In my previous post, return on equity (ROE) was highlighted as an important indicator to measure the management performance of a company. But one of my readers pointed out that earning per share (EPS) is also useful for investors to determine the value of a stock. I totally concur with him and would like to emphasize that both are needed to evaluate the value of a stock.Undeniably, valuing a stock is more difficult than assessing the financial health of a company because the former is a combination of art and science, while the latter can be found most of the time from the annual reports. In this article, I shall attempt to share with my readers how I value a stock, using the well-known OSIM as an example.
Firstly, P/E refers to the price earning ratio, It can be derived by dividing price-per-share over earning-per-share (EPS). For example, OSIM is currently trading at $2.71 a share. Based on the 2013 report, the EPS for 2012 was $0.12 and for 2013, it was $0.14. Given the latest quarterly report, the full year EPS should be about $0.16 for 2014. The P/E ratio had also been decreasing since 2011, from 30% to 20%. This meant that earning has been rising faster than price appreciation. Based on my forecast, the P/E ratio will continue to drop to 18% for FY2014. Using all the above data, I derive the forecast value of OSIM to be $3.30 by December this year. Thus, OSIM can potentially increase in value by $0.60 per share. As for the ROE, it averages about 40% since 2011. This is an impressive figure for a growth stock but going forward, it might be difficult to sustain at the same level.
Beside financial analysis, I also do qualitative analysis of a stock. Even though I have never invested in OSIM, it has always been one of the local enterprises that I admire and respect. The founder and CEO, Ron Sim, has managed to re-invent OSIM into a powerhouse innovative lifestyle company that recorded an incredible 21 consecutive quarters of profit growth as reflected in the company’s 2013 annual report. This is an amazing achievement that very few local enterprise can boost of and credit should go to the CEO, who managed to grow the company to such a global scale.
One of the reasons for the company’s ability to stay ahead of its competitors and achieve record profit is due to their relentless product innovation and competitive positioning. They are able to continue to create higher consumer demand for OSIM products like uInfinity, uDivine App, uDiva, uPhoria Warm, uHug, uPixie, uCozy, uRelax, uPebble, uSlender, uShape, nutritional supplements like Taut, Stem C, Zhi, Triflex, Liver Protector and luxury tea like Sakura Tea and Follow Me Tea.
Clearly, OSIM has built an impressive moat that many of its rivals will find it hard to match, and they are not resting on their laurel yet. OSIM has more than 580 OSIM outlets. In China, they are in 45 cities with 269 OSIM outlets. For this year, they are targeting to open 20 to 30 OSIM outlets. Their 222 GNC outlets are doing well. GNC Taiwan is progressing well. For RichLife, they are continuing to focus on Shanghai for better focus, control and efficiency. There is a total of 242 GNC/RichLife outlets in ONI Global. TWG Tea has 30 outlets and they are targeting to have about 45 outlets by end of the year.
Yet, on looking back, all the above achievements seem impossible for OSIM. Back in March 2009, this counter was trading at a mere price of $0.04 per share. Yes, that’s right. Its $0.04. Just imagine if you have loaded up one million shares of OSIM at that point of time, you would become a millionaire by now. One million shares of OSIM at that point of time would cost you $40,000, but within 5 years, you could grow the money to $2,000,000. Obviously, it would take a very brave investor to invest in OSIM when it was languishing at the bottom. But as the saying goes, fortune favors the brave. To become rich and build your wealth, you need to have the knowledge and information to make tough judgement call.
The reason why OSIM hit an all-time low of $0.04 was partly due to its botched investments in Brookstone, a chain of retails stores in U.S. Back in 2007, OSIM’s strategy was to enter the U.S market and to boost its sales of its massage chairs. But it turned out to be a sour investment as the loss-making Brookstone began to affect earnings. In 2008, Brookstone reported losses of US148.3 million for the year and that announcement coincided with the on-going financial crisis. This has prompted OSIM to bite the bullet and write off their entire investment in Brookstone, resulting in a total loss of S$112.5 million. The market took the cue and what happened was the perfect storm for OSIM – the stock reached an all-time low of $0.04 in 2009.
Fast forward to 2014, OSIM has put the Brookstone’s fiasco behind and move on to achieve stellar growth year after year. The Brookstone incident illustrated the performance of the management team helm by Ron Sim, who was not afraid to make the tough decision to write off OSIM’s investment in Brookstone within three years. His decisive action saved the company from spiraling into an uncontrollable crisis and displayed the hallmark of a great leader. Indeed, the Brookstone episode is a set back for Ron, but who does not make investment mistakes? A world class leader or investor would know when to cut losses and learn from mistakes.
The above article is not meant as an inducement to buy OSIM products or stocks and readers must not misconstrue this article as a form of investment advice. The OSIM’s story is used to illustrate how I perform my stock analysis and there is a need to highlight that I am currently not vested in any stocks. In addition, OSIM did not sponsor me to write this article.