The first level value analysis of IMB suggested that it would meet all the value criteria, but further investigation suggested some question marks over the value case especially for defensive value investors.
The two statistics that created some doubts for the value case for IMB at current prices were related to earnings and the financial structure of the company.
The underlying earnings number suggested IMB was cheap, but reported earnings suggested that IMB was very expensive. A defensive value investor must look at reported earnings, but a more enterprising value investor can take account of underlying earnings. Therefore, a critical consideration when considering an investment in IMB is what type investor you are. A defensive value investor could not invest in the common stock of IMB due to the ratio of share price to reported earnings. There are plenty of other prospects for defensive value investors where you can find safety and value in the other analyses on this site.
The second area that raised question marks for defensive value investors is the financial structure of the company. The level of long term debt creates some risk for owners of the common stock. The level of funded debt also creates a second level risk for owner of the common stock. Much of the debt issued by IMB is in a different currency to the UK-domiclie of IMB. In order to manage the foreign currency exposure IMB has derivatives to hedge the foreign currency risk. The change in value of these derivatives impacts reported earnings. The change in the derivative valuations is the main reason for the big difference between reported earnings and underlying earnings given in the Annual report for 2016.
A defensive value investors would not want to have to account for changes ion derivative values when considering an investment in common stock of any issuing entity. More enterprising value investors can take account of how the derivative valuations will impact reported earnings and make a judgement about an investment in the common stock.
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