Friday, December 21, 2012

Chesswood Group Ltd

I do not own this stock Chesswood Group (TSX-CHW, OTC- CHWWF). In the next paragraph is the hype for the stock and then after than I will talk about what I found.

A reader wrote me that he was researching and found a company that he hoped I could give me a brief outlook on. He said that the company is Chesswood Group (TSX-CHW) and they are basically a financial leasing company. In 2009 they increased dividends from 2.5 to 3.0 cents per month. In 2010 they increased dividends to 3.5 and to 4.0 and to 4.5. In 2011 they increased dividends to 5.0 and this year increased again to 5.5 per month. He writes that he knows I like that sort of a trend. He also said that they do not appear to have much long term debt but in 2011 seemed to really increase leasing obligations and in 2011 cash flow was negative. Currently they are yielding about 7.5%

So, let's first look at the dividends. The dividends were increased since 2009. However, what is not mentioned is that dividends were decreased by 74% over 2008 and 2009. The 5 year dividend growth rate is a negative 6.7% per year. This is not a good sign.

This company does not have growing dividends; rather the dividends have tended to fluctuate. This may change since they are no longer an income trust, but I do not know.

Next question is "Can they afford the dividends being paid?" The basic answer is no. The best year was 2010 when the Dividend Payout Ratio was 67%. It was 106% in 2011. Mostly, they either paid out too much money or they made no money to pay out. This is another bad sign.

They have done better in the Dividend Payout Ratio for cash flow per share, with the ratio around 23%. However, this stock is no longer an Income Trust and earning a profit does become important. They just increased the dividends by 10% in 2012. However, cash flow, over the past 5 years has grown at the rate of 5.72%. You cannot increase dividends faster than cash flow and EPS grows.

Next, has it made any money for the shareholders? To the end of December 2011, the total return was 6.09% per year, with 9% per year from dividends and a capital loss of 2.9% per year. Share prices are up sharply during the current year by 42.9%.

Next thing to look at is debt ratios. For this company, the Liquidity Ratios are not easy to come by as they do not give you current assets and liabilities in their statements. I was depending on others sites and doing my own calculations. Liquidity Ratios have been rather low with a 5 year median of just 1.18. Sometimes they have had good cash flow and sometimes not so much. This is not good.

If you do not have good Liquidity Ratios you need a strong and growing cash flow. This company seems to have a fluctuating cash flow. Cash flow therefore does not seem to be able to overcome low Liquidity Ratios.

The Debt Ratios are acceptable, with the 5 year median being 1.55. The current one seems to be at 1.61. A Debt Ratio of 1.50 or above is acceptable. The current Leverage is a little high at 3.14 and Debt/Equity Ratios are ok at 1.96.

It would be a plus if management had a significant ownership in this company. However, the CEO owns shares worth $0.8M (less than 1% of outstanding shares) and options worth $5.9M. The CFO has shares worth $0.3M and options worth $1.6M. The only significant ownership I can find is by Edward Sonshine who is an Advisor to the Board. He has shares worth $12.2M and almost 14% of the outstanding shares.

There does not seem to be much in the way of institutional ownership. Just under 5% of the shares are owned by 4 institutions. They have decreased their ownership by 18% over the past 3 months. This is not good.

There seems to be one analyst that is following this stock and his rating is a buy. He gives a 12 months stock price of $10.50 with 7.33% from dividends and 16.67 from capital gain. He expects sales to rise over the next two years, and with rising says he expects rising EPS. Over the past 5 years, Revenue has increased by 2.53% per year. However, revenue per share has fallen 3.51% per year. Not a great performance so far.

The future is just speculation. There is nothing in the past that supports it as far as I can see.

Chesswood Group Limited is a financial services company operating primarily in the specialty finance industry. Chesswood's approach is to acquire financial services businesses. It owns Pawnee Leasing Corporation, located in Fort Collins, Colorado, is Chesswood's largest operating company. Pawnee's assets comprise approximately 75% of Chesswood's consolidated assets. Chesswood recently added Case Funding Inc., a U.S. legal finance company, to its specialty finance portfolio. Chesswood owns of one of the larger Acura dealers in Canada, Acura Sherway, in addition to Canada's only eDealer, Its web site is here Chesswood Group. See my spreadsheet at chw.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 or StockTwits.

No comments:

Post a Comment