With political turmoil in the Middle East, and the region’s heavy reliance on oil exports, we looked at companies that are immune to oil prices. We scanned for companies with strong earnings quality that analysts are excited about and that do not seem expensive on a valuation basis. One company that fits the bill is Arcelik (ARCLK.IS), a Turkey-based household appliance manufacturer. The company has 45% of revenues coming from Europe, which makes it less affected by upheavals in its home area. It operates 14 manufacturing plants in Turkey, Romania, Russia, China and the Republic of South Africa, where costs are lower, giving it a distinct advantage over some of its competitors.
Source: Thomson Reuters Eikon/StarMine
Sifting choices
We screened for companies in the Middle East that have market cap of over $1 billion. We then looked at those companies in the top quintile of the StarMine Earnings Quality model. We also looked for companies in the top quintile of our Value-Momentum model, which combines both value and momentum signals. Finally, we screened out companies that have less than 30 on the Combined Credit Model to ensure we eliminated ones that are levered or have weak balance sheets. Arcelik looks attractive since it generates so much of its revenues from outside the region.
Source: Thomson Reuters Eikon/StarMine
Analyst favorite
Arcelik performs well on most of the StarMine models. It has strong analyst revisions momentum. Earnings estimates for the year are up 12% in the last 90 days, and revenue estimates are also up 2.5% in the past 90 days. Estimates for next year are higher, too. That is a sign that analysts are optimistic about future earnings and a big reason the company scores in the top decile of the Analyst Revisions Model.
Source: Thomson Reuters Eikon/StarMine
Looking down the road
In a good sign for future earnings, Arcelik also displays strong earnings quality. Arcelik has seen robust positive cash flow from operations to back its earnings — and that is a sign of good earnings quality. Cash on the balance sheet has increased to more than 2 billion new turkish lira. The company pays a healthy 3% dividend yield which seems safe based on the strong cash flows and fortified balance sheet.
It has also seen return on net operating assets improve by two percentage points to 15.6%, in the last year, a sign of improved operating efficiency. That improved efficiency is driven by improving asset turnover. That means that Arcelik has been more efficient at generating revenues from its assets, which tends to be a sustainable signal.
Source: Thomson Reuters Eikon/StarMine
Warehouse control
Arcelik has also done a good job managing inventory. Y-O-Y inventory levels have fallen for three consecutive quarters. This is despite 20% revenue growth in each of the last three quarters. That is a good sign for future earnings as the company has less risk of inventory obsolescence and write downs.
The company does not seem expensive based on our valuation models, and scores a 97 on the new StarMine Combined Alpha Model, which incorporates all the models to generate a single score for the company. Turkish companies have seen some pressure from the political fallout with Russia. However, Arcelik has not been too badly affected, and other European countries seem to continue to drive revenues. Looks like the company could be an oasis amid the turmoil in the region.
