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.
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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;
Earnings Per Share
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;
Average P/E ratio
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.
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.
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.
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