Ahold: More Than A Hold?

Aug. 4.14 | About: Koninklijke Ahold (ADRNY)

Summary

Ahold gives exposure to the improving economy in the U.S. and Western and Eastern Europe.

Ahold is generating lots of cash and returning excess cash to shareholders via dividends and buy-backs.

Ahold appears to be significantly undervalued with strong return on invested capital.

Koninklijke Ahold NV (AHONY) is a retail company based in the Netherlands and has a market cap of 15.3 Billion USD. It is engaged in operating supermarkets, online retail, convenience stores and fuel stations. In the US it operates supermarket banners such as Stop & Shop, Giant etc. Its major operations are in the Netherlands, US and the Czech Republic. You can get the key facts about the company here.

I have owned Ahold for about 15 years now, having bought into it during its ill fated expansionary phase, and it has not been a great investment. However it pays a decent dividend and provides good exposure to Europe. The company over-expanded in the 1990s and early 2000s and became over-leveraged. This culminated in accounting irregularities in 2003 which led to a steep drop in share price and a replacement of top management. Since 2004 Ahold has been shedding assets and is becoming much more focused and shareholder friendly and therefore I am taking another look now. In fact I was surprised to that since 2004 it has out-performed the grocery store industry and S&P 500 on a total return basis and I am thinking the outperformance will continue. A 10K investment in 2004 has turned into 25K in 2014. (This is an example of where it may be better to invest in companies that are shrinking to their circle of competence rather than expanding for better investment returns - but I will explore that thesis in another article, but the tobacco industry comes to mind).

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Figure : Source: Morningstar

Total Return % (08/01/2014)

1-Year

3-Year

5-Year

10-Year

15-Year

AHONY

8.52

13.04

11.30

8.99

-3.81

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Ahold is generating lots of free cash.

I am a free cash flow hound. A company which is generating lots of free cash is less likely to get into trouble than a company which does not. I like my management to show me the cash and how they are giving back to the owners of the company via dividends, return of excess capital or buy backs. Ahold in delivering buckets of cash. The chart below compares price/ free cash flow ratio and price / earnings ratio for Ahold. As you can see Ahold has been generating a 10% freecash return over the last few years. Not bad.

Figure - Price/Cash Flow vs. Price/Earnings for Ahold over the last 5 years

Ahold is rewarding its shareholders

Ahold's dividend history is given below. Note that in March Ahold returned cash to shareholders via a special dividend accompanied by a 12:13 reverse stock split. Currently Ahold stock is yielding 3.13% with a payout of 47% - so there is lots of head space for dividends. (source: Morningstar).

Ex-Dividend Date

Dividend Type

Amount

04/22/2014

Cash Dividends

$0.5421

03/27/2014

Special Cash Dividends

$1.5467

04/19/2013

Cash Dividends

$0.5197

04/19/2012

Cash Dividends

$0.4729

04/26/2011

Cash Dividends

$0.3768

04/15/2010

Cash Dividends

$0.266

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Ahold has being buying back shares and since 2009 has shrunk share count from 1.147 billion to 920 million (3/2014). The share re-purchase continues.

Financial Condition

Ahold financial condition is strong and getting stronger. No worries there.

Figure - Balance Sheet

USD $ Million.

Equity6,462.70

Debt1,929.5

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Valuation & Concluding remarks

A quick and dirty discounted cash flow calculation (using $1.80 per share free cash flow and a cost of capital of 12% and assuming 10% cash flow growth) brings me to a share value of $26.55. This is a good margin of safety for cash rich business with a relatively debt free balance sheet.

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Figure - Discounted cash flow calculations

My review of Ahold informs me that I should add to my position in the company. The "new" Ahold has redeemed itself and is dedicated towards share-holder interest. It is generating and returning cash to shareholders and has started to grow prudently again having made a recent acquisition in the Czech Republic. Its return on equity and invested capital is strong.

Profitability

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

TTM

Net Margin %

-0.92

0.36

2.04

10.41

4.18

3.20

2.89

3.36

2.52

7.78

1.97

Asset Turnover (Average)

2.36

2.19

2.33

1.74

1.87

2.03

2.06

2.04

2.18

2.16

2.34

Return on Assets %

-2.18

0.78

4.76

18.10

7.80

6.50

5.95

6.85

5.50

16.79

4.60

Financial Leverage (Average)

3.05

5.10

4.67

3.59

2.91

2.56

2.49

2.55

2.52

2.32

2.95

Return on Equity %

-7.29

2.97

23.25

74.80

25.08

17.68

15.03

17.26

13.93

40.54

13.58

Return on Invested Capital %

-7.29

2.97

23.25

43.13

17.24

15.36

14.29

16.25

12.66

31.15

13.57

Interest Coverage

-

-

-

2.88

3.86

4.21

4.74

5.21

5.07

5.21

5.63

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(Source: Morningstar).

I look forward to reading your comments and rebuttals of my analysis.

Disclosure: The author is long AHONY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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