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)….
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 company I’ve chosen at random from a list of companies that have been engaged in buybacks these past few weeks.
The company in question is Hi-P International Ltd (SGX: H17), one of the largest contract manufacturers in the region.
The company provides a one-stop solution to customers in various industries such as telecommunications, consumer electronics, computing & peripherals, and more. Its customers include the “world’s biggest names” in mobile phones, tablets, household & personal care appliances, and more.
Hi-P International currently has 14 manufacturing plants in four countries, namely, China, Poland, Singapore, and Thailand. Hi-P has been busy buying back its shares in the month of September. Since the start of the month, it has bought back shares of itself on 14 occasions, spending a total of S$0.985 million on 2.228 million shares.
In Hi-P International’s latest reporting quarter (the quarter ended 30 June 2016), the company saw revenue fall by 9.3% year-on-year to S$285.3 million. Hi-P said the main culprits for the lower revenue are lower market demand and a shift in mass production of certain products from the second quarter to the third quarter of the year.
That said, Hi-P International’s bottom-line looked better: Net income to shareholders came in at S$7.65 million, reversing a loss of S$7.97 million in the previous year. Better cost controls had helped.
In the earnings release, Hi-P International’s chairman and chief executive, Yao Hsiao Tung, gave a positive outlook. He commented:
“The impact arising from the market slowdown was felt by suppliers and our competitors who shared a similar voice in echoing weak consumer demand. With our business acumen and anticipation of the market situation, we adopted the right measures to mitigate the impact and achieved positive results.
Without these, our top and bottom line would have been affected tremendously by the challenging market conditions.
Driven by our concurrent measures to accelerate business development efforts and further diversify our customer base, we are confident in regaining momentum for future performance.”
Hi-P International’s shares closed yesterday’s trading session at a price of S$0.47 each. The company does not have a P/E ratio as it is loss-making over the last 12 months. At a price of S$0.47, Hi-P International is valued at just 0.75 times book value.
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 does not own any companies mentioned above.