Coast Wholesale Appliances Inc

On my other blog I am today writing about what to read for novice investors. I think that if you want to learn about investing today I would suggest reading some blogs rather than any particular book. One of the bloggers I follow is "The dividend Guy" continue...

I do not own this stock Coast Wholesale Appliances Inc. (TSX-CWA). This is a small cap dividend paying stock I picked up from Rise of a Millionaire blog. See second paragraph of of this entry of August 18, 2012 and see second last paragraph of this entry dated April 29, 2012. I decided to explore this stock further. So what did I find?

First of all I will deal with dividends. This company only went public mid-way through 2005. The dividends hit a peak in 2007 and have been travelling south ever since. The 5 year decline is 21.8%. The most recent declined occurred in 2011 where the dividends were again reduced by some 15.9%. This stock may have dividends, but if they continue to decline that may not be the case. It first appears that the dividends for 2012 is higher than 2011. However, only 10 dividends were given out in 2011 and I have an expected 12 dividends for 2012.

As far as Dividend Payout Ratios go, the 5 year median for earnings is far too high at 100.3%. The 5 year DPR for cash flow per share is not bad at 59%. The really problem is that DPR for earnings is expected to be 116% in 2012. If you look at the CFPS over the past 12 months to June 2012, you get a DPR of 60%. Both these DPRs are growing and this is not good.

The only good thing you can say about the dividends is that the yield is quite high at 11.9%. However, too high a yield can be a sign that all is not well for a stock. The thing is that dividends can be high because investors have no faith in future dividends (or a stock).

As far as total return goes, it has declined over the past 5 and 6 years. The decline is 0.97% and 2.05% per year over the past 5 and 6 years. Dividends were 13.87% and 12.29% per year over the past 5 and 6 years. This leaves the capital losses at 14.84% and 14.34% per year over the past 5 and 6 years.

Shares recently increased by just over 50% as the non-controlling interest in the company was changed into shares on the conversion of this stock from an income trust to a corporation. On such conversions, dividends are often decreased. However, dividend decreases started before the conversion. The company managed to lower DPRs in 2009 and 2009, but they went up again in 2011 and it would appear that the same will happen in 2012. This is the wrong direction for DPRs.

Because of the big increase in outstanding shares in 2011, revenues are better than revenues per share. The growth in revenues is very low with growth at 1.2% and 1.6% per year over the past 5 and 6 years. Revenue per share has declined by 7.2% and 5.5% per year over the past 5 and 6 years.

Earnings are even in a worse decline, with the decline at 19.5% and 18.1% per year over the past 5 and 6 years. Looking at Cash Flow per Shares does not give a happier story, with the declines at 19.34% and 8.38% over the past 5 and 6 years. The decline in Book Value per share is not quite as bad as BVPS only declined at 8.7% and 7.6% per year over the past 5 and 6 years.

Analysts do not expect much increase in earnings over the next couple of years. Also, there seems to be no improvement in cash flow either. For 2011 I have used the EPS value that excluding goodwill impairment. However, this only gives a very weak Return on Equity of 6.1%. Because the comprehensive income includes this goodwill impairment, you get an ROE based on comprehensive income at a negative 46.9%. The 5 year median ROE at 8% is not quite as bad, but this is a rather weak value also.

The current Liquidity Ratio is rather weak at just 1.03. The 5 year median is bang on what one would want with a value of 1.50. The Debt Ratio is quite good at 2.32 and it has an even better 5 year median value of 2.95. The current Leverage and Debt/Equity Ratio at 1.76 and 0.76 are quite good and they are a bit lower than the 5 year median values of 2.23 and 0.71.

One way of valuing a small company is to look at Gross Profit Margin. This is a financial metric we can use to assess a company's financial health by see the proportion of money left over from revenues after accounting for the cost of goods sold. Unfortunately, the Gross Profit Margin on this company is going the wrong way. In 2006 the GPM was 25.13%. In 2011 the GPM was 24.41. For the most recent quarter, the GPM was 22.54%. It is going the wrong way. However, the Operational Profit Margin Ratio (CF/Revenue) seems to be improving.

The Price/Sales Ratio is quite good at 0.25. (This means that you are getting a $1 of sales for just $.25.) This would be a bargain if the company was making money. This company is making money and it has never had a negative EPS, except when it wrote off some of its goodwill in 2011. The problem with this company is that the goodwill left on its books is still 113% of the company's market capital. Will the company need to write off any more goodwill? This is a possibility.

The ratio of the company's goodwill and its market cap is getting better, but it is still over 100%. In fact the Globe and Mail just had an article on this very subject at the end of August. The recession is not yet over and things might get worse before getting any better.

Unfortunately, this stock might get hammered more before we see any real improvements. The company has little debt, so chances are good it will survive. But for an investment in a company, you want a company to thrive, not just survive. It is producing some good statistics, but a lot are going the wrong way.

Coast is a leading independent supplier of major household appliances and accessories. Headquartered in Vancouver, British Columbia, we sell to developers and builders of multi-family and single-family housing, designers and retail customers. Its web site is here Coast Wholesale Appliances. See my spreadsheet at cwa.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.