the PEG ratio has numerous advantages there are also several drawbacks. 1. A one off charge or gain could mean that the earnings and growth of a company could be depressed or inflated, giving it a PEG score that is too low or too high, when in reality this one of charge will have little to do with what the earnings will be in the future. 2. The PEG score does not include cash conversion rate, a company could have high and rising earnings, but if this is not converted into cash it is difficult to envisage a scenario where the company generates value for the shareholders, or alternatively earnings could start to fall off as the company does not have as much cash to fund growth. 3. The PEG ratio does not give a far representation of cyclical shares, for example during a temporary downturn a company could have a high P/E and a low eps growth rate, but this is actually not an issue of a company it is just a common fluctuation. On the flip side during the upturns the company could have a low P/E and a very high eps growth rate, but this is actually not to do with the company itself. 4. The PEG ratio does not factor in how much debt or cash the group is carrying. A a company can enjoy the dual effect of increasing eps growth and earnings by simply acquiring another profitable corporation. The end effect is that without the company performing well itself a company can have a very low PEG as a result of higher eps and higher growth. So it makes sense that a company with net cash should be rewarded with a higher PEG than one which is highly leveraged as the group with net cash can expand more easily. However, the PEG ratio does not factor this in. 5. The PEG ratio also seems to favour companies with extremely high growth rates. The issue is that if a company has growth rates of 100% or more, the growth is likely to fall off quickly and so the company could look cheap on the PEG ratio, when in reality it is actually expensive. To deal with this I would recommend valuing a eps growth rates over 100% as 100% meaning that no company can have a PEG ratio of 1 or lower with a p/e of over 100. Then there is also the issue of diluted and basic EPS. As stated previously in the P/E article I would recommend using diluted EPS. I would recommend using diluted eps for both parts of the PEG ratio, I.e diluted eps for the earnings and growth parts of the ratio. This is the income yield: The income yield: This is the same as the P/E ratio, except it is calculated as a yield, to convert from the P/E ratio to the income yield find the reciprocal of the yield and multiply it by 100%. Since we are using the reciprocal this time, the larger the yield the better, as you are recovering a higher percentage of your earnings each year. (Complete analysis on the P/E ratio is already on TradingView see link at the bottom) The income yield, has the same limitations and advantages as the P/E ratio, except for the fact that it can be compared against other sources of income such as cash or bonds. It is worth noting that there are several other things to bear in mind apart from the yield when you are planning an investment. Firstly, the risk matters, you should generally expect a higher return from a riskier asset than a safe one, otherwise why take the risk? Secondly, it is also worth bearing in mind that the yield of an asset can fluctuate the yield can fall or hopefully, it should rise, and so it is worth paying a premium if the actual yield is likely to increase over time.
LSE:BOWLEducation
by hammochess
2
Analysis of the P/E ratioThe P/E valuation metric: This is by far the most popular valuation and it is simply dividing the market cap by net income (for the year), it can also be calculated by dividing the share price by eps, the lower the p/e the better, as you are having to pay less for the earnings. Generally, a company is considered expensive with a P/E of over 30 and cheap with a P/E of less than 15. The main advantage of p/e is that it provides a quick and simple way of finding how many years would you have to wait to get your money back from the investment. There are however, numerous drawbacks of the P/E ratio: 1. It does not factor in how quickly the earnings are growing. Whilst the earnings may look small in comparison to the price now, if the company is quickly growing in the future the earnings could look large in comparison to the market cap. 2. A one-off loss or gain could distort the earnings to look smaller or larger than they actually are and thus not giving an accurate representation of how richly the companies earnings are being valued. 3. It does not factor in how indebted a company is. A company can easily boost eps, by simply acquiring another profitable company and then using debt to finance the acquisition. The end result is that net income is boosted without diluting the shareholders. So a cash rich company should be rated more highly than an indebted one, as the cash rich corporation can use that cash to boost eps through acquisitions. 4. It does not factor in how cash generative the business model is, a company can be producing plenty of net income, but if the company is not converting it into cash it will be harder to create value for the shareholders. 5. The P/E ratio can be skewed for cyclical companies and earnings could be temporarily depressed or inflated, but this is not actually to do with the actual company itself is doing, but just the nature of cyclicals. 6. Earnings could also be skewed by events that impact trade. Most notable is a black swan event, of which Coronavirus is the latest event. It can however be more subtle than that, for example in 2018 British bowling alley operator Hollywood bowl had trading impacted after England did very well in the World Cup, people had sources of entertainment by watching England and so less people went bowling than otherwise. It is also worth noting that there are actually several types of P/E ratio. Mostly the P/E is compared to last years earnings, but you can also have forward P/E ratios. When people talk about forward a P/E ratio they almost always mean next years, however it can also be meant for years in the distant future for example forward 2030 earnings. It is worth noting to take forward estimates with a pinch of salt, they are usually overly optimistic and there is no guarantee that these earnings will be the same (or even near) to the earnings, so I would prefer sticking to past earnings as these are more reliable. It is also worth noting that whilst I have said that P/E = share price / eps it is worth noting that there is not one eps but two. In a company’s income statement, you will have basic (undiluted) eps and diluted eps. Undiluted eps is simply net income divided by total number of shares outstanding. However, diluted eps is slightly different in that it uses the number of shares when all convertible securities (such as convertible bonds or stock options) are converted into shares. I would recommend using undiluted eps as although earnings may be constant your earnings will look less and less as these securities are converted into shares. It is also worth noting that if you use market cap / net income, you have used the same as share price / basic eps, but I would recommend to actually use diluted eps, after all the share price can decrease even if the market cap increases, I.e. if your stake gets smaller.
LSE:BOWLEducation
by hammochess
4
Can Hollywood bowl return to pre-pandemic levels?HOLLYWOOD BOWL Tip: STRONG BUY Current price: 239.00 Target price: 302.72 Bullish points: - Net cash - Staycation likely to remain a theme - Return from lockdown likely to cause spending surge - Consistent profit growth pre – pandemic - Consistent dividend growth pre – pandemic - Record start to 2020 - Non – reliant on acquisitions to grow - Opening new centres - Trialling new products - Resilient during the pandemic - Well run business - Spend per head increasing prior to Covid - Relatively niche area - Falling debt levels prior to Covid - Strong brand name - Has a competitive edge Bearish points: - Pain of Coronavirus continues - Valuation at a premium to rival - Potential for more bowling alleys to be set up after people see the earnings and the growth Prior to the pandemic English bowling alley operator Hollywood bowl was thriving, earnings were consistently rising along with a dividend and revenues, as a result the share price had almost doubled from their IPO in 2016 to early 2020, however, not long after that, the pandemic struck, causing the share price to crash from north of 300p to a share price that only consisted in of two digits (non – decimal). The shares have subsequently bounced back, aided by the discovery and roll out of the Coronavirus vaccine and now trade at 236.00 p per share. As a result of Coronavirus, the group was forced to slash at its dividend after the group was forced to shut its venues, causing revenues to take a massive hit. However, Hollywood bowl, has proved resilient and still managed to post a 1.4 million pound profit in the 2020 financial year, despite having been closed for 5 months and having trading impacted in two others. The group was equally resilient in the first half of the financial 2021 year with a loss of only 11,633,000 despite being fully closed for 75% of that period and trading severely impacted in the rest. What’s even more impressive is that the loss for the half year of 11,633,000 is less than 3% of Hollywood bowl’s market cap of around 400 million compared to billions of pounds of losses by other hospitality companies such as Cineworld, such low losses was aided by a reduction in rents. Whilst, even at the end of the interim results Hollywood bowl was still closed the centres have since reopened (on the 17th of May – freedom day) and there are reasons to be optimistic about the trading despite the pandemic. The first reason, is that when the centres re – opened briefly in October, trading exceeded expectations with revenues at 66% of the previous year despite many restrictions such as the 10pm curfew, maximum groups of six, a maximum number of people allowed in the centre and more. What’s more is that spend per head only decreased from £10.29 to £10.16 from the first half of 2020 to October 2020 despite there being many Covid restrictions, implying that consumer habits have not changed at all. Secondly, the group has taken steps to mitigate the effect of Covid such as adding lane dividers meaning that now all the lanes can be used. Thirdly, the group has received very strong customer pre-bookings prior to May the 17th implying that there will be strong trading. Fourthly, since customers have been deprived of these forms of entertainment and have not been able to spend a lot of money it is likely that the savings made will be released into the economy and Hollywood bowl could benefit. Finally, since flights abroad still look like a distant possibility for most places and people given all the lists, quarantines, bemusement and uncertainty surrounding the trips staycation is likely to remain a theme meaning that people will look for forms of entertainment in the UK and Hollywood bowl could benefit. For these reasons there are reasons to be optimistic with how Hollywood bowl will perform whilst re-opened. Despite numerous lockdowns and impacted trading the group has a very strong balance sheet. From the 2021 interim results the group has 41,679,000 current assets compared to 27,705,000 current liabilities, meaning that it has a current ratio of 1.5 implying that it has a robust working capital position. The group also has net cash of 8,160,000 pounds aided by a 30 million placing with 29.2 million net proceeds after 800,000 worth of costs, showing that the group is not under financial strain and can continue its growth. Hollywood bowl also managed to change covenants with its lender Lloyds bank implying that it can continue the growth story and has reserves for future lockdowns. The group has a highly cash generative business model so once it is allowed to open any debt that could have built up from the expansion plans and lockdowns can be paid off. There is clear scope for growth ahead, and even more impressively, the group has the ability to grow organically without the need to open new centres. The group has instead improved existing centres by making them more cost efficient and also by enhancing consumer experience. For example, it is revamping the technology around the business, such as improving the IT, creating new scoring systems and adopting pins on strings systems. The group has also refurbished sites or is planning to sometimes even getting rent concessions in the process for example a £0.8 million one in Liverpool. The group has also begun to roll out its new mini golf course Puttstars, which so far has been very successful in the few places it has been implemented, very good reviews. Hollywood bowl also caters at the centres with bar and diner lay outs attracting more and more people to eat at the centre, product changes also helped increase bar and diner spend per game by 3.1% from 2018 to 2019. From this it is unsurprising to see that spend per game was £8.63 in 2016 rising to £8.70 in 2017 rising again to £9.22 in 2018 and even rising to £9.64 in 2019. This trend is unlikely to stop given the consistency (spend per game rose to £10.29 in the first half of 2020 and was resilient in the pandemic.) It is also worth noting that many of these changes / additions were suggestions by employees showing how the group has a growth mindset and that it is a well run business. Along with improving existing centres, the group has been expanding and is planning to have 14-18 new centres by 2024 a target which has been doubled, a material number in relation to the 61 already established. Predicting when the effects of the pandemic will wear off is very tricky, but I believe that especially with the safety procedures in place Hollywood bowl will be able to operate more easily than other hospitality companies. My conservative earnings for the 2023 financial year are 25 million, compared to 22,285,000 in 2019 I think that my predictions are conservative as it has consistently increased earnings both organically and through acquisitions and the worst effects of the pandemic should have hopefully worn off by then. I believe that after the acquisitions and refurbishments, but counter balanced by the strong cash flow the group will be in net debt / net cash 0, note: the current net cash position is 8,160,000 million pounds. So come the 2023 full year financial results, according to my estimates (25 million net income and the current market cap is £407.8 million) Hollywood bowl will have a p/e of 407.8 / 25 = 16.312. For all these reasons above I believe that the valuation is very undemanding and there is huge scope for earnings growth and p/e expansion. To demonstrate how well Hollywood bowl is growing let’s look at how operating profit did over the years. 2015: £13.0 million 2016: £14.4 million 2017: £22.2 million 2018: £24.9 million 2019: £28.4 million. From this we can see that earnings have been consistently growing and the group has increased operating profit by 118% over 4 years or almost 22% every year. It is also worth noting that earnings could have been rising faster had the group not been paying out an increasing dividend and paying down debt. The money used for the dividends and the debt could have been used for expansion and thus increasing earnings further. Let’s see how the dividends did over time, total dividends paid (per share): 2015: 0p 2016: 0.19p 2017: 9.08p 2018: 10.59p. 2019: 11.93 Let’s also see the how the debt levels of the group were doing pre - pandemic: 2015: £24.6 million 2016: £20.8 million 2017: £8.1 million 2018: £2.5 million 2019: £2.1 million. Considering the fact that the group managed to increase earnings, dividend and reduce debt consecutively for the 4 years after the IPO up until 2019 (pre – Covid.) Should the group pay out let alone increase dividends and reduce debt levels I believe that earnings can I create by somewhere around 30% from 2023 going forward. Please note I used operating profit growth to avoid one off costs such as the ones required to have the IPO, would not distort earnings. I believe that a conservative p/e for Hollywood bowl is 2023 is 25, considerably higher than the 16.312 it is currently on. This would give the group a market cap of £625 million (366.29p) offering a conservative 53% upside from here. I believe that a p/e of 25 is conservative given that the group could have eps growth of 30% giving it a PEG ratio of 0.83333333333333333 (recurring) which looks cheap given that it is under 1. Throw in the fact that the group will be debt free and a strong cash converter and it will not be surprising to see Hollywood commanding a p/e in the 30’s. Some could argue that given the good returns Hollywood is making it could be possible that more companies will be attracted to the sector and could start to create completion and eat into the returns. However, given the strong brand name (Hollywood bowl has taken special attention to rebranding bought bowling alleys such as Bowlplex and AMF) and the good quality centres of Hollywood (following refurbishments, enhancements and new products) it looks like Hollywood bowl will have a competitive edge. It is also good to know that the directors have plenty of skin in the game with the CEO owning over £7 million of shares and in total 3 directors owning over £2 million shares, and even without the incentive plans they will be incentivised to deliver. So come 2023 and I believe that the group should have a market cap of £625 million (366.29p), (so I believe that Hollywood bowl can return to pre-pandemic levels) given the date of the FY2023 results is around 2 years and Hollywood bowl is a medium risk investment, the market will probably be wanting a 10% return every year, and so 21% over 2 years. 625 / 1.21 = 516.53 (million) (302.72p) indicating around the group is currently 27% undervalued. However, I have been conservative on my earnings and valuations estimate so my target is could be very conservative, given the growth on offer here. So a company with robust cash generation, strong balance sheet and plenty of potential for growth is being rated on a forward 23 earnings of just over 16, not to mention the fact that it has a strong brand name, a competitive edge and that it is a well run business. From this I believe that the group is very undervalued. STRONG BUY Current price: 239.00 Target price: 302.72
LSE:BOWL
by hammochess
Trade Setup: Rolls Royce Plc - Medium TermAlong with the Marks and Spencer Plc, one of the UK names I've been looking at it Rolls Royce Plc. Below are the key drivers as noted last week. Rolls Royce Plc (Industrials, LSE) - Recent earnings: back in profit - Sideways channel, potential to break up - Potential gap close at 182.00 - Price basing above 200-day - 2-tier trend line play - Long above 116.00 - Stop: 104.00 - Tgt: 144.00 (Also have a look at Royal Dutch Shell, which is nearing the upper range of an 18-month base). For me immediate (non-delayed) access to my insights and ideas, get in touch today.
LSE:RR.Long
by LD_Perspectives
Finally a strong breakout from strong support levelsSimply put, that fight for a big share of the engine market has been extraordinary costly – but it is now won. #RR. has finally reached 50% market share for wide-body engines, a milestone that consolidates its outlook and should see significant growth in share price. 'Its defence and power arms now each account for roughly a third of the whole and the former in particular has proved a stable business, while the latter works to a much shorter cycle than the aero-engine division and should therefore recover more quickly from the pandemic.' Share price is still at bargain levels, guaranteed gains in coming months. www.telegraph.co.uk
LSE:RR.
by mjtrad25
Ferrexpo pays out massive dividend as profits surgeFERREXPO Tip: SPECULATIVE BUY Current price: 353.60 Target price: 450 Bullish points: - Lowly shares valuation - Strong balance sheet - High iron price - Premiums paid on pellets likely to increase with stricter emission standards - Strong ESG credentials Bearish points: - Iron prices could fall back down to Earth - Shareholder has a controlling stake - Major litigation issues - Political issues In the latest interim results (on the 4th of August) , Ukrainian iron miner Ferrexpo saw profits rise to 661.426 million dollars or 482.841 million pounds using the dollar to pound conversion rate of 0.73. Nearly 500 million pounds in profit is a massive sum (not far shy of a quarter) in relation to Ferrexpo’s market cap of 2.08 billion pounds, even more impressive considering that profit was made in just half a year. It is also worth noting that these profits were on higher costs such as a 72% increase in freight costs. The group is also a strong cash converter with cash from operations standing at 660.58 million dollars, nearly a 100% conversion rate. As a result the net cash position soared to 213 million dollars despite the miner spending 93 million dollars making developments to their infrastructure. This allowed the board to pay out a 39.6 cents dividend, the company went ex - dividend on the 12th of August, meaning that adjusting for the dividend, I believe that the group will now have net debt / net cash 0. Ferrexpo’s shares clearly look cheap against mining major Rio Tinto. Rio Tinto’s profit of 12.2 billion dollars (8.96 billion pounds) compared to the valuation of 86.91 billion pounds, meaning that Ferrexpo has a p/e of around half of that if Rio Tinto’s (if you compare the interim results.) Cash conversion and balance sheet were only slightly better for Rio. I am comparing Ferrexpo to Rio Tinto, as Rio derives the vast bulk of its earnings from iron, also since Rio Tinto is a massive company the valuation can be a proxy for what the sector deserves (or what the market thinks is deserves) since the larger the company the less likely the shares will be anonymously priced. It is also worth noting that Ferrexpo sells high grade pellets instead of traditional iron ore. They can be more easily converted into steel and therefore can be sold at a premium. Ferrexpo’s pellets produce 40% less CO2 emissions than traditional sinter fines during the manufacturing of steel. As steel makers have to adhere to stricter emission standards the premiums can rise further, also the lower emissions of pellets are a plus for ESG credentials. The group is also building a 5MW solar facility and uses biofuel from the sunflower husk industry as fuel, another bonus for ESG, Ferrexpo has also been replacing diesel transport with electrical transport. The reason why it is cheap, however is no secret. The company is constantly facing legal struggles over deals that were performed a very long time ago. These deals are mostly concerned around controlling stakeholder Zhevago. With his 50.3% stake Zhevago wields a lot of power over the company, and has entered many agreements with Ferrexpo, perhaps at the expense of minority shareholders. For example, Ferrexpo shareholders have found themselves with interests in football club AFC Vorska Poltava, which seems a bit odd keeping in mind Ferrexpo is a mining company, which is not very related to football, what’s more is that an international arrest warrant has been issued for Zhevago, putting the company into more uncertainty. Ferrexpo have investors have good reason to be concerned about the issue with Zhevago, however the shares look very cheap and arguably Zhevago can in some ways help Ferrexpo, as he will benefit from Ferrexpo prospering. All in all Ferrexpo looks very cheap even if the iron prices come down from record highs, Ferrexpo is on a miserly p/e despite strong ESG credentials, a strong balance sheet and a strong cash conversion rate. Still the risks posed are huge so my price target of 450 is still a discount to the majors, I would recommend only buying a small amount until more of the legal issues have been resolved. SPECULATIVE BUY CURRENT PRICE: 353.60 TARGET PRICE: 450
LSE:FXPO
by hammochess
ITM Power Analysis 17.08.2021Hello Traders, here is a full analysis for this asset. The entry will be taken only, if all rules of your trading plan are satisfied. Therefore I suggest you keep this pair on your watchlist and see if all of your rules are satisfied. Leave your thoughts in the comment section, I will reply to every single one of them. P.S. Tell me which asset you want me to break down next and I will cover it in my next analysis _____________________________________________________________________________________________________________________________________________________________________
LSE:ITM
by basictradingtv
2
Stopping volume for Just GroupLSE:JUST These are definantly my favorite signlas. it gives a great insight into the volume & price analysis that I use for my setups. There are a couple of factors supporting the bullishness here. The main one being the size of the last trading candle compare with 2 days ago, its much smaller. However look at the volume at the bottom, its even slightly higher, this is telling me the buyers are absorbing all the sell orders getting thrown at them. There is also the support level to consider where it has fallen to previously. Looks strong and will look to get in tomorrow if the spread is sensible.
LSE:JUSTLong
by srmatthews888