The Razor’s Edge

2-Year Price History

Ockham’s Rating

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GFI Revenue

As a value investing shop, we are interested in seeing how GFI’s revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock’s current underlying value. Using this method, we have established a high range for Price to Sales of 2.76x and the low end of the range at 1.40x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for GFI of 1.74x is well below its normal historic Price to Sales levels. At a price of $10.51, GFI is 17% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

GFI Cash Earnings

As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of GFI, Ockham views their current Cash Earnings as significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from GFI. For example, GFI’s Cash Earnings ratio per share has fluctuated between 12.46 and 23.51 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where GFI is with respect to prior business periods.

So with GFI’s current price (latest close of $10.51) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, GFI is 57% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn’t exist in a vacuum. So if the market doesn’t recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with GFI.

GFI Dividends

A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive Ockham rating. That being said, we don’t require dividend payments for company’s whose management has elected to forgo them entirely.

When reviewing dividend yields for GFI, we compare the historic high and low levels over the past, which is similar to our evaluation of Sales and Cash Earnings per share. Paying a dividend is not necessary for any company, but changes in dividend often can lend clues as to the health of the business. A rising dividend is a strong sign for an established company, as it reflects management’s confidence in the company. GFI’s estimated annual dividend is $0.25 resulting in a current dividend yield of 2.38%. The highest dividend yield from GFI over recent history was 5.39% while the lowest dividend yield was 0.48%. With that range in mind, GFI’s current dividend yield is a full 18.91% below its median dividend yield historically. This is a negative from our perspective.