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 Nordic Group Ltd (SGX: MR7), a systems integration solutions provider for the marine, offshore, and oil & gas industries.
Nordic’s suite of services include valve remote control systems, tank gauging systems, and precision engineering, among many others. The company has a business presence in many parts of Asia and Europe. It also has business interests in Brazil.
The company has been actively purchasing its own shares since the start of September 2016. From then to now, Nordic has bought back a total of 160,500 shares for over S$36,000.
In Nordic’s latest earnings release for the first-half of 2016, the company saw its revenue increase 11% to S$41.6 million compared to a year ago. Net profit followed suit, surging 34% higher to S$5.3 million. The company also ended June 2016 with a balance sheet that has a net-debt of essentially zero – Nordic has total debt of S$33 million and cash and cash equivalents of S$33 million.
Chang Yeh Hong, Nordic’s executive chairman, had the following comments to share on his company’s results and outlook ahead:
“We are delighted to see sustainable earnings growth in 1H2016 despite the recent reversal in Brent crude prices that further impacted the sector. We managed to consistently stay profitable through the diversification of our revenue streams.
During 1H2016, we secured several contracts amounting to approximately S$50.4 million consisting of mainly maintenance works. The current order book of S$26.6 million, combined with recurring income from maintenance contracts should tide us over this current volatility in the industry.
On a positive note, we have fully paid up our financial obligations to the Vendors with regards to the acquisition of Austin Energy (Asia) Pte Ltd on 1 June 2016. That would free up more cash flow and enable us to seek potential earnings-accretive acquisitions at attractive valuations given the current market conditions…
…Barring any unforeseen circumstances, our Group remain cautiously optimistic in maintaining profitability in the upcoming period.”
Nordic’s shares closed at S$0.225 each last Friday. At that price, the company is valued at just 7.6 times its trailing earnings.
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.
For more investing insights and to keep up to date on the latest financial and stock market news, you can sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
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.