Is it really time to be thinking of the classic fundamental investing strategy of buying on the dip? Many would argue the recent world wide market downturn is more a heart pounding plunge than a dip. In theory, buying on the dip should allow investors to buy shares at discounted prices. In practice, the strategy needs to take into account the nature of the dip. In situations where there is extreme volatility across the entire market, the strategy makes sense. If you believe the recent downturn is largely due to macroeconomic concerns like global growth and sovereign debt, you can look for shares whose dip has nothing to do with the company itself or the sector in which it operates. However, many an unwary investor has been burned by the flip side of that strategy – catching the falling knife. Even in markets driven downward by global concerns, some shares will fall not only because of the overall market, but also because there is something about the share that makes it particularly vulnerable. In last week’s 18 Share Tips column on thebull.com, analyst Andrew Inglis of Shadforth Financial Group suggested there is a buying opportunity to be found in Australia’s number one online job source, Seek Limited (SEK.) Inglis makes a good case for Seek, but does the employment picture in Australia right now suggest Seek could be a falling knife? As you may know, recently released figures from the Australia and New Zealand Bank’s (ANZ) job ad index showed both print and online job advertising decreased slightly in July; continuing a trend that began in January. While the declines are very modest – less than one per cent – there are other signs that raise concerns about the Australian economy, such as consumer sentiment and retail sales. What do the fundamentals of SEK tell us about their ability to maintain their growth going forward? We can start with some basic market valuation ratios, comparing Seek to the Sector averages in which it operates – Commercial Services and Supplies. Market Valuation Ratios
SEK Sector P/E 18.97 12 P/B 5.45 1.11 P/S 6.85 .44 PEG .96 .69
The high Price to Earnings Ratio suggests market participants see SEK as a growth share. The Price to Earnings Growth Ratio suggests it is slightly undervalued. The Price to Book and Price to Sales Ratios indicate market participants are willing to pay more for these shares. Now that we have a glimpse at how the market views Seek let us turn to a comparison of their year over year performance on revenues, net profit after taxes, earnings per share, and dividends per share. Year over Year Comparisons
HY FY10 HY FY2011 $ (+/-) % (+/-) Revenue 130.3m 159m +28.7m +22% NPAT (Net Profit after Taxes) 47.9m 36.6m +11.3m +31% EPS (Earnings per Share) 10.9 cents 14.2 cents +3.3 cents +30% DPS (Dividends per Share) 5.2 cents 6.8 cents +1.6 cents +31%
There is not much not to like with this picture. The company is growing in profitability and earnings as well as increasing dividend payments to shareholders. The final thing we need to consider before moving from a quantitative analysis to a more qualitative view is debt. Here are some year over year comparisons for total long term debt and debt to equity ratio.
FY 2010 FY 2011 Long Term Debt 99.6m 111.3m Debt to Equity Ratio 17% 24.2%
They have decreased both their total debt and their reliance on borrowing – the lower debt to equity ratio. While these numbers are solid, all the numbers we have looked at are backward looking and our concern with Seek is the future, not the past. For that we need to look to the company’s annual reports found on their website to dig into their business model and growth prospects for the future. A good place to start is to review the opinions of the original analyst recommendation from which we initiated our search. Here are some highlights from what Andrew Inglis had to say about Seek: • Seek is number one for online job ads in Australasia, south-east Asia, Mexico and Brazil. • Seek is number two in China. • Many of these countries still have relatively low internet usage rates. • Employers will continue to switch to online advertising. • Seek is also building an education and training business. A summary of analyst opinion in a recommendation serves as a good starting point for things to investigate in the company’s reports and presentations. First we learn that Seek’s Australian and New Zealand operations account for a massive 83% of the total time job seekers spend online. Their international operations are associate companies, and Seek continues to invest in their growth. Location is their most relevant advantage. Most are in the Asian region, including sites in Indonesia, Hong Kong, Singapore, Malaysia, Thailand, the Philippines, and China. As you know, the Asian region has weathered the recent troubles and continues to grow. Many believe there is a definite shift of economic power and influence underway from the West to the East, driven in large part by China’s phenomenal growth. In short, Seek is well positioned in that area of the world where growth is expected to continue. Second, we learn although the volume of job ads have shifted dramatically from print to online, the actual share of spending is split 50-50, indicating room for further growth in online ads. Third, while employment is Seek’s largest income generator, they are expanding their other division – education. As business models go, their model of providing a single platform where users can access resources to get skills needed for featured employment offerings is actually quite brilliant. They are establishing a partnership with one of Australia’s leading providers of vocational training – Swinburne University of Technology – to build educational courses available online. Seek maintains a data base of those who have used the site to look for jobs which provides them an impressive market for these new course offerings. There is much more you can learn from investor presentations on the Seek website, but we already have a picture of a company in a good position to withstand global shocks if for no other reason than the countries where it operates. Consider this – the population of Australia is around 22 million. There are about 210 million people in Brazil; 243 million in Indonesia, and 1330 million in China. While Internet usage in fully developed countries like Australia and New Zealand is high, some experts say internet penetration in countries like China, Brazil, and Indonesia is well below 50%. That is impressive growth potential. Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.
More articles from this week's newsletter 18 Share Tips - 22 August 2011
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Bullish Outlook For Seek's Global Domination
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