Cooks Global Foods (NZX:CGF) recently announced that they made a (maiden?) operating profit of $0.4m following restructuring of unprofitable business units.
You might expect that the share price would reflect this significant change. Perhaps the announcement went under the radar due to the size of CGF? Perhaps this is because the announcement was a Preliminary Results announcement instead of a Full Year announcement? Perhaps it’s because people have lose interest in this historically unprofitable company and aren’t reading their news? Well maybe, but I have a different theory. I suspect that it’s about value.
Moving to a profitable position allows investors to evaluate a company based on it’s performance instead of using methods that don’t have a way to calculate return, such as CM analysis or speculation. Therefore (and this transition is always lumpy) the stock will move towards being valued on their ability to return shareholder value, and longer term shareholders will find out how well they did speculating on the value.
Calculating Value In CGF
I’ll start by saying that I’ve not done more than a few minutes research into CGF and I’m just poking my nose in so I can see if there’s anything of interest in the Preliminary Results announcement. I would definitely recommend doing your own research and analysis (as you always should), if you intend to invest or divest. Let’s look at the numbers.
CGF declared a ~$0.6m loss in the last HY report. They’ve restructured to turn that around to $0.4m operating profit (which excludes tax and a few other things like the upcoming payment for 222 coffee, which may or may not be required).
If we pretend (my gut tells me that this is optimistic, but I guess we’ll find out) that means $0.8m Operating Profit for 2nd Half Year (the difference between the $0.6m 1st Half Year loss and the 2HY profit of $0.4m), and we pretend that means $1.6m OP for the year ($0.8m HY x2 for a Full Year), which might be ~$1m NPAT for that year ($1.6 minus tax, etc.). That puts them on an NPAT to MC ratio of 37x.
It’s worth remembering that this is a company with an history of no profit coupled with an upcoming recession.
Given this, I would personally value CGF at slightly above half it’s current value. There’s opportunity for CGF to do well if they can develop an history of solid profit growth, and speculators will certainly like the stock for that reason – though probably not at this price. For investors, this may be a stock to buy at the right price. Personally, I will be waiting for at least another year’s worth of good news with which I can begin to assign a more appropriate value based on an established growth trajectory, evidence of being able to execute the growth plan, and good management.
It is my believe that this is the reason that the share price hasn’t increased following the announcement of profitability.
:!:Note: Once again, please not that I’ve not done much research into this company at all, so you’re going to have to take my first impressions with a big grain of salt. As usual, I’d love to hear your own feedback, views and anything you feel needs added to the analysis in the comments below.