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Today we will be sharing with you one of the most valuable tools in any investor’s toolkit. When you hear toolkit, most would expect it to be something fancy but actually it instead is something very basic, in fact it is about understanding corporate financial statements.

So must have you guess it right this time, the three tools we are talking about is the balance sheet, income statement and statement of cash flows. Knowing how to judge a company’s financials will save you time, effort and most importantly, help you avoid investing in companies that are secretly doomed to underperform.

Let us start first with Balance Sheet. This gives a snapshot of a company at a single point in time. Showing what a company owns (assets), what it owes (liabilities) and its’ net equity (which is the difference between assets and liabilities). You would want to invest in a company with a larger asset base, fewer liabilities and, therefore, a greater net equity value.

The other two financial statements, measure items generated over a specific period of time. The Income Statement measures how well a company is performing. In particular, it tells how much business a company generated (its revenue) and subtracts from this what the company spent (its expenses). The net result is its profits or net income. All else being equal, you’d prefer to invest in a company with higher revenues, lower expenses and, therefore, higher profits (with higher profit margin).

Lastly, is the Statement of Cash Flow. This statement shows how much actual cash a company generated over a given period. Cash is king, so at the end of the day, the more cash a business generates over time, the more valuable the company is. From this statement, you can also determine a company’s free cash flow (calculation: net cash from operating activities minus capital expenditures) which is what’s left after the company pays for all expenses. This is a great measurement of the excess cash a company generates which can be used to enrich shareholders through dividends and buybacks, or to invest in growth.

So next time you think about investing in a company, take a hard look at its financial statements. A better understanding of these financial statements will be a valuable addition to your investing toolkit.

We will dive deeper into each of these financials in our next blogs.

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The central bank of Philippines has raised interest rates to a total of 100 basis points so far this year bringing the rate to 4%.  And with inflation being forecasted to remain elevated at between 5.7 to 6.1% by the end of 3rd quarter, we can expect a few more rate hikes coming before end of the year.

But is there a correlation between Interest Rates and the Stock market?  Generally, the stock market doesn’t like high interest rates with the reason that this increases borrowing cost for companies which can mean lower profits and consequently lowering stock prices.  

Further, higher interest rates may prevent companies from taking on additional debt for capital expenditures.  Without expanding their operations, it becomes harder for companies to grow their profits which can trigger lower stock prices. 

Another point to remember is as interest rates go higher, investors may shift their monies out of the stock market to other more attractive investment opportunities like treasury bonds with little risk.  This shift can lead to fewer stock market buyers to push stock prices higher.

Let’s look at how the Philippine stock market reacted in the past, beginning from 2002 since the Monetary board formally adopted the shift to inflation targeting as BSP’s framework for conducting monetary policy.

Indeed we can observe from this chart that the PSEi does seem to give negative returns when interest rates are higher.  This spells bad news for investors as several economists is expecting more rate hikes from BSP this year to stabilize inflation around the country.  The next rate-setting meeting of the central bank’s Monetary Board is on Sept. 27.


Historical record of Monetary Policy Decisions


Decision on Overnight

Borrowing Rates

PSEi Range after decision

17 January 2002

– 25 basis points to 7.5

1200 to 1400

14 February 2002

– 25 basis points to 7.25

1380 to 1470

14 March 2002

– 25 basis points to 7.25

1360 to 1430

April 2002 to June 2003

Keep steady at 7.0

1000 to 1430

2 July 2003

– 25 basis points to 6.75

1230 to 1310

31 July 2003 to March 2005

Keep steady at 6.75

1200 to 2190

7 April 2005

+ 25 basis points to 7.0

1820 to 1930

5 May to 25 August 2005

Keep steady at 7.0

1810 to 2050

22 September 2005

+ 25 basis points to 7.25

1930 to 1985

20 October 2005

+ 25 basis points to 7.5

1910 to 2100

17 November 2005 to 31  May 2007

Keep steady at 7.5

2000 to 3800

12 July 2007

Adjusted to 6.0

2850 to 3800

23 August 2007

Keep steady at 6.0

3200 to 3700

4 October 2007

– 25 basis points to 5.75

3600 to 3880

15 November 2007

– 25 basis points to 5.5

3440 to 3750

20 December 2007

– 25 basis points to 5.25

2990 to 3660

31 January 2008

– 25 basis points to 5.0

2900 to 3350

13 March to 24 April 2008

Keep steady at 5.0

2710 to 3050

5 June 2008

+ 25 basis points to 5.25

2350 to 2720

17 July 2008

+ 50 basis points to 5.75

2390 to 2780

26 August 2008

+ 25 basis points to 6.0

2370 to 2770

6 October to 20 November 2008

Keep steady at 6.0

1780 to 2550

18 December 2008

– 50 basis points to 5.5

1830 to 2010

29 January 2009

– 50 basis points to 5.0

1810 to 1950

5 March 2009

– 25 basis points to 4.75

1750 to 2070

16 April 2009

– 25 basis points to 4.5

2060 to 2350

28 May 2009

– 25 basis points to 4.25

2350 to 2620

9 July 2009

– 25 basis points to 4.0

2480 to 2890

20 August 2009 to 10 February 2011

Keep steady at 4.0

2800 to 4400

24 March 2011

+ 25 basis points to 4.25

3740 to 3960

5 May to 1 December 2011

+ 25 basis points to 4.5

3880 to 4320

19 January 2012

– 25 basis points to 4.25

3770 to 4700

01 March 2012

– 25 basis points to 4.0

4610 to 4950

19 April to 14 June 2012

Keep steady at 4.0

4900 to 5350

26 July 2012

– 25 basis points to 3.75

5140 to 5310

13 September 2012

Keep steady at 3.75

5240 to 5440

25 October 2012

– 25 basis points to 3.5

5400 to 5830

13 December 2012 to 19 June 2014

Keep steady at 3.5

5600 to 7400

31 July 2014

+ 25 basis points to 3.75

5700 to 7350

11 September 2014

+ 25 basis points to 4.0

6800 to 7350

23 October 2014 to 12 May 2016

Keep steady at 4.0

6050 to 8100

23 June 2016 to 22 March 2018

Adjusted to 3.0

6550 to 9010

10 May 2018

+ 25 basis points to 3.25

7350 to 7850

20 June 2018

+ 25 basis points to 3.50

6990 to 7820

9 August 2018

+ 50 basis points to 4.0

7500 to 7830


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An indicator of bear market is when there is a drop of 20% or more in the market.  PSEi is already in bear market territory now as it is already more than 21.8 percent below its 52 week high of 9,078 last January 29.  Here are some words of advice about how to deal with the bear market environment:

Keep Calm

Just because the market is going down does not mean that you are losing money.  The worst thing that you could do now is to panic and sell your holdings. Remember, that it is only a loss on paper until sold. Selling at the wrong time could result in unnecessary losses.

The difference between a good investor from a novice is that mostly good investors keep a cool head and do not make decisions based on emotion. The ability to do this is crucial in coming out of the bear market relatively unscathed.  Sometimes the best thing to do when being attacked by a bear is to do absolutely nothing.

Drawing up your portfolio

Make sure that your portfolio is balanced comfortably between the different sectors (financials, property, holding, services, etc), dividend stocks or preferred shares and savings in cash.  Most of the time, there is at least one sector or class that performs well even during bear markets.

A bear market is also a good time to access your risk appetite. If you are feeling stressed out due to the market situation, it may be wise to adjust to a less aggressive portfolio. There is absolutely nothing wrong with playing it safe.

Read up

Take a step back and try to find out more information about the situation.  Markets are heavily moved by news: the recent threat of a full-blown U.S.-China trade war is one of the key reasons of negative investor sentiment that lead to an outright dive in global stock market prices.

Make an effort to read through what’s happening in the global and regional economy at least 15 minutes a day. While it does not guarantee that you will not be affected during the next downturn, it helps you to stay ahead of other investors if you know how to spot trends and make educated investments.

Feed the bear

There is a fine line between catching a falling knife and getting a great deal in a sale. Before you decide to feed the bear, make sure that you have a good grasp of the fundamentals of the company.

If the company looks strong, a bear market could be a good opportunity to pick up some shares at a much lower price. These are going to middle to long-term investments, and be prepared to sit on them for weeks, or even months. If they are fundamentally sound and fulfill a real need in the market, you will be glad that the bear market let you obtain more of the shares at a lower price.


Bear markets are not permanent, even if they feel like they last forever.  Patience and discipline are two of the hardest things to adhere to in a situation like this; there is a feeling of helplessness as your portfolio drop in value.  But if you diligently follow the 4 advice described above, you are likely to come out of it better off than other fellow investors. Don’t forget that everyone is bleeding during a bear market .   If you’re losing 5% compared to the market average of 20%, you’re faring much better than everyone else.

We wish you all the best in these trying times but remember there is always sunshine after the rain. The bull will be back!

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  1. Screen the market and identify at least 10 companies you would like to include in your portfolio
    • Look for these fundamental characteristics possessed by the companies:
      • Solid earnings
      • Healthy balance sheet (generating a lot of cash and don’t rely much on debt)
      • Generates a high rate of return on shareholder’s equity
      • Able to generate and retain a surplus of earnings
      • How good of a job the management is reinvesting its retained earnings
  2. Write down the reasons on why you would invest in these companies
    • What are its competitive advantages against other competitors?
    • What are its business growth vectors (must include top and bottom line)?
    • How would the company be in 10 years?
  3. Look at how each company reacted during the 2008 stock market crash
    • The idea here is timing the market is impossible so don’t stay on the sidelines just because you are afraid of the next market crash.The stock price of strong and stable companies recovers very fast (less than 3 years on average) after a market crash.
  4. Start small, but start at least somewhere.Start monthly with 10% of your cash, once you do, it will get easier as time goes on.Remember, investing even with little money can reap big rewards.
  5. Focus on dividend growth.Most of the time, dividend increases are indicative of underlying business success.Management would not raise dividend payments to shareholders if the business was not experiencing growth in revenues, profit, and (most importantly) earnings per share.
  6. When investing, be emotionally intelligent, don’t panic when the market crash.In the long run, the stock market has a pronounced tendency to go back up.The key to making money as an ordinary investor is to ride out those highs and lows and take advantage of the beneficial long-term trend.
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Since late 2017, we have seen quite a number of companies registered their interest in conducting stock rights offer in the Philippine Stock Exchange. 

Stock Rights Offering (SRO) involves the offer of new shares to existing shareholders at a discounted price for the purpose of raising funds for the company.  Capital is raised when investors pay for the new shares that are being issued.  Other ways a company can raise capital are borrowing from banks or issuing bonds.

Impacts of SRO:

  • Company’s net profit gets diluted as the profit is spread over a larger number of shares.
  • Company’s earnings per share will decrease as earnings allocated to each ordinary share an investor has invested in will be diluted.
  • Significant changes to the company’s cash flow or working capital.
  • Further strengthen the company’s balance sheet and allow it to pursue strategic opportunities in core markets.

Let us take Robinsons Land Corp (RLC) as an example. RLC announced efforts to raise capital of Php20 billion by offering 1 rights share for every 3.7217 common shares at an issue price of Php18.20 per rights share.  In other words, for every 3.7217 shares you hold, you will be able to buy another 268.69 shares from RLC at a deeply discounted price of Php18.20. Sounds great, but wait! One must remember that the market price of RLC’s shares will not be able to stay at a particular future price after the rights issue is completed. To make the calculation simple, let us say that you buy 10,000 shares in RLC on the last date before ex-rights, which the share price closes at Php21.60. The value of each share will be diluted as a result of the increased number of shares issued. To calculate the theoretical share price, which is the ex-rights share price, you will divide the total price you paid for all your RLC’s shares by the total number of shares you own.

Php (10,000 x 21.60) + (2686 x 18.20) / 12686 = Php20.88/share

Theoretically, the value of each of your existing share will decline from Php21.60 to Php20.88. However, the loss on your existing shareholding is offset by the gain in value of the new rights shares.

Existing shareholders need to make an investment decision as to whether or not they want to take up the rights issue.

Here are the list of companies that have recently announced SRO.

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Out of 8 companies who have expressed plans to be listed in the Philippine Stock Exchange (PSE) during 2017, only 4 managed to successfully have their plan push through.  We review these four companies as part of our year-ender blog.


Wilcon Depot Inc. – WLCON

Listing Date:  31-Mar-2017

IPO Price: 5.05

Year-end Price:  8.26

Performance since inception date:  +61%

Wilcon was the first company to debut at the PSE in 2017.  Wilcon aims to build a total of network of 65 stores nationwide by 2022 managed to open five new operating stores in 2017 to reach 40 total stores.  During its first two months in the stock market, WLCON price was quite stagnant but price movement started to tick up early June and reached its peak price of 9.7 on 7th of Sep, its price has since stabilized at 8-ish levels.


Eagle Cement Corp.

Listing Date:  29-May-2017

IPO Price: 15

Year-end Price:  14.78

Performance since inception date:  -1.01%

Despite cutthroat competition, cement-maker Eagle Cement managed an 8% increase in its net profit for the first nine months of 2017.  Net sales grew by 12 percent driven by more than 20 percent expansion in sales volume of bagged and bulk cement, partially offset by a decline in the average selling price of cement versus last year’s average.

Other than reaching its high of 16.6 exactly one month after its listing date (on 29th of June), EAGLE had a lackluster price movement in 2017 mostly hovering around 14 level without much significant trading volume.


Cebu Landmasters Inc.

Listing Date:  2-Jun-2017

IPO Price: 5

Year-end Price:  4.88

Performance since inception date:  -1.02%

Recently awarded as 2017’s Best Condo Developer–Visayas based on Lamudi survey, Cebu Landmasters  had a banner year in 2017 as it aggressively expanded its footprint in Mindanao launching multiple residential projects and increased its hotel portfolio.  CLI’s net profit is expected to exceed P1.2 billion on 2017 on the back of P3.6 billion in projected revenues.  This growth is expected to continue next year as the company plans to launch 20 new projects.  To date, 46 projects are ongoing and in various stages of completion.

Similar to EAGLE, CLI price movement in 2017 was disappointing to say the least as it pretty much hovered around 4.50 to 5.10 range since August.


CLC Chelsea Logistics Corp.

Listing Date:  8-Aug-2017

IPO Price: 10.56

Year-end Price:  8.78

Performance since inception date:  -1.20%

A firm led by Davao businessman Dennis Uy, this company was one of the hottest stocks to watch in 2017.  Since its successful listing in August, the company has been on a buying spree, acquiring new vessels, tugboats and other passenger-ship operators as part of its expansion plans after its initial public offering.

With the hype surrounding the company prior to its actual listing date, a lot of investors were excited with the potential capital gains the shares would bring due to high expectations, however, these investors ended up with disappointment as the shares was mostly priced by the market below its IPO price.

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Investment Highlights
Maintained market dominance on both canned tuna and canned meat categories
CNPF  continue to enjoy market leadership  across all categories of its product offering,  with its strategy  of  differentiation geared towards offering wide variety of products across different price points to capture a broader consumer market continuing  to  pay  off  on  back  of  a  growing  middle  class  and  strong  GDP  growth.  The  company  notably  holds  a behemoth share on the canned tuna category, with a market share of 82%.

Double-digit revenue growth retained – Strong demand domestically and internationally
Robust demand both locally and internationally boosted the company’s revenues by a stellar 23.4% y-o-y for the first half of 2017. This performance is mainly attributable to the double-digit growth of its branded business  which saw a 13% y-o-y increase, amplified further by the recovery of its OEM tuna export business which saw strong topline growth of over 60%  on back a surge in average selling prices of tuna in the international market.  Local demand remained resilient despite of having a higher base from last year’s election spending binge.

Higher input costs drag margins and bottomline
The company faced a relatively tough first-half in terms of costs, with margins and bottomline under pressure as prices of raw materials partially mitigated the uptick in revenues. Consequently, margins and bottomline were under.  Gross Margins fell by 3.5 ppts to 26.7% versus the same period of last year. Likewise, on a year on year basis EBITDA margins and net income margins lost 1.5ppts to 14% and 1.3% to 9.2% respectively.

Acquisition of the Hunt’s brand
CNPF,  in  its  efforts  to  further  diversify  its  product  offering  recently  acquired  the  license  to  the  Hunt’s  Brand  from Universal Robina Corporation. The said brand has an 86% market share in the pork and beans category. The acquisition also includes some PPE and inventory. This would allow CNPF to capture  a  broader consumer base and provide the company the opportunity to synergize with its existing  product  offers.  Moreover,  the  initiative  would also help the company diversify risk and minimize exposure to a few input prices, potentially smoothing out margins moving forward.

Using the 2016 P/E (historical P/E method)  as a benchmark for the forward P/E of CNPF, I arrived at a target price of
P17.45 versus the current price of P15.14.  Showing that with the current price level, there is a 15.26% potential upside
for  CNPF  and assuming that the company’s stock price would  revert to its historical P/E levels.  I give the stock a buy

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Business Summary
MAX’s Group (MAXS) is engaged in casual dining full-service restaurant business, with a total of 14 brands under its portfolio. The company’s star brands include Max’s Restaurant, Pancake House, Yellow Cab Pizza and Krispy Kreme. Brands categorized as invigorate are Teriyaki Boy, Dencio’s and Sizzlin’ Steak, while the niche brands are Jamba Juice, Le Coeur de France, Kabisera, and Maple.

Investment Highlights
Sustained double-digit net income growth
Net income grew 12% YoY to P331.72mn during 1H17 on the back of higher sales, with 8% contribution coming from new store openings and relatively steady same store sales growth at 4%. Cost of sales, however, increased 13% to P4.43bn or 73.3% of revenues versus 72.1% in the same period of last year. The uptick came from higher costs of raw materials incurred by the company, specifically from the aftermath of general commodity price hikes.

Mitigating higher direct costs and boosting operating efficiencies
MAXS is strategically implementing efforts to reduce some of its direct costs by sharing logistics across all brands. Despite food and beverage having the largest chunk in cost of sales, the company is trying to minimize its delivery costs to somehow effectively maintain its gross profit margin. Also, MAXS latest initiative to combine Teriyaki Boy and Sizzling Steak in a single outlet should provide lower operating costs for the company in the long run.

Sound organic growth and expansion initiatives
SSSG logged during 2Q17 alone was at 6%. Growth in 1H17, however, was tempered by lower SSSG recorded in 1Q17, thus  translating  to  a  mere  4%  growth  during  the  period.  MAXS’  expansion  initiatives,  on  the  other  hand,  remain aggressive as the company stays committed with its plan to open a total of 1,000 outlets by 2020. During 1H17, MAXS rolled out 41 new stores, but closed 13 stores and converted 1 outlet.

Share Price Performance

Financial Highlights

Key Ratios

Valuation and Recommendation
Using 2-year historical average P/E of MAXS and PIZZA as a benchmark for the forward P/E of MAXS, I arrived at a
target price of P19.77 versus the current price of P19.86. This shows that at the current price, there is no potential upside
for MAXS despite the 11% YoY growth in net income projection for 2017 at P681mn. I suggest waiting for the store
rationalization efforts and expansion initiatives of MAXS to materialize in its earnings first before buying the stock. I am
rating MAXS with a HOLD rating.

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Business Summary
Cebu Landmasters, Inc. (CLI), established in 2003, is a homegrown developer in Cebu. Its portfolio mix is composed of residential,  commercial,  hospitality,  industrial  and  mixed-use  that  cater  to high-end,  mid-market,  economic  and socialized housing segments of the market. Majority of CLI’s projects are located in Cebu, while others are in Cagayan de Oro and Davao City.

Investment Highlights
Net income doubled to P634mn in 1H17, on track to achieve P1.2bn guidance for 2017
Earnings results registered in 1H17 was stellar as CLI managed to record 164% YoY growth in net income at P634mn. Total revenues surged by 107% YoY to P1.81bn., driven primarily by robust real estate sales at P1.79bn (+108% YoY). Better gross profit margin at 51% versus last year’s 46% also contributed to the strong earnings performance. Given that CLI has achieved roughly 53% of its P1.2bn earnings guidance for full year 2017, the company is likely to achieve or even earn more beyond its target.

Higher reservation sales to translate into higher revenue realized moving forward
Reservation sales recorded in 1H17 was P2.84bn, only 4% lower than 2016’s full year figure of P2.95bn. This figure could possibly breach and go beyond the P3bn level given that there are still 7 projects worth P10.61bn on the pipeline for the 2nd half of this year. CLI targets to launch 14 projects in 2017. Out of the 14, the company already launched 7 projects worth P7.09bn in 1H17.

Covering key growth areas, capitalizing from infra push
With CLI having the 2nd largest market share in terms of the total supply of condominium units in Metro Cebu and having exposure in several other key growth areas, aggressive infrastructure push by the government is seen to benefit the company. Improving transportation, particularly in Cebu, could help ease travel time and provide accessibility to property owners.


Status of Projects


Financial Highlights


Key Ratios

Valuation and Recommendation
Using 2-year historical average P/E of CLI’s closest peers as a benchmark for the forward P/E, I arrived at a target price estimate of P8.70. Comparing to the current price of P5.04, CLI has a potential upside of 73%. This was on the back of strong earnings growth prospects in 2017 for the company. It is seen that the company will grow its net income by 71% YoY to P1.2bn compared to P702mn reported in the previous year. In addition to that, aggressive project launches are also seen to contribute significantly to CLI’s earnings potential moving forward. I am rating CLI with a BUY rating.

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Business summary

A subsidiary of Ayala Corporation, Integrated Micro-Electronics, Inc. is engaged in providing electronics manufacturing services, power semiconductor assembly and test services in the world.  The company serves markets that include automotive, industrial, medical, telecommunications, storage device and consumer electronics industries.  Integrated Micro-Electronics was founded on August 8, 1980 and is headquartered in Binan, Philippines.

Highlights in 2016

  • Ranking up to sixth place by revenues among the world's top provider of electronic manufacturing services to automotive industry.
  • Partnership with Austria’s KTM to produce an annual 20,000 motorcycles starting 2017, 70% of which for exporting to China, and rest to Southeast Asian countries.
  • Acquired a controlling stake in VIA Optronics (a leading German display solutions company) on Sept 2016 to strengthen its competitive position.VIA offers optical bonding and display solutions for various applications like Display in cars, POSand POI, Collaboration devices, etc.

Positives on this acquisition are (a) increasing demand for touch panel display applications in the automotive industry (b) VIA has an active engagement with 7 of the top 10 automotive display system suppliers in the world

  • IMI to play a key role in supporting AC Industrial Technology Holdings, a newly formed subsidiary announced on Aug 2016 under Ayala Automotive Holdings for the development of automotive and manufacturing divisions.This is part of the long-term ambitious strategy of Ayala to make Philippines a regional hub for next-generation cars, including autonomous vehicles.
  • Announced building of new manufacturing plant in Serbia for expansion of its European footprint to serve a growing market for automotive components in the region.The plant is expected to start construction by 2017 and commence production by 2018.This move is the same strategy being adopted worldwide by manufacturers wherein the manufacturing is as close as possible to the markets where end-users are located to reduce transport charges while reducing the time taken for this activity, which enable savings for both the supplier and the end-user.

Growth prediction

While IMI currently contributes the least among all Ayala’s listed subsidiaries to the group earnings, this might change moving forward as Ayala is indicating it will capitalize on IMI as part of its long-term strategy of leading the resurgence of manufacturing industry in the Philippines. 

Also amid the company’s slowing revenues in its China operations, revenue from Europe and Mexico operations remains resilient and continuously growing.

Forecasting where the stock’s price could head in the 2017


According to the company’s fillings, IMI registered a net income of $20.8 million during the first 9 months of the 2016, 5% lower year-on-year, and since the full year results for 2016 is yet to be available, let’s assume that they managed to earn $6 mil in 4Qtr of 2016 and with that, the P/E ratio would be 8.76 for year 2016.

Based on analysts’ estimates, IMI would report earnings in 2016 and 2017 at 0.79 and 0.84 respectively.  However the recent quarter’s unexpected decline in earnings could very well drag down the FY2016 figures making the earnings estimate less likely for this year.

Assuming that all the good operational highlights in 2016 would slowly start to translate and improve the company earnings with a 5% increase in 2017 and keeping the P/E ratio at 8.50 since this seems to be the average ratio the last few years (from 2013 to 2016) no matter how it’s earning have performed.

Using forward P/E ratio and its predicted earnings in 2017 as the formula to calculate the value of the  stock, the share price could well reach 11Php which is close to 50% upside potential from its current price of 6.10.

Disclosure: I am long on IMI.

Disclaimer:  This is not a stock recommendation but is an opinion of the writer.  Please conduct your own independent research before making a purchase decision.

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