I did a bit of fundamental work on SEB given that the stock has been such a great performer. I'm puzzled on the valuation as well:
1) SEB is trading at 10.5x current annualized earnings ($40/share last qtr x 4 = $160). PORK is 8.5x on the same metric ($0.48 x 4 = $1.90 EPS).
2) Of SEB's $160/share in annualized earnings, roughly 1/3 is coming from the shipping business. Container shipping companies are trading at 3-5x earnings b/c container shipping rates are falling very rapidly right now (too much supply being added). So if you assume the shipping business is worth 4x, then you are implicitly valuing the rest of the pork business at 14x (vs. PORK at 8.5x).
3) Earnings momentum is turning negative: earnings are rolling over (fell from $49/share last qtr to $42/share this qtr, and they got a bit earnings boost from lower tax rate due to the new jobs creation bill) as pork and shipping weaken. Operating income was down in both pork and marine, but this was somewhat offset by the lower tax rate.
4) Price/book is now 2.4x. Historically this has always traded at 0.5-1.0x.
5) The other potential problem I saw was that SEB owns only 30% of its boats and leases the other 70% on short-term contracts (they say 1-3 years). These contracts were signed when shipping rates were lower, so as shipping rates took off they probably benefitted (b/c costs were fixed but revenue went up). when these contracts get renewed at market rates though costs will go up and revenues are now declining b/c shipping rates are falling.
SEB's been a great investment to date but seems a little shaky here on the fundamentals. if earnings momentum turns negative then the stock seems like it might have serious downside. Any thoughts?
Why should we move on?
If its not a good buy it might be a good sale, as you seem to think. Or vice-versa.
This one moves enough to have fun going in both directions if one is inclined to go tht way.
Longs should encourage reality-based arguments from bears so as to know what they might be missing. The opposite also holds true.
Good summary of what is going on and how the future will eventually play out. I haven't been able to get a borrow at Etrade the several times I've tried so I remain uninvested here.
SEB is a sound business, but is overvalued.
I haven't figured out where to come out on this one, the stock's obviously been an incredible performer (going from 200 to 1700 in two years). It seems like a lot of people who trade it focus on technicals vs. fundamentals, not surprising given that the company gives no guidance and there are no sell-side analysts who cover it. I've tended to always focus much more on fundamentals when I invest.
I guess my concern on this one is that it isn't a growth business, it's cyclical. The two businesses that SEB is in (pork raising and processing, container shipping) are generally tough, cyclical businesses with low returns on capital. This is why the stock was a 200 stock for over 15 years and traded at a discount to book during that time. Both of these businesses tightened up considerably in 2004, and that took the stock from 200 to 1,700 today (8x!) and made this a home run investment. Looking forward, the pork business has peaked but is still in decent shape but container shipping is rolling over now, and this will drive negative earnings trends from here (this began in Q3). If pork starts to come off its peak as well, that would accelerate the negative earnings trend.
B/c SEB isn't a growth business, it therefore simply doesn't have the ability sustain a long-term run in the stock (like other growth businesses). It will trade up into a peak and then down into a trough.
The huge positive earnings momentum over the last two years clearly took the stock up, but it seems like that is heading the other way now (Q3 was down vs. Q2, despite Q3 benefiting from a lower tax rate b/c of the new tax bill).
Anyone have any other thoughts on the fundamentals?
Ladies and Gentlemen , I would like to bring to your attention that the Captain has turned on the seatbelt sign. Would you kindly return to your seats and securely fasten your seatbelt.
During times like these it is always wise to look back and reflect on the past rides that we have had. Check out my post 2197 and 2217 back in August. Also read 2220 a great post from Joan.
IN fact to those heavily invested in SEB it would be wise to skim the posts for that period when SEB took a slide from its 1800 perch. Also be very aware of the posters that show up . You should all know their names buy now . Some will come back as an alias but you can recognize them by the tone and spirit of their words.
I would STRONGLY advise not to respond to any of the negative posts even in a curious way. Surely don�t repeat their subjects. Stay tuned very closely to the T& S reports. Look at the last 12 minutes of the market yesterday. It was only 300 shares traded that dropped the market 30 dollars and it closed at 1752 . Funny thing there were no shares offered up below 1760 all day.
Today there are lots of small sells coming in at 5 to ten dollars below the asking price . You know that this scenario is ripe for shorts and they will do anything to drive the price down. Create panic with so called interesting news. Suggest very low floors that tend to paint pictures in investor�s minds of the May and Aug 2005 slide. Your stops will only truly protect you if they are at market and that will cause further erosion. A hand full of small investors started the sell off. Some bigger boys have entered the sell side today . I counted 23 blocks of 400 shares each being offered in the high 1600's .
I am off to Canada to visit Mom. Take care my investing friends. Have a great weekend , a truly very merry CHRISTmas and may the God of the Universe, the God of Isaac, Jacob, and Abraham truly bless you with all spiritual blessings this year.