I do not own this stock of K-Bro Linen Inc. (TSX-KBL, OTC-KBRLF). People were talking about this stock at the 2009 Toronto Money Show. This was one income trust being touted as currently a good buy with very good yield. It was also recommended by Aaron Dunn who is the Senior Equity Analyst for Keystone Publishing Corp, a publisher of Canadian investment newsletters.
When I was updating my spreadsheet, I noticed they made less in 2017 because expenses went up faster than revenue. Long Term Debt also went up substantially by some 67% in 2017 and another 65% for the first two quarters of 2018. Last year Long Term debt went up 998% (from 2.4M to 25.8M) in 2016. So, they have increased their debt substantially. However, the Long Term Debt/Market Cap is still at just 0.17 currently.
This stock used to be an income trust and as such the dividend yield would be higher than for corporations. As a corporation, a decrease in yield as expected. The current dividend yield is moderate at 3.12%. The 5 and 10 year median dividend yields are 2.83% and 3.96% with the historical at 5.56% and the yield since the change to a corporation at 2.90%. Note that this company was made public just 13 years ago.
Since Income Trusts can pay out more than earnings in dividends, most of them did just that. This company was no exception. Since going to a corporation, they did a few low increases but they have kept their dividends flat since 2014. We will probably not see any dividend increases before 2019. Analysts see them being flat into 2019.
The DPR for EPS has been coming down. For 2016 the DPR for EPS was 83% with 5 year coverage at 77%. Because of lower earnings for 2017, the DPR for EPS for 2017 was 190% with coverage at 88%. Analysts expect that DPR for EPS will improve greatly by 2019.
All Debt Ratios are good. The Long Term Debt/Market Cap Ratio is still very low even after the second quarterly increases. The one for 2017 is 0.10 with the current one at 0.17. the Liquidity Ratio for 2017 is 1.79 with 5 year median at 1.78. The Debt Ratio is 3.15 with 5 year median at 3.26. The Leverage and Debt/Equity Ratios are 1.46 and 0.46 for 2017.
The Total Return per year is shown below for years of 5 to 13. Under the Capital Gain column is the portion of the Total Return attributable to capital gains. Under the Dividend column is the portion of the Total Return attributable to dividends. See charts below.
Shareholders have made a good return on this stock.
| Years | Div. Gth | Tot Ret | Cap Gain | Div. |
|---|---|---|---|---|
| 5 | 0.86% | 11.06% | 7.44% | 3.62% |
| 10 | 0.87% | 17.44% | 11.84% | 5.60% |
| 13 | 1.27% | 16.27% | 10.21% | 6.07% |
The 5 year low, median, and high median Price/Earnings per Share Ratios are 25.69, 30.52 and 35.35. The corresponding 10 year ratios are 17.58, 20.52 and 23.45. The historical ratios are 16.80, 17.74 and 19.91. The ratios are increasing lately mostly due to a drop in earnings. The current P/E Ratio is 41.85 based on a current stock price of $38.50 and 2018 EPS estimate of $0.92. No matter how you look at this, the P/E Ratios are high. This stock price testing suggests that the stock price is relatively expensive.
Analysts expect the EPS to improve in 2019 and 2020 to $1.61 and $1.69, respectively. This will drop the P/E Ratios to 23.91 and 22.78 based on the current price of $38.50. These are better P/E Ratios, but they are still rather high.
I get a Graham Price of $19.90. The 10 year low, median, and high median Price/Graham Price Ratios are 1.38, 1.61 and 1.84. The current P/GP Ratio is 1.93 based on a stock price of $38.50. This stock price testing suggests that the stock price is relatively expensive. However, this ratio is expected to move to 1.45 in 2019.
I get a 10 year median Price/Book Value per Share Ratio of 2.46. The current P/B Ratio is 2.01 based on Book Value of $201M, Book Value per Share of $19.13 and a stock price of $38.50. The current ratio is some 18% below the 10 year median ratio. This stock price testing suggests that the stock price is relatively reasonable and below the median. If the current ratio was lower by 20%, the stock price would be considered to be relatively cheap.
I get an historical median dividend yield of 5.56%. However, since this used to be an income trust stock, a better yield to use is the one since the conversion to a corporation. That yield is 2.90%. The current dividend yield is 3.12% based on dividends of $1.20 and a stock price of $38.50. This stock price testing suggests that the stock price is relatively reasonable and below the median. Analysts had expected rising prices and drop in dividends would leave most old income trusts with interest rates in the 4 and 5% range. The dividend yield is lower than this range.
The 10 year median Price/Sales (Revenue) Ratio is 1.64. The current P/S Ratio is 1.70 based on 2018 Revenue estimate of $238M, Revenue per Share of $22.65 and a stock price of $38.50. The current ratio is some 3.6% above the 10 year median. This stock price testing suggests that the stock price is relatively reasonable but above the median.
I would discount the P/E Ratio test because it is based on a temporary low EPS. This is the same reason for discounting the Graham Price as the EPS estimate goes into the formula. I like the Price/Book Ratio test as it is based on relatively recent information. It shows the price to be relatively reasonable and below the median. The P/S Ratio is also a good one because expected future revenue is important to expected future earnings. This show the stock price to be relatively reasonable but above the median, but not by that much. So, the stock price is probably reasonable.
When I look at analysts’ recommendations I find Buy (6) and Hold (1) recommendations. There are only 7 analysts following this stock. The consensus would be a Buy. The 12 month stock price consensus is $44.71. This implies a total return of 19.25% with 3.12% from dividends and 16.13% from capital gains.
Lisa Matthews on Fairfield Current talks about an insider of Ronald Graham selling shares in the company and what some brokers have said about the company recently. Lacy Summers on Simply Wall Street says the P/E Ratio is 71.8 while industry average is 17.9. Mary Kom on Fairfield Current talks about a director selling shares. Kris Knutson of Motley Fool says the company has stable long term contracts. However, she thinks the debt levels following expansion and acquisitions may be too high. See what analysts are saying about this stock on Stock Chase. They think it is a good solid business.
The insider selling by Ronald Graham might be interesting, but he is not important enough to be listed in the website. Also, people buy for one basic reason, but can sell for lots of reasons most of which may have nothing to do with the company. Ronald Graham may just need some money. With a director selling shares, you have to wonder why, but still we do not know the reason. I must admit there is a lot of insider selling over the past year and it is at 0.64% of market cap. You would expect insider buying or selling to be closer to 0.01% or 0.02%.
With the article on the P/E being very high, I say so what. It is not because their earnings are valued higher than other companies. It is because they had a bad year and investors are not stupid enough to lower the price to set a reasonable P/E Ratio. In such cases you need to look at other indicators to see what a reasonable price is. I think that P/E Ratios, although quite popular, are not that good for judging stock price reasonableness.
K-Bro Linen Inc provides linen services to healthcare institutions, hotels and other commercial accounts that include the processing, management and distribution of general linen and operating room linen. Its web site is here K-Bro Linen Inc.
The last stock I wrote about was about was Le Chateau Inc. (TSX-CTU, OTC-LCUAF)... learn more. The next stock I will write about will be Linamar Corporation (TSX-LNR, OTC-LIMAF) ... learn more on Tuesday, October 9, 2018 around 5 pm.
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. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.
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