General Donlee Canada Inc

I do not own this stock (TSX-GDI, OTC-xxx). I got the name from MPL Communications' Buy and Sell Adviser email. The write up was by Keystone Publications. I have found that stocks recommended by Keystone Publications and especially by Ryan Irving of Keystone to be good to great stock. So I investigated this stock.

Well, it is hard to say if this was a waste of time or not. The write-up says that the company has been profitable during the 11 years of a public company. This is not true as they had losses in 2003 and 2004. This is a long time ago, but still they were rather large earnings deficits.

There is a $12M investment by Geosam Investments Limited owned by George Armoyan. There is an interesting article on him at Globe Advisors. The article calls him the best investor in Canada that you have never heard of. There is a News Wire article dated in 2007, where George Armoyan buys more units in this company. Then his company was Clarke Inc.

There is a positive report on this company by Canadian Dividend Investor blogger.

The main good thing I see about this stock is the very good dividend yield which is currently at 6.89%. It used to be higher when it was an income trust, but with the change to a corporation, dividends were decreased by almost 40%. They are managing the transition from Income Trust to Corporation well. The dividends were lowered and the Dividend Payout Ratios seems to be under control.

Shareholders have made money on this stock. The 5 year total return was 11.28% per year. However, 11.08% per year was from dividends and only 0.23% from capital gains. With the dividends lower, you will not get the same return.

In the past the company has been paying out in dividends more than they have earned. However, the DPR for earnings has been decreased and was at 70% and 84% in 2011 and 2012. They have also paid out more than the cash flow in the past, but for DPR for CFPS was at 47% and 32% for 2011 and 2012.

There are things that I do not like about this stock. The Debt Ratio is just 0.94. That means that the assets cannot cover the liabilities. The Liquidity Ratio is good at 1.67. The company's book value is negative and it has been negative for the last 3 years. This is mainly because they have paid out more in dividends than they could afford to pay.

The company has been very busy buying back shares. Outstanding shares have decreased by 7.4% and 5.1/% per year over the past 5 and 10 years. Revenues have only increased by 0.9% and 7.3% per year over the past 5 and 10 years. However, the Revenue per Share has increased by 9% and 13% per year.

When the per share values are lower than the total values (i.e. Revenue per Share vs. Revenue) this might point to the fact that the growth, when there is any, of EPS and CFPS is not as good as it might look. Would not the shareholders have been better served if debt was paid down rather than the company buying back shares?

The thing is that companies with weak balance sheets, as this company has, have a greater chance of going bankrupt in hard times than companies with strong balance sheets. The current economic climate is not great and especially at this time I personally prefer companies with strong balance sheets.

The only standard stock price test I can do is the Price/Earnings Ratio test. The 5 year low, median and high median P/E Ratios are 5.96, 7.59 and 9.22. There is no analysts following this stock so using the last 12 month EPS that I have and that is for the financial year of 2012, I get a P/E of 12.16. On a relative basis, this P/E is high. (On an absolute basis it is not particularly high. A P/E of 30 or more is considered high and a P/E of 10 or less is considered to be low.)

With a negative book value, I cannot do the Graham Price test or the Book Value test. The dividend yield test would not be good because of recent dividend decline and the structural change from an Income Trust to a Corporation.

If you look at the 5 year median Price/Cash Flow per Share Ratio, I get one of 5.19. The current P/CF Ratio is at 4.67 a value that is 10% lower and suggests a reasonable price. If you look at the 5 year median Price/Sales per Share Ratio, I get one at 0.73. The current P/S Ratio is 0.93, a value some 27.6% higher and this suggests that the stock price is relatively high. (Although on an absolute basis, a P/S Ratio at 1.00 or lower is considered to be low ratio and therefore a good stock price.)

It seems that some people think that this company will do very well for the shareholders in the end and they may be right. However, I do not think that this is a small cap stock that I would like to buy. I do not favour small companies (or any company) with a weak balance sheet. However, the problem is with the Debt Ratio rather than the Liquidity Ratio. See my spreadsheet at gdi.htm.

General Donlee is a leading solution provider of complex machined products, serving the Aerospace, Oil and Gas, and Nuclear and Power Generation industries. Its web site is here General Donlee.

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.