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

Thursday, Nov 29 2018 by
3

I just started using Stockopedia, and i was screening some stocks and one which picked my interest is LG Electronics. Good value, good quality and a momentum which is up 34 last 30 days.

https://www.stockopedia.com/sh...

Keen to hear anyones thougths.


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LG Electronics Inc. is a Korea-based company principally engaged in the manufacturing and distribution of electronic products. Along with its subsidiaries, the Company operates its business through six segments. The Home Appliance & Air Solution (H&A) segment provides refrigerators, washing machines, air conditioners, microwave ovens, cleaners and others. The Mobile Communications (MC) segment offers mobile terminal equipment. The Home Entertainment (HE) segment supplies televisions (TVs), monitors, personal computers (PCs), security equipment, audios and videos. The Vehicle Components (VC) segment provides automobile parts. The LG Innotek Co., Ltd. (Innotek) and its subsidiaries segment offers light-emitting diode (LED), board materials, optics solutions and others. The Other segment involves in the solar energy business and provision of display materials. more »

LSE Price
$12.3
Change
 
Mkt Cap (£m)
8,495
P/E (fwd)
2.7
Yield (fwd)
1.8



  Is LON:LGLD fundamentally strong or weak? Find out More »


5 Posts on this Thread show/hide all

Gromley 30th Nov 1 of 5
12

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.

5c01420ecf5e0LG-STOCKRANK.JPG

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.

5c014338601e2LGBROKER.JPG

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.

5c0143faaaa08LG-SCREENS.JPG

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.

| Link | Share | 1 reply
Howard Adams 30th Nov 2 of 5

In reply to post #423418

Hi Gromley

Excellent posting illustrating your thought patterns as you stepped through the Stock report, great read, thanks.

Regards
Howard

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JohnEustace 30th Nov 3 of 5

With the large South Korean companies that have historically organised as Chaebols it can be difficult to understand where the individual parts fit within the overall structure and what you are in fact buying into.
LG Electronics is not the top company, that is LG Corporation. The Wikipedia page has a chart of the structure.
https://en.m.wikipedia.org/wiki/LG_Corporation

https://en.m.wikipedia.org/wiki/Chaebol

| Link | Share
Henry55 3rd Dec 4 of 5

Thanks for the time you took to put that together Gromley. Really excellent and helpful.
Regards,
Henry

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Jacky Thaoe 5th Dec 5 of 5

Gromley, that was above and beyond what I expected :)
Thank you so much, it's truly motivating to learn from skilled people willing to share.
Especially your comments around quality and gearing was points I truly overlooked.
Thanks again!

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