Every now and then, I like to keep track of companies which have been buying back their own shares. That?s because share buybacks may be a sign that a company?s stock is undervalued.
Peter Lynch, the legendary manager of the U.S.-based Fidelity Magellan Fund, also included buybacks as one of the criteria in his investing checklist. To Lynch, it?s a good sign if a company or its insiders are buying shares.
Of course, management may be tasking the company to buy back shares for other reasons other than its stock being undervalued (some other reasons would be to offset dilution). And…
Every now and then, I like to keep track of companies which have been buying back their own shares. That’s because share buybacks may be a sign that a company’s stock is undervalued.
Peter Lynch, the legendary manager of the U.S.-based Fidelity Magellan Fund, also included buybacks as one of the criteria in his investing checklist. To Lynch, it’s a good sign if a company or its insiders are buying shares.
Of course, management may be tasking the company to buy back shares for other reasons other than its stock being undervalued (some other reasons would be to offset dilution). And even if management feels that the stock’s undervalued, they may well be wrong in their assessment too. But, companies that have been buying back their own shares are still worth digging further into.
With these in mind, let’s take a look at one blue chip company, chosen at random out of a list, that has been engaged in buybacks these past few weeks.
The company in question is SIA Engineering Company Ltd (SGX: S59).
As a brief background, the company provides MRO (maintenance, repair, and overhaul) services in airframe, component, engine, aircraft conversions, and modifications to major airlines around the world. SIA Engineering has a wide clientele, given that it serves over 80 international airlines. It has also established joint ventures with leading engine and component manufacturers and these help to deepen the company’s MRO service offerings.
Since the start of July, SIA Engineering has bought back shares of itself on six occasions, spending over S$1.15 million on a total of 312,500 shares.
In the firm’s latest first-quarter earnings for the three months ended 30 June 2016, it saw a 2.1% dip in revenue to S$271.6 million when compared to a year ago. There was a huge 380% jump in profit to S$198.4 million, but that was the result of a S$178 million one-off gain that came from the sale of a subsidiary. If the one-off gain was taken away, SIA Engineering’s profit for the reporting quarter would be just S$20.4 million.
The company also painted a gloomy picture for its outlook. It said that “the challenging operating environment is expected to persist, amidst growing economic uncertainties.” But, SIA Engineering added that it will continue building its business. It said:
“Aided by a strong balance sheet, the Company will continue to invest in capabilities to handle new generation aircraft, and on innovation initiatives and new technologies to enhance customers’ fleet efficiencies and reliability, while generating higher productivity and process improvements.”
SIA Engineering’s shares closed yesterday’s trading session at a price of S$3.74. At that price, the company is valued at just 12.5 times trailing earnings, though it must be noted that the firm’s earnings include the aforementioned large one-time gain.
A Foolish conclusion
Companies that are engaged in share buybacks are just a good starting point for investors looking for opportunities. It’s up to the individual investor to dig further and determine for him or herself whether a company’s shares are actually cheap or not.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.