Monday, 7 December 2015

Electrolux - a failing GE deal but don't ignore the shares

A little under five months ago writing about the Swedish capital goods company Electrolux I noted:

'I like some of the trends here (pricing positive, happy to keep pricing up at cost volume) but buying here clear hope on US deal not only occurring but also adding value for them.  So a ‘trust management’ call especially with the shares trading at a mid-teens EV/ebit multiple.  

I would prefer wait for the full set of Q2 numbers in a few weeks time and maybe the c. SEK225 level where support where the shares have exhibited some historic resistance/support' 

(my additional emphasis added)

The above became hugely relevant today as the Electrolux/GE deal broke apart as noted on Fast FT here:
Electrolux shares have been spun around in a washing machine this morning after the Swedish appliance maker had its $3.3bn deal for General Electric's appliances business scuppered by the US Department of Justice.
The shares have fallen 14.5 per cent to SKr204.6 this morning. Before today, they had climbed 50 per cent over the last two years.
Electrolux will now have to pay GE a termination fee of $175m.
As I write the shares are off the 14.5% reduction lows...but are still not looking that healthy on a last 24 hour perspective down at a new 52 week low:


Now we all know the rationale for the deal: beefing up the US exposure in the light of general competitive challenges but - in the absence of such a transaction - we go back to the Electrolux business today (or at least as shown by the recent Q3 numbers).  SEK6bn+  of ebit profitability...


...and generally positive trends underpining the business (price-mix, cost savings etc.)...


...implies there may be a price to get interested.  At current multiples a low teens EV/ebit valuation is getting more interesting, especially when combined with a 2.7% dividend yield and generally good cash flow generation (5-6% free cash flow yield). 

The shares have tracked back to where they were before the GE deal was announced which means...they look interesting to me here.  

A useful insight as I pull together my top stocks for 2016 list over the next couple of weeks. 

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