Rating Update: Stock Rating F-Lowest (3/21/19)-Libbey Inc. (LBY).

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BUSINESS

Libbey Inc. designs, produces, and sells tableware and other products worldwide. It offers glass tableware products, including tumblers, stemware, mugs, bowls, vases, salt and pepper shakers, shot glasses, canisters, candleholders, and other items; storage ware; serve ware; bakeware; handmade glass tableware; and other components for original equipment manufacturers, such as blender jars and mixing bowls. The company also provides ceramic dinnerware products comprising plates, bowls, platters, cups, saucers, and other tabletop accessories; metal flatware consisting of knives, forks, spoons, and serving utensils; and metal hollowware, which consists of serving trays, pitchers, and other metal tabletop accessories.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be in line with the cost of capital, LBY is expected to be Value Creation neutral.

Libbey has a current Value Trend Rating of F (Lowest Rating).
The Value Trend Rating reflects complementary signals from PTR’s two proprietary measures of a stock’s attractiveness. Libbey has a slightly negative Appreciation Score of 34 and a very low Power Rating of 9, triggering the Lowest Value Trend Rating.

Libbey’s stock is selling above targeted value. The current stock price of $3.23 compares to targeted value 12 months forward of $3.
This moderately low appreciation potential results in an appreciation score of 34 (66% of the universe has greater appreciation potential.)
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Libbey has a Power Rating of 9. (Libbey’s very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 9% of companies in the universe.)
Factors contributing to this very low Power Rating include: recent price action has been extremely unfavorable; and the trend in Libbey’s earnings estimates has been unfavorable in recent months. An offsetting factor is is currently in a modestly favorable positi.

INVESTMENT PROFILE

Libbey’s financial strength is low. Financial strength rating is 30.
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Relative to the S&P 500 Composite, Libbey Inc. has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that LBY is extremely high risk. All factors are relative weaknesses. Relative weaknesses for Libbey include: low historical profitability, low financial strength, high stock price volatility, high financial leverage, low expected growth, low historical growth, and high earnings variability. Libbey’s valuation is moderate: low dividend yield, moderate P/E ratio, and low price/book ratio. LBY has unusually low market capitalization.

CURRENT SIGNALS

Libbey’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

Libbey’s current technical position is very weak. The stock price is in a 0.9 month down move. The stock has declined 30.2% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. Libbey’s stock price decline is extreme and the stock appears oversold.

ALERTS

Significant negative changes in fundamentals have recently occurred for Libbey Inc. (NYSEAMERICAN: LBY): the consensus estimate for December, 2019 decreased significantly, and the consensus estimate for December, 2020 decreased significantly.
The stock is currently rated F.
Libbey Inc. (NYSEAMERICAN: LBY) stock enjoyed a major increase of 10.6% on 3/21/19. The shares closed at $2.72. NORMAL trading volume accompanied the advance. The stock has declined -4.2% during the last week and has been extremely weak relative to the market over the last nine months.

CASH FLOW

In 2017, Libbey experienced a very significant reduction in cash of -$36.32 million (-60%). Sources of cash were much lower than uses. Cash generated from 2017 EBITDA totalled +$74.08 million. Non-operating uses consumed -$85.70 million (-116% of EBITDA). Cash taxes consumed -$15.81 million (-21% of EBITDA). Withdrawal of investment from the business totalled +$19.82 million (+27% of EBITDA). On a net basis, debt investors pulled out -$43.85 million (-59% of EBITDA) while equity investors supplied +$15.14 million (+20% of EBITDA).
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Libbey’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Libbey Inc. Peer Group. In most years, Libbey was in the top quartile and lower quartile. Currently, Libbey is lower quartile at -116% of EBITDA (-$85.70 million).

Libbey’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Libbey Inc. Peer Group. (Since 2015 Cash Taxes, %EBITDA has accelerated very sharply.) In most years, Libbey was in the third quartile and top quartile. Currently, Libbey is substantially below median at -21% of EBITDA (-$15.81 million).

Libbey’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Libbey Inc. Peer Group. (Since 2015 Business Re-investment, %EBITDA has experienced a very sharp recovery.) In most years, Libbey was in the top quartile and second quartile. Currently, Libbey is at the upper quartile at +27% of EBITDA (+$19.82 million).

Libbey’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Libbey Inc. Peer Group. (Since 2014 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Libbey was in the lower quartile and top quartile. Currently, Libbey is lower quartile at -59% of EBITDA (-$43.85 million).

Libbey’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Libbey Inc. Peer Group. In most years, Libbey was in the third quartile and second quartile. Currently, Libbey is at the upper quartile at +20% of EBITDA (+$15.14 million).

Libbey’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Libbey Inc. Peer Group. In most years, Libbey was in the second quartile and third quartile. Currently, Libbey is substantially below median at -49% of EBITDA (-$36.32 million).
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Libbey’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Libbey Inc. Peer Group as well. In most years, Libbey was in the third quartile and second quartile. Currently, Libbey is substantially below median at +3%.

PROFITABILITY

Libbey’s return on equity has eroded very significantly since 2008.
Libbey’s very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a major performance consideration.
The productivity of Libbey’s assets rose over the full period 2008-2018: asset turnover has exhibited a small overall uptrend.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Libbey’s return on equity is slightly above median (-15.9%) for the four quarters ended December, 2018.
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Operating performance (pretax return on assets) is at the upper quartile (0.3%) reflecting asset turnover that is at median (1.12X) and substantially above median pretax margin (0.3%).
Tax “keep” rate (income tax management) is lower quartile (-346.%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is upper quartile (14.31X).

GROWTH RATES

Overall, Libbey’s growth rate has slowed considerably in recent years.
Libbey’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been -3.3% per year.

Total asset growth has been -4.2% per year.

Annual E.P.S. growth has been -16.1% per year.

Equity growth has been 20.8% per year. (More recently it has been -33.7%.)

Libbey’s consensus growth rate forecast (average of Wall Street analysts) is 7.5% — substantially above the average of the historical growth measures.
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Relative to the Libbey Inc. Peer Group, Libbey’s historical growth measures are erratic. Equity growth (20.8%) has been upper quartile. Total asset growth (-4.2%) has been substantially below median. Revenue growth (-3.3%) has been substantially below median. E.P.S. growth (-16.1%) has been lower quartile.

Consensus growth forecast (7.5%) is at median.
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PRICE HISTORY

Over the full time period, Libbey’s stock price performance has been variable and significantly below market. Between May, 2008 and March, 2019, Libbey’s stock price fell -72%; relative to the market, this was a -86% loss. Significant price moves during the period: 1) August, 2018 – March, 2019: -67%; 2) March, 2018 – August, 2018: +101%; 3) December, 2016 – March, 2018: -75%; 4) June, 2015 – June, 2016: -62%; 5) September, 2011 – June, 2015: +292%; and 6) June, 2009 – April, 2010: +957%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -27.7% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through January, 2019 of -27.7% is slightly above median relative to Libbey Inc. Peer Group.

Current 5-year total return performance of -23.6% is lower quartile relative to the S&P 500 Composite.
Through January, 2019, with lower quartile current 5-year total return of -23.6% relative to S&P 500 Composite, Libbey’s total return performance is lower quartile relative to Libbey Inc. Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, LBY’s overall valuation is low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is slightly below median. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable.

Relative to Libbey Inc. Peer Group, LBY’s overall valuation is normal. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is slightly below median. Ratio of enterprise value/revenue is at the lower quartile. Price/equity ratio is at the lower quartile. Ratio of enterprise value/assets is at the lower quartile. Price/earnings ratio is unavailable.
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Libbey has a major value gap compared to the median. For LBY to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.57X to 0.67X. If LBY’s ratio of enterprise value/revenue were to rise to 0.67X, its stock price would be higher by $4 to $7.
For LBY to achieve upper quartile valuation relative to the Libbey Inc. Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.57X to 1.52X. If LBY’s ratio of enterprise value/revenue were to rise to 1.52X, its stock price would increase by $35 from the current level of $3.23.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be in line with the cost of capital, LBY is expected to be Value Creation neutral.
Libbey’s current Price Target of $3 represents a -10% change from the current price of $3.23.
This moderately low appreciation potential results in an appreciation score of 34 (66% of the universe has greater appreciation potential.)
Reinforcing this moderately low Appreciation Score of 34, the low Power Rating of 9 contributes to an Value Trend Rating of F.
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Libbey’s current Price Target is $3 (-80% from the 2017 Target of $14 and -10% from the 03/21/19 price of $3.23). This dramatic fall in the Target is the result of a +2% increase in the equity base and a -80% decrease in the price/equity multiple. The forecasted increase in growth has a slight positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. More than offsetting these Drivers, the forecasted decline in return on equity has a very large negative impact.
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PTR’s return on equity forecast is 5.8% — significantly below our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2009 and 2017. The current forecast is significantly below the 2010 peak of 175%.

PTR’s growth forecast is 4.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2009 and 2017. The current forecast is below the 2014 peak of 6%.

PTR’s cost of equity forecast is 6.2% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic decline between 2009 and 2017. The current forecast is well below the 2014 peak of 13.8%.
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At Libbey’s current price of $3.23, investors are placing a negative value of $-7 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 22.1% versus a cost of equity of 6.5%.
PTR’s 2019 Price Target of $3 is based on these forecasts and reflects an estimated value of existing assets of $3 and a value of future investments of $-0.

About John Lafferty 58018 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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