Lg Electronics Inc is it a stock pick at current level?

Gromley

30th Nov '18

Hi Jacky,

Well I am no expert on £LG – I have a big TV of theirs in my lounge & have owned a few other of their gizmos over time , but I have never been invested nor researched them. But in absence of any other responses (yet), I thought I would take a walk around some of the excellent information available through the StockReport. (As I have probably underused the StockReports so far, this is a useful learning exercise for me too.)

The first thing to note is that, obviously, they are a South Korean company ; list on the LSE and Nasdaq (I don’t know if they have other listings). So as a potential investor, the first thing to check would be whether there are any barriers (or hidden costs) in investing in them. Also the business reports results in SK won (the exchange rate of won to GBP has been relatively stable recently so perhaps not a major concern.

StockRank

Looking more generally at the StockReport I see that they are classed as “contrarian” (a winning style). That is high, Value and Quality, but low Momentum. To paraphrase; this means we are looking at a ‘good’ company, that is relatively ‘cheap’ but is not exciting the markets at the current time.

Value

looks exceptionally good (too good?) with a PE ratio of less than 3, forecast earnings growth giving rise to an even lower PEG. Price to Book Value of 0.91 is also very good value (price to Tangible book of 1.14) Net Debt at 6.Tn Won looks quite high, compared against the market cap of 13Tn Won, but has been fairly consistent over the last few years and the interest expense has been in the region of 20-30% of operating profits. So nothing suggests that the level of debt is necessarily problematic. I note however, an oddity that the 2017 figures appear to show a positive interest figure, which seems very odd given the net debt was still in existence so I would want to understand that further before considering investing.

Quality

also appears to be good. Return on capital of 10.9% is reasonably strong (the 5 year average is a lesser 7.1%, although it looks superficially to me as if they have improved something in their overheads which may keep this metric above 10%). Operating margins at 4.74% is less good and would put some off. One key measure used in the QualityRank is the ratio of Gross Profit to Assets at an impressive 35.6x .

Gross margins average around 23-24% of revenues, so the measure above I believe points more to the business being relatively asset light rather than generating excessive gross margins.

One reason for looking at whether GM was high, is that high Gross Margin coupled with low Operating Margin would point to a high level of operational gearing meaning that any reduction in revenues could have a disproportionate impact on profits (obviously the converse is also true, but my concerns on consumer electronics would be to the downside currently). This does not look to be a massive concern at these levels

Momentum

however is poor. The MomentumRank is made up of a composite of Share Price and Earnings factors. It is not hard looking at the chart to see that price momentum is very poor. The relatively poor earnings momentum I think is particularly influenced by the fact that earnings forecasts have been on the wane.

That’s not a profile that one would particularly want to see, but may go some way to explaining why the value is so high.

Guru Ratios

Are generally positive.

The Piotroski / Health Trend score is a strong 7 out 9, the Greenblatt Magic Formula comes in at B+ (on a scale of E- to A+) and Beneish M Score / Earnings manipulation risk is low.

The Altman Z1- score measuring Bankruptcy risk flags caution with 3 out of the 5 metrics being adverse. I would not personally get too concerned about this measure, unless it deteriorated towards the “risky” categorisation.

Other Ratios and Recent History

Net Gearing at 47.5% is quite high and this reflects back to the Altman Z1 score above.

Revenue growth is fairly anaemic, perhaps not too surprising given the maturity of the business. Earnings growth however looks more impressive and as I mentioned above, I suspect that this reflects improvements they have made to their overheads.

Screens

You mentioned in your initial post that you came across this company from a screen. Given what I have seen, I would guess at this being a value oriented screen?

Interestingly LG Electronics Inc (LON:LGLD) passes none of the “guru” screens on Stockopedia. There is a really handy feature on the stock report where you can view each of the screens as a checklist and view which criteria a given stock passes and fails on.

I might be worth digging here to understand which factors would turn off the various value gurus.

Overall

This looks like a potentially interesting value situation (potentially quite deep value).

If I were to be considering it further I should want to better understand :

A little more about the debt (and in particular to understand what the real interest costs are)
What the recent improvements in OpEx have been and whether they are sustainable
The reasons for the falling earnings forecasts.

I note that the RNSed results are incredibly terse and include only a very few numbers, you can get more of the results from the company website.

Posting Hint

One useful feature with Stockopedia posting is the ability to link you initial post to a company and/or investing theme. This helps people find it now and in the future and can potentially draw in further readers and therefore feedback.

You can do this when you first post or after the event.

If you click on the edit button (towards the top right of your original post) and then scroll down towards the bottom you will find.

"3. File under a Company, Topic or both"

Here you can link the post to as it says a company, topic or both.

If you link it to the company it will then be accessible for future reference from the StockReport via the "discuss" link, which shows a list of all the previous (indexed) discussions on the company. As there are none for LG Electronics Inc (LON:LGLD) so far, yours will be the first!

I hope that's been of some use, it has certainly been interesting from my perspective to work through a company that I knew very little about using solely the StockReport.

Lg Electronics Inc is it a stock pick at current level?

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About the Author

Jacky Thaoe

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