By bargainvalue

The third on our list has been WH Smith, which is a company from the “General Retailers” industry. We would like to take a closer look on its financial data and try to establish how probable it is, that this company could be a Pearl. Pearls are the enterprises which are well-managed and generates stable profits. But what is the most important, they stay below the radar of many investors, thus they are undervalued and can produce a very high return (50% or more) in a year.

Purchase price (11.12.2015): 1732.00 GBp

Is has catched my attention with its financial indicators:


Once again, we see superb profitability performance, a lot better than the sector and market average. ROE is so high, because the company rely strong on debt (356.0 £m compare to 101.00 £m of equity in 2014). Although, margins are also great, so we can say with a confidence, that the company is well-managed and know, how to earn money on its core business.

On the chart below, we can see how the margins have been rising in the past:



It is a superb performance and nothing else needs to be said.

Revenues are rather stable, which we can observe on the chart below:



The company’s core business do not give much space for an improvement of this feature. Its two divisions sells convenience, books, news, stationery, newspapers, magazines, and impulse products. It is not a sector with great development potential. On the other hand, all kind of economical struggle and recessions, seems not to have impact on the company performance. It is great to know this, because this position can be great one,  for the hard times.

Quick glimpse on the net profit:



Above, we see what value investor like the most. The long-term, growing tendency in net profit. In the last 5 years this indicator has been growing by 3,9% annually.  The chart of operating profit looks identically. What this fact tells us? The company do not increase its revenues, but year after year, it improves efficiency and cut the costs of operation. We can see it here and looking at operating and net margin. What is important, the management is not choke revenues by this action, which is very common and dangerous.

Another great characteristic of this company is dividend per share:


This view is very encouraging. Dividend per share is rising by almost 15% annually (during the last 5 years). If the pace will be maintained, in the next year this indicator should hit almost 40.0 p. The yield is going down, because the stock price has been skyrocketing for two years (since 1 Feb 2014).

Unluckily, the next characteristics are not so good. Firstly, the debt:


The situation is not very bad yet. The total debt ratio is falling recently, but for the long period (2007-2014) it was rising and the current level is more than 10 p.p. higher, than the industrial average (65.33%). However, if we compare the current level with the 90% in 2004, the company have made great progress.

Now, we are going to look at a very daunting fact:


Current ratio below 1 (0.82) is very dangerous and it is clear, that WH Smith has got a big problem with liquidity. It is caused by a very high level of current liabilities. The company is not in healthy financial condition, but not necessarily will go into bankruptcy. Although we have here the first warning and if we consider investing real money in this stock, better be careful, because any slip can be mortal for the company and our money.

At last but not least, let’s look at the Cash Flows:


The management is investing some money, but negative financial flows are very high. It is connected with fair level of dividend and a lot interests. On the other hand, operating cash flows are healthy and rising.

In the end, we must notice, that the company price is very high and probably it is overvalued:


It is the next reason, why we should be very careful about investing in this asset. The momentum can be very dangerous. However, the P/BV is so high, because of the wide use of liabilities to finance the company’s operations. P/E and EV/EBIT are on the acceptable level. The stock price has been growing for 4 years with an average pace of around 60% annually and is very high right now. It is visible on the chart below:




WH Smith has got a very stable core business and high margins. However, the company has got a problem with liabilities and the management should do something with this fact. We think, that despite this, the company is worth giving it our trust. The time will show, if this decision has been a good one.

Current price (29.01.2016): 1842.00 GBp (+6.35%)

Price chart has been drawn from the LSE site