As I'm beginning to finally see the market come around on many of my personal equity holdings, I know there's still work to be done in order to stay a step ahead of the herd. It was easy a couple of months ago when I was finding great valuations on some very high quality companies, but those have since surpassed my threshold for price/fair value discounts. Time to dig in and get creative.
I have no idea what's going to happen in Europe, China, and the future of any other macroeconomic factor of the world that professional investors attempt to understand, or even predict, but what I do know is that basic material goods, particularly agriculture, is definitely going to be important over the course of my life. The next step is to figure out which of the many investment opportunities available today is the best one to make, while the uncertainty associated with the aforementioned is making these kinds of investments too scary to touch.
As usual, I'm looking for great valuation, strong financial health, reasonable growth (although I'm pretty lenient here), and of particular importance to me at this time, something that's being overlooked and under-appreciated. To assist in this process, I put together a few basic criteria in my stock screener:
- Sector = Basic Materials
- Current Ratio >= 2
- Financial Leverage <= 3
- Cash Return (variation of free cash flow yield) >= 5%
- Operating Margin >= 10%
- Return on Assets >= 8%
- Dividend Yield >= 1%
- % Below 5yr. High >= 30%
Interestingly, only one company associated with agriculture made it through to pass - Yara International (YARIY.PK). I presently own Yara, so I'm certainly delighted it continues to show promise for me. Nonetheless, it's still a good idea to take it through my absolute valuation methodology process in order to decide upon a fair value for the company.
In USD (converted at current 0.1687 NOK):
- Reproduction Book Value: $30.7
- Normalized (zero growth) Earnings Power Value: $34 - $42
- Franchise Value Range: $52, $60, $72
With a 52-week low of $33.8, my reproduction book value looks like a pretty strong base to work from. The EPV is strikingly close to the recent range of prices. Lastly, the Franchise Value looks to fully capture the full value of Yara's 2008 highs and even its 52wk high of $62.5. I am comfortable giving Yara the benefit of a "franchise" value after a full review of their financial statements and past operational performance. The EPV also exceeds reproduction book value, which is another supporting indicator.
Overall, I'm comfortable giving Yara a fair value of $60. Presently, Yara's market price is $41.53, which gives me a price/fair value discount of 0.69. With a margin of safety like this, I'm very happy to be an owner of Yara, and highly recommend you put forth a similar review of the company for potential ownership.
Disclosure: I am long YARIY.PK