Cheap for the Wrong Reasons

Key metrics:

• 5.5x EV/EBIT

• Single digit PE

• No debt

• Long dividend record

Some businesses take weeks to understand.

This one probably takes about an hour.

Here’s the setup.

An old manufacturer, well over two centuries in business, making a product that will never go out of fashion.

It comes with a net cash balance sheet, no long term debt, a 24 year record of profits and uninterrupted dividends going back to at least 2002 that only COVID managed to break.

And right now, it’s trading at 5.5x EV/EBIT with a single digit PE on depressed earnings, 0.7x book value and a 5.5% dividend yield.

Well below where this stock has traded historically.

Naturally, you have to ask why.

Part of the answer is real, structural weakness in its sector. But part of the selling had nothing to do with that operating weakness at all. It just happened to arrive at the same time, and got buried under the more obvious headwind.

So while some of the selling was fair, it was not to this extent.

Good for us though.

Because what we now have is a good, well run, dividend paying business with a strong brand, that derated so much, it finally got cheap.

Let’s take a look at this business.