URC Stock Analysis: Is URC Worth PHP 229.00 A Share? | The Investing Engineer PH

Stock Picks for the week (Apr. 16-20, 2018) by First Metro Securities

Check out the Stock Picks for the week by First Metro Securities in this special report which you can find only here in PinoyInvestor. (Needs premium access.)


READ REPORT
38

URC Stock Analysis: Is URC Worth PHP 229.00 A Share?

I was asked by one of my readers as to why is it that there’s a sudden decline on Universal Robina Corporation’s (URC) stock price.

I answered him “I don’t know“.

I was like, “uhhhh, hmm”. On the other hand, I was also thinking of the price decline be like, “Yeah baby, yeah!”

This made me curious. Is the decline a major fundamental issue or is it something that the company can weather out? Is there something in the company that caused panicky investors to sell?

But whatever the reason may be, one thing I do know is that this may offer a good entry point for value investors like me.

pinoyinvestor

Which stocks to BUY or SELL? Find out on PinoyInvestor.com!

Switch from FREE Version to PREMIUM ACCESS now! Subscription starts at P399 per month. Click here and try it today!​

ADVERTISEMENT

News About URC

Looking for reasons why the price declined, I've come into the conclusion that it might have something to do with their 3QFY2016 reports. According to COL’s earnings analysis report, URC’s profits disappoint due to below expected performance of Philippines and Vietnam.

If that’s really the case, then I can say that this problem is something that the company can solve easily based on its capability to earn money. More on that as I explain below.

Initial Rate Of Return

But first, let’s run some quick calculations;

URC’s Market Price as of this writing is P180.10/share. With its current Shares Outstanding at 2,181,501,933, the market is now pricing the company at about P392B.

Its Net Income TTM is now at P14,235,974,980.

With these data, we get the initial rate of return to be 3.62%.

Comparing that to a 5-yr. bond rate of 3.113%, it doesn’t look a good investment at all today.

Intrinsic Value Calculations

Earnings Per Share is as follows;

Period

Earnings Per Share

2011

2.25

2012

3.69

2013

4.60

2014

5.30

2015

5.68

TTM

6.53

CAGR

23.75%

The earnings growth rate for the past 5 years is 23.75%. But to be on the safe side, we’ll put in a 25% Margin of Safety to that.

This equates to a 17.81% CAGR.

Now for the 5-yr. average P/E Ratio;

Period

P/E Ratio

2011

18.36

2012

19.56

2013

26.71

2014

35.29

2015

33.82

Average P/E ratio

26.75

Now that we have all the data needed, calculating the future value 5 years from now turns out to be P396.43/share.

We’ll now discount back that Future Value using the same growth rate. Take note that I used the same growth rate that I used in calculating the Future Value. You don’t have to use the same growth rate. You may use any value from 9% to 13% which is the approximate average returns of the PSEi.

This equates to P174.66/share.

COL’s Fair Value estimate is at P229.00. If we use a 12% discount rate, we arrive at a value near COL’s estimate at around P224.94/share.​

As you can see, stock valuation is not an exact science. It’s fairly important to be precise and accurate on the variables you will use because it will greatly affect the outcome of your calculations.

So for now, I’ll use an intrinsic value of P174.66 because I believe that the growth rate used truly represents what the company can really do.

Data Analysis

Remember that we computed Present Value based on a growth rate with a 25% MoS. Buying around this price means that you’re allowing a 25% room for error in case your calculations are slightly off. Theoretically, at P174/share, you’re already 25% “safer”.

Another point is that at this price, you’re basically buying the stock at its Fair Value. It’s like buying a piece of candy valued at one peso for one peso.

A value investor likes to buy at discount prices. If a candy that’s worth one peso is selling at fifty cents, that’s a bargain. Likewise, a stock that’s selling at a same valuation is considered a bargain.

But it’s also important to know the reason why the company is undervalued. Some companies have no moats and may be considered value traps. URC on the other hand, is far from being a value trap.

Going back to our figures, URC is trading almost the same as our intrinsic value. URC is just like the candy I mentioned above; a one peso candy selling at one peso.

Is it a good investment at this price? In my opinion, it’s not. But is it a good “BUY” at this price? I’ll tell you that it’s a YES.

The logic is simple. It’s not a bad thing to buy a one peso candy that’s selling at the same price. If you buy it at one peso, you can sell it too at one peso because that’s what it’s worth. No loss of whatsoever.

But we are not talking about candies. We are talking about stocks. At today’s price, URC will theoretically give you a 3% return. This is low but I want to point out that this stock has the capability to grow at 23% compounded annually.

If you don’t believe that URC is capable of such growth, then consider how the company utilized its Retained Earnings to improve its wealth and earnings capacity.

Going back from the data, URC earned a total of P21.52/share from 2011 to 2015. From that same period, URC paid out dividends worth P12.2/share. Subtracting the two, we can conclude that URC retained earnings of P9.32/share from this 5-yr. period.

Now, from 2011 to 2015, earnings increased from P2.25 a share to P5.68 a share. This increase may be attributed to the management’s effectiveness in deploying the P9.32 per share retained earnings. Thus, the difference between the two meant that the company produced an additional P3.43 a share income in 2015 for a return of 36.80%.

There’s not a lot of companies in the Philippine Stock Exchange that demonstrates that kind of return. In my opinion, URC has done a really good job of utilizing these earnings in increasing shareholder wealth and earnings.

Final Thoughts

I believe that at today’s price, URC is a good buy not because it is undervalued, but because URC is a wonderful company to own. Also, the valuations above are already calculated using a Margin of Safety so in theory, it’s already a good buy.

When I think of URC, I remember a Warren Buffett quote that goes like this;

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

This concludes my URC stock analysis.

Now what do you think? Should we buy today or wait for a much lower price? Or should we avoid this stock for now? I want to hear your thoughts. Share them by leaving a comment below.

Happy investing!

quantitative data solutions

Know The Numbers And Trade Smart Using Quantitative Data Solutions!

Applicable in PSE, Forex and Commodities. Click here and start trading intelligently!​

ADVERTISEMENT

truly rich club

Do You Want to Gain Financial Wealth and Spiritual Abundance at the Same Time?

If you want Bro. Bo to be your personal financial coach and know more about the Truly Rich Club, then click this link here.

ADVERTISEMENT

Model Portfolios: Unloved, Value Play, Yield Seeker, Riding the Momentum (Apr. 11, 2018)

Looking for model portfolios to guide your stock picking decisions? Don't worry, we got you covered! Check out this special stock picks and model portfolio report today! (Needs premium access.)

  • Joe says:

    Love This. 🙂

  • Bob says:

    Great article!

  • Adan says:

    GALING MO! Tnx!👍

  • Ace says:

    This is worth reading and sharing.

  • JRP says:

    Great article, as always.

    Thanks also for showing the calculations, so we can follow along, and apply to other stocks that we may be interested in.

  • ryann says:

    thank you so much for including calculations in your analysis. this really helps newbies like me 🙂

  • Patrick says:

    Hi chief, in DCF they usually use T-bill rate plus inflation rate as their discount rate. This would only give roughly 4% and would produce a higher present value. This is what I am using right now for my intrinsic values, am I wrong? Should I use the 9% to 13%?

    • In my opinion, the 4% you mentioned is the risk-free rate. But then, you should also consider your risk premium.
      Discount Rate = risk-free rate + risk premium rate
      Discount Rate = 4% + 5% = 9%

      The reason of adding a 5% risk premium is that we want to be compensated more because we are investing in stocks right? If we’ll calculate it using 4%, then we might as well invest in retail treasury bonds..

      One thing I do is that I get the return rate of a stock and compare it to the bond rate. If the stock’s return is almost the same as a bond, then I’ll look for other investments. I usually use a 12% discount rate. That is 4% risk-free rate plus 8% risk premium.

    • Ebs says:

      4% required rate of return for equities is too low. You should add a risk premium. You dont have to bother yourself computing it based on capital asset pricing model or CAPM. Just use 10 to 12% as a discount rate. The author use of the growth rate of 17% as a discount rate is theoretically wrong. Its too high. We should use a discount rate, not growth rate.

      • The reason I did use a 17% discount rate is because of the assumption that URC might well perform better than 12%. So I tried using the growth rate as the discount rate as an illustration. I also made a comparison between 17% and 12% as shown above.

        I agree with your statement that 10% to 12% is the suitable value that must be used when discounting. I guess I’m just kinda fond of capturing the gist of using different numbers.

  • abril m. patag says:

    Sir, paano po macompute ang TTM (EpS) ung 6.53

  • Heston says:

    Galing mo talaga bro! Keep this one up! 😀 Ako ba ang dahilan kung bakit ka gumawa ng evalution sa URC? Nyahaha!!!

  • Dennis De Guzman says:

    Thank you. Your analysis just told me my calculations are correct. I thought URC is undervalued and the market is just reacting to the bad news in Vietnam. I hope you will do more analysis of this sort and help us understand the market psychology more. More power to you.

  • alex says:

    Your article is very helpful. I’ve read your book “Value investing made easy for newbies” and followed how you did it in your analysis of URC. I really appreciate that there are people like you who share their time and effort to educate other people, “newbies” like me, in investing. I am now a frequent visitor of your page. More power to you.

  • tedd says:

    Hi , thanks much for sharing.
    Any updates sir? Is URC still a good buy at present?
    COL released a report that URC fy16 results underperform on weak domestic branded operations.

    • Hi Tedd,

      Seems like competition is eating away its profits. Making a buy decision in the coming days ahead would seem a challenging task. But if you would try to value the company, in my opinion the price is still attractive.

      Lower profits can slow down a company’s growth but that doesn’t mean that it will become a bad investment. As long as you buy a good company lower than its intrinsic value, that will reduce your risks.

      A company with a deep and wide moat can always stay competitive no matter what the competitors are doing. In URC’s case, I think the moat is now being breached.

      URC will still sell consumer products, people will still buy them and will continue to profit. Cash would pile up and the management would invest it back in their company for future growth. Buying a good company lower than its true worth I think is still a smart decision to do.

  • Ernie says:

    hi mark ngayun kolang nabasa itong post mo 7 months ago na pala. now presyo na ng urc is php 163. pwede na pala mag invest ngayun dito.salamat sa info engr.

  • Randell Rellin says:

    Oh myy.. Being a reader of buffettology, i admire you for applying the concepts in analyzing the PH stocks. I really wish i could’ve found your blog earlier. Honestly, im impressed.

  • Sanami Tam Solomon says:

    Hi! I’m also kinda new to the market but I’ve a question for you. With the current situation of URC, is it still ok to buy in your own opinion in 2018? In my own opinion through the COL charts of URC, I see it has a stock that’s fainting but I don’t really know if it might rise again. I’ve been thinking of making URC among my five stock portfolio for a long term investment. Please tell me what you think, thank you.I don’t want to diversify my portfolio more than five stocks. Here are my planned picks: JFC, SMPH, AC, BDO, URC. But I’m thinking of replacing BDO with URC since SMPH and BDO are under the same owner then add another worthy stock to make it five. I’m just trying to make a diversification that’ll give me a cool return in the next 4-5 years. Please I really need your feedback, thank you.

    • Hi Sanami,

      Some points I consider:

      1) URC’s earnings grew in 2016. From 5.68/share in 2015 to 6.94/share in 2016. We have yet to see its 2017 annual report.
      2) From my calculations, it would seem that buying URC at Php169/share would yield an annual compounded return rate of 15.8% pre-tax and 13.5% after tax.
      3) Current ratio and D/E ratio last quarter at 1.89 and 0.47 respectively. Pretty healthy balance sheet as well.
      4) The weakness of the stock price is sentiment driven. Something to do with their weak sales in Vietnam and debts in Australia and New Zealand: https://www.rappler.com/business/187641-universal-robina-corporation-net-income-q3-2017
      5) URC has a lots of room for growth and they are now reestablishing it: http://www.philstar.com/business/2017/12/04/1764963/urc-wants-reestablish-growth-next-year

      In my opinion, accumulating between Php136 to Php145 would be a bargain. Between Php145 – Php160 would be fine too. I would be fine with 13% to 15% CAGR if bought at Php169 but if you can buy it cheaper, then good. 🙂

      The only thing I don’t like with URC is the low dividend yield. That’s why I think that prices between Php136 and Php145 are a bargain. At those prices, you can get at least 1% annual yield while waiting for the stock to reach fair value price.

      If my projections are right, URC can reach a book value and earnings of Php120+ and Php25+ on a per share basis respectively within a span of 10 years. By that time, the stock should be priced around Php600+/share.

      URC will also benefit in the TRAIN law. More spending will be expected from the consumers. Earnings will increase due to higher sales. Inflation will rise on healthy levels… It’s good for the consumer sector.

      Good luck! 🙂

      • Sanami Tam Solomon says:

        Thank you so much for your feedback. And also for the articles you were able to provide for me to read further. From what I got from the 2nd article which says that URC is planning on increasing their company worth, if they really are working towards making progress then I think I can consider buying it. But I really hope they try to grow higher. From previous observations, I think URC was really a nice stock to keep in a portfolio. I just hope it won’t decline more and more after my investment. Thank you for helping me with your information.

  • >