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Buying luxury wood furniture for the home or office can be expensive. It seems like it could mean lucrative opportunities for a lumber specialist. Christmas Woodbois (LSE: WBI ) trades in coins, as they have done for more than a decade.
Does that make them a bargain I should consider adding to my portfolio?
Value, not value.
First, I think it is important to clarify the difference between price and value. While Woodboys shares trade for pennies, that doesn’t necessarily make them cheap. It is simply a price statement.
Determining whether something is cheap involves deciding on a price. To do this, as well as knowing the value of a share, I need to have an idea of what I think it is worth. Then I can compare the current stock price to what I think is the underlying price. That allows me to determine whether the stocks will offer good value for my portfolio if I buy them.
Woodbois shares price
What does it mean to turn to the company specifically?
One way to gauge what I think the shares are worth is to look at Woodboys’ business performance, which I think is a useful indicator of what may happen in the future. But I don’t think so for the Woodboys. The company’s revenue is growing and I expect this to continue. Wood takes decades to mature, so it’s hard to know the ultimate value of woodboys’ properties.
In addition, the company is constantly incurring losses at the operational level. It recently reported a small operating profit. If revenues continue to grow while keeping costs under control, profits can grow over time. However, I don’t think the Woodboys’ current business is very helpful in assessing what they can do in the future.
Market opportunities
Another approach to valuing Woodboys stocks is to try and evaluate the size of future opportunities. I think the market for quality lumber is likely to remain strong and demand is limited. The cycle of forest growth means that supply increases can take decades. Woodboys may be well positioned to capitalize on this demand with its own forestry concessions, sawmill and factory.
So can I use the discounted cash flow model to value Woodboys shares?
I could try. But many of the inputs will be estimates and may be very unreliable. It is difficult to know what the future holds for the business economy. For example, the price of wood can move. The company’s operations are mostly concentrated in one country. If inflation or regulatory changes in that country change significantly, the impact on cash flow could be significant.
My step
In short, I am not comfortable valuing Woodboys shares at this time. If I can’t evaluate their value, I can’t tell whether or not a penny stock price offers me an attractive buying opportunity.
So I didn’t add them to my portfolio.