Electronic Data Processing (EDP)
Posted on February 4, 2009 by Richard Beddard
Filed Under Companies |
Don’t judge a company by its PE ratio alone
At first glance, Electronic Data Processing (EDP) doesn’t have much to offer a value investor. The share price resembles a comatose patient briefly awakened during the technology bubble and its erratic earnings record and apparently high price (its long-term price earnings ratio is nearly 22) might suggest erratic and relatively low returns in future.
It might, but at second glance, it depends on what management does with all that cash. It had £9m in the bank and no debt in September last year , which taken away from EDP’s market value of about £12m, leaves the business valued at about £3m. Against that measure, this year’s net profit of about £675,000 looks a little more impressive (it equates to a PE ratio of less than five).
EDP sells stock control and business intelligence software to wholesalers, which boosts their sales and improves efficiency. Since its customers include builders’ merchants, timber merchants, and engineering, plumbing and tool vendors, it’s easy to imagine their IT budgets will be lower during recession, but up to September at least, EDP was growing.
The sale of its headquarters and another office building last year also swelled EDP’s bank balance, but that could continue as EDP deems four of its five remaining buildings surplus to requirements. It may take them a while to sell them, the commercial property market is in disarray, but then I think this kind of share can reward patient investors.
Disregarding the special dividend it paid out after last year’s property sales, its dividend yields nearly 6%, which should keep investors interested until it either fritters away all that loot, returns it to investors through buybacks and dividends, or invests it in something nice and profitable. If, as Peter Temple says in his recent Growth Portfolio update, it’s a good time to buy cash rich asset situations, then EDP could be one.
Is that good enough to crown it pick of the week? Dunno. I have four more annual reports to look at tomorrow. It would appeal to Piotroski, though. The shares are cheaper than the value of EDP’s assets, net of liabilities and it’s a financial ox, with an F_Score of 7.
In other words it could be a good company going cheap, despite its PE ratio.
Footnotes:
- The quoted price is only firm up to £240 and if you wanted to buy (or sell) significantly more you might end up paying more or receiving less than expected for the shares.
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