DMC: A case of good management

Is there a difference between a “great company” and a “great investment?”

According to investment gurus the answer is “yes.”  The two, they say, can be very different and that a “great company” is not necessarily a “great investment.”

True enough, wonderful businesses may fetch fire-sale prices at one time from the investing public while money-losing businesses may be priced and valued like crown jewels in another time.

Let me may add, though, that a “great investment” will always be made of a “great company.”

A great company is one that is engaged in a very profitable trade or commercial enterprise. This can happen in any of two business situations or circumstances.

Great company

First, the company could be profitable because it has competitive advantage, or which “The Oracle of Omaha,” Warren Buffett, prefers to call “economic moat.”

This may happen in a company that is enjoying a market that may be extraordinarily huge and sparsely exploited. This means the company is enjoying a monopoly of sorts or very little competition.

The company could have such a wonderful, unique or “state-of-the-art” product that gave it competitive advantage over other similar products in the market.

Second, the company could be very profitable because it is simply managed efficiently. As such, it is able to hold off competition and is able to deliberately generate consistent profits and solid returns on stockholders’ equity (ROE) and assets (ROA), to mention a few measures of profitability. In any which case, the company is making profits.

Great investment

A great investment is about a company that is profitable and more. In particular, its goal is focused on creating and enhancing stockholder’s value.

The company is not just earning profits in excess of cost of capital or what is described in reference books as “generating substantial cash relative to the amount of investments made,” but is also able to control and improve the company’s net margin (net margin is net income as a percentage of sales) and finding new innovative ways to enhance continued growth and value.

In other words, a great investment is about a company that does not only have wonderful financial performance at the present time but is positioned for long-term sustainable growth and profitability.

The one common factor that makes a great company a great investment or vice versa, is the company’s management.

Bottom-line spin

DMCI Holdings Inc. (DMC) is an example of a great company and a great investment. It’s a company that had phenomenal growth and profitability due to good management.

From its latest SEC Form 17-Q filing, DMC has not only strengthened its financial standings but also improved its chances for continued growth and profitability into the future.

Net revenue grew by 19 percent to P26.22 billion in the first half of the year from P22.11 billion a year ago. Net income amounted to P7.29 billion compared to P5.24 billion in the same period in 2010. This represents a 40-percent leap in revenue for the current year.

In the same period, DMC realized a net profit equivalent to P1.99 per share. This amount is about 27 percent higher than the net profit achieved a year ago. It is also about 67 percent of the reported net income for the whole year of 2010.

DMC’s financial condition further improved, as well. Total assets and net assets increased by 18 percent and 16 percent, respectively.

Cash rose by about 76 percent to P17.5 billion. This came from DMC’s various business and syndicated loan raised by the real estate business.  (This included the cash set aside for cash dividend amounting to P2.65 billion declared in May 2011 but subsequently paid in July 2011).

DMC has a strong current ratio (current assets over current liabilities) equivalent to 2.19 times for every peso of liability. Its debt-to-equity ratio (total debt over total equity), in the meantime, is also very favorable. It has only about 1.16 times debt for every peso of equity.

The only downside is its free float level. At the moment, only about 28 percent of its 2.66 billion listed shares are potentially free for trading. In conclusion, at DMC’s current price of P41.50, its share price is only trading at 10.43 times against the current market earnings multiple (PER) of 14 times. At this ratio, DMC’s market price should be about P55.70 apiece.

Other updates

The market price of Lepanto Consolidated Mining Co. (LC) has been downhill since two weeks ago. This was precipitated by the surprising report that it was not going to make it in the recomposed list of stocks that will comprise the new benchmark index that will take effect Tuesday following the revision of the policy on the matter.

And as if that was not bad enough for its share prices to go down, LC was the subject of another bad news that sent its share prices to trade lower again last week.

According to unverified reports, the company is slated for a secondary offering—a development that could only be interpreted to mean that the principals of the company are taking their profits which, in turn, may send the message that no further initiatives are at hand to assure the continued growth of the company.

Lastly, apologies to Papa Securities Corp. for not having the proper attribution in the stock updates for Banco de Oro Unibank Inc. (BDO), Manila Water Co. Inc. (MWS) and Ayala Land Inc. (ALI), which came out in this column on Aug. 16, 2011.

(The author is a licensed stockbroker of Eagle Equities Inc. You may reach Market Rider at [email protected] or directly at www.kapitaltek.com.)