Friday, November 29, 2013

Gildemeister: A Better Cup of Tea?

Some who read the recent post on American Vanadium (AVCVF:  OTC) saw too much risk in the low priced micro-cap stock.  As exciting as the new industry of high capacity energy storage might be, the risk inherent in early stage companies is….well a ‘buzz killer.’  Limited financial resources, no operating track record and unproven products are just a few of the worries that can keep a shareholder awake at night. 

For investors looking for a better cup of tea, an alternative access road to the large capacity storage market might be through American Vanadium’s partners.  The company hopes to supply high purity vanadium to Gildemeister for that company to make is CellCube batteries.  Gildemeister markets the CellCube as a low cost energy storage solution for wind and solar power generators.  The CellCube has power ratings from 10 kilowatts up to 200 kilowatts and can be scaled into the megawatt range.  It complements the company’s photovoltaic and wind turbine products.  Since the first model was launched in 2008, Gildemeister boasts over 8,000 installations for its CellCube batteries around the world.  Gildemeister came by the CellCube product line by taking a majority position in an Austrian company called Cellstrom GmbH. 

Gildemeister is now DMG Mori Seiki AG after the tie up with Mori Seiki.  Machine tools are the majority of the conglomerates business.  Make no mistake, this is a modern business with innovative high-tech machines and turning and milling with the most up-to-date ultrasonic and laser technologies at play.  The company’s energy business offers solutions for energy production and storage, including large-scale photovoltaic plants and wind turbines for industrial customers. 

In 2012 the company earned 1.32 euros per share (US$1.84) on 2.0 billion euros US$2.7 billion) in total sales.   About 35% of the sales were in Gildemeister’s home turf in Germany.  So far in 2013, the pace of sales has grown in the high single digits compared to last year and earnings have grown by 11%.  Along with the September 2013 quarter results, management made bullish remarks on expectations for the fourth and final quarter of 2013 and pledged a higher dividend payout. 

The strong income has helped build up equity to 1.1 billion euros (US$1.5 billion) at the end of September 2013.  Total liabilities totaled 832.1 million euros (US$1.1 billion), of which the majority is trade related accounts.  The company has nominal long-term liabilities, most of which are associated with pension commitments.

Gildemeister is clearly a substantial company.  The stock is trading near 23.00 euros per share (US$31.50), implying a price-earnings multiple of 15.8 times trailing earnings.  Do not forget the dividend yield near 1.5% weighing whether that is a fair price.  Investors have a choice of the XETRA or the Frankfurt exchanges to take position in the stock.

Before you run out to take a position in this Germany-Japan tie up, take note of the fact that despite management’s bullish prognostications for sales and earnings in the near-term, there has been weakness in the company’s core machine tools business.  Demand conditions have been under pressure.  The company’s order intake was down 5% in the first nine months of 2013 compared to the prior year.  What has made management so enthusiastic is that expectations had been for an even greater decline.  The group seems to feel that the pace of orders has been exemplary at the many trade shows its sales representatives attend.

As beguiling as the big sales numbers and low-debt balance sheet might be, also take note of unique risks of the multinational corporation.  Gildemeister management has to keep an eye on the Euro, the U.S. dollar, the Japanese yen and China’s renminbi.  Recently, the Euro has gained against all these currencies.  This means that the company’s products sold in Euros are more expensive for customers in the U.S. and other dollar-dependent markets like China.  The silver lining in this storm cloud is that now that Gildemeister has a Japanese partner, its yen-denominated machine tools have an advantage.

If Gildemeister seems too complicated, American Vanadium has also been whispering sweet nothings into the corporate ear of Sumitomo.  We will look at that company in the next post.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


No comments: