Saturday, July 13, 2013

Weyco Group Inc scores a 6 on Piotroski's method

Piotroski chose nine fundamental signals to measure three areas of the firm's financial condition: profitability, financial leverage/liquidity, and operating efficiency. In this article I will show how this method works out for Weyco Group Inc, a dividend champion which paid dividends for over 30 years. This stock came up in one of my screeners and I was curious to see how the fundamentals look.

1. Return on Assets
Net income before extraordinary items, one point awarded if positive, zero otherwise. If the firm's ROA is positive, the indicator variable is equal to one, zero otherwise.

Table 1201220112010
Net Income$18,96 $15,25 $13,67 million
Total Assets$285,32 $273,51 $223,44 million
Return on Assets6,6%5,6%6,1%%

Result: 1 point

2. Operating cash flow
It's important a company has positive cash flow! Positive operating cash flow in the current year gives 1 point.

Table 2201220112010
Operating cash flow$17,99 $17,14 $0,11 million

Result: 1 point

3. Higher return on assets
Higher return on assets in the current period compared to the ROA in the previous year gives 1 point. From the table at section 1, return on assets is 6.6% in 2012, compared tot 5.6% in 2011.

Result: 1 point

4. Cash flow from operations are greater than ROA 
This is used because in 1996, Sloan showed that earnings driven by positive accrual adjustments (i.e., profits are greater than cash flow from operations) is a bad signal about future profitability and returns.

Table 4201220112010
Net income less extraordinary items$18,96 $15,25 $13,67 million
Operating cash flow$17,99 $17,14 $0,11 million

Result: 0 points

5. Lower ratio of long term debt
Piotroski gives one point to this variable if the company's leverage ratio fell relative to the previous year, and zero if it rose.

Table 5201220112010
Total Assets$285,32 $273,51 $223,44 million
Long-term debt$- $- $- million

WEYS carries no long-term debt, but does have short-term debt (to be clear).

Result: 1 point (even though technically, the ratio did not improve...)

6. Higher current ratio
This variable measures the historical change in the firm's current ratio between the current and prior year. Improvement in liquidity adds one point to the score, because it is a good sign of the company's ability to service current debt obligations, zero points if the current ratio decreased.

Table 6201220112010
Current Assets$146,44 $128,23 $111,49 million
Current Liabilities$70,02 $64,90 $27,71 million
Current Ratio209%198%402%%

Result: 1 point

7. Outstanding shares
Companies that raise external capital could be signaling their inability to generate sufficient internal funds to service future obligations. This indicator variable will equal one if the company did not issue common equity the previous year, zero if it did.
Table 7201220112010
Outstanding shares10,8310,9211,36million
Result: 1 point

8. Higher gross margin
The firm's current gross margin ratio is calculated as follows: (revenue - cost of goods sold) / revenue. An improvement in margins signifies a potential improvement in factor costs, a reduction of inventory costs, or a rise in the price of the firm's product.

Table 8201220112010
Revenue$293,47 $271,10 $229,23 million
Cost of goods sold$178,58 $164,38 $138,93 million
Gross margin39,1%39,4%39,4%%
Result: 0 points (although the difference is quite small!)

9. Higher asset turnover ratio
The firm's current year asset turnover ratio (sales/beginning of the year assets) less the prior year's asset turnover ratio. An improvement in asset turnover signifies greater productivity from the asset base. This can come from more efficient operations (fewer assets generate the same amount of sales) or an increase in sales, which could also signify improved market conditions for the company's products.

Table 9201220112010
Sales / revenue$293,47$271,10$229,23million
Beginning of the year's assets$273,52 $223,44 $207,14 million
Asset Turnover ratio107,3%121,3%110,7%%

Result: 0 points

Weyco Group Inc scores 6 points on Piotroski's method to evaluate shares. While this is a nice performance, there probably are stocks out there with better scores. So for now, I'll keep Weyco on my watchlist to see if they improve their operating efficiency this year.

1. Return on Assets1
2. Operating cash flow1
3. Higher return on assets1
4. Cash flow from operations are greater than ROA0
Leverage, Liquidity and Source of Funds
5. Lower ratio of long term debt1
6. Higher current ratio1
7. Outstanding shares1
Operating Efficiency
8. Higher gross margin0
9. Higher asset turnover ratio0
Total score
6 points

Do you use Piotroski's method to evaluate shares? Let me know!

PM: I've corrected table 9 because I used the wrong values for revenue.

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