Geoff Gannon March 18, 2011

Blind Stock Valuation #1 – Watlington Waterworks

A couple months ago, I posted a blind stock valuation. Basically, I just gave you 7 important financial figures for each of the last 6 years and asked you to value the stock as best you could. I didn’t give you the name of the stock.

And – although I didn’t tell you this – I multiplied all figures by 10 to eliminate any bias caused by you realizing this was a very small stock.

I promised I would give a copy of Ben Graham’s The Intelligent Investor to the reader who sent in the best email telling me how much the stock was worth.

The stock was actually a foreign microcap called Watlington Waterworks. It’s a water company on the island of Bermuda.

Bermuda is a rich island nation – actually a territory of the United Kingdom – 650 miles off the coast of South Carolina. It has a population under 70,000. Bermuda’s economy is based around insurance and American tourism. Its currency is convertible into U.S. dollars at a fixed 1-to-1 ratio.

There is no fresh water on the island. Bermuda’s water comes from removing salt from seawater and collecting rainwater.

This is an analytical exercise. Not a stock tip. In all likelihood, your broker doesn’t have the ability to buy stocks for you in Bermuda.

Here is the information I provided about the company:

And here is the best email a reader sent in:

1) Growth in sales and earnings is roughly tracking inflation.  This is a mature, roughly no-growth business so I will pay no premium for growth.

2) FCF is consistently less than earnings.  So this is a business with a significant amount of long-term assets which causes CapEx to exceed accounting depreciation due to the effect of inflation.

3) FCF in this case is a more relevant determinant of value than earnings.

4) The FCF yield on equity has averaged roughly 10% over the 6-yr period presented.

5) My hurdle rate for investment is 10%, therefore I am willing to purchase the company at 1X equity.

6) So I would be willing to pay up to 181/10.5 or approximately $17.25 per share.

7) An additional consideration: The company is carrying very little debt and has stable earnings.  As a control buyer or an activist investor, I would give strong consideration to leveraging up my equity.

The stock trades on the Bermuda Stock Exchange. Shares last traded hands at $13.95 a share.

Most readers sent in valuation estimates in the $20 to $30 a share range.

Thanks to everyone who participated.

Talk to Geoff About Blind Stock Valuation