Forum Archive Index - October 2001

[not important <cullen150@yahoo.com>]

Thanks Peter awesome post, easy to understand.
Certainly makes one think twice!

     Better off cullen 150  :)
 
--- Peter <pmaiden@xtra.co.nz> wrote:
> Up until 1998 WAM was one of the star performers on
> the NZSE. It's 1998 performance was typical of how
> it had performed over many years - EPS growth of 18%
> and ROE and ROIC of about 14%. WAM deserved the P/E
> in the high 20's the market gave it.
> 
> However this organic growth was not enough - the
> market demanded more. Another comapny in the same
> boat was Nuplex.
> 
> Growth was needed by acquisition. This started in
> 1999 with the acquisition of Wastecare. In addition
> WAM bought out the interests of it's US shareholder
> Waste Management International.
> 
> The result - a bigger comapny, $80M more share
> capital and new debt of $46M (as at Dec 2000).
> 
> In the period between 1998 and 2000 sales increased
> from $78M to $137M. Operating margins have inproved
> slightly but the $59M increase in sales has only
> resulted in profit going from $10.8M to $13.9M - the
> reason being that depreciation/amortisation /
> interest costs were $14M more in 2000 than they were
> in 1998.
> 
> WAM's ROE has fallen to 9.0% and because of the
> higher level of debt ROIC has fallen to below 8%.
> WAM is no longer earing more than it's cost of
> capital.
> 
> In addition earnings growth has stopped and the
> market has re-rated WAM accordingly. At the current
> price of 250 still a P/E of about 18. At this price
> the market is also valuing the NPV of future cash
> flows (based on earnings growth) at about a positive
> $40M. This means that the market is expecting WAM to
> earn more than it's cost of capital in the future -
> something that it has not managed over the last 2
> yaers and won't do this year.
> 
> On current performance this suggests that WAM is
> still overvalued and the share price could drift
> down to somewhere closer 200 (it's level of capital)
> - which would also better reflect its current
> earnings performance.
> 
> Phaedrus says wait until a new up trend has been
> confirmed. Paul says there are indicators that the
> trend is about to change.
> 
> As others have said WAM fundamentals are strong - it
> consistently makes good profits etc. However the
> acquisition path that WAM has gone down means that
> it's financial performance is now only solid - not
> of stellar proportions. To achieve that staus it
> needs to get NOPAT up to over $20M.
> 
> At the current time I feel that even though the WAM
> price has dropped a lot over recent times it is
> still slightly overvalued. I would follow Phaedrus's
> advice and wait for a confirmed uptrend to form
> before buying for a short to medium term hold.
> 
> Cheers
> 
> Peter
> 


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