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Should value investors buy Cabcharge Australia Limited (ASX: CAB)?

Many years ago, a young Warren Buffett made his mark with an investing strategy that many now call cigar-butt investing.

This is the strategy described eloquently by Forbes magazine whereby the investor searches for “beaten-down shares of unloved, troubled companies–firms whose earnings have been shrinking, whose industries are perceived to be in trouble, or whose plans for growth are being questioned. These companies’ shares tumble to the point that they look quite cheap and attractive compared to earnings, sales, cash flow or book value, even if the businesses themselves are not particularly good.”

Buffett himself said it was “like picking up a discarded cigar butt that had one puff remaining in it. Though the stub might be ugly and soggy, the puff would be free. Once that momentary pleasure was enjoyed, however, no more could be expected.”

One beaten down share that value investors might be looking at is Cabcharge Australia Limited (ASX: CAB).

The company has faced a number of challenges which knocked back its share price to a low of $1.63 in March this year but since then, it’s up 35%. The AFR even reported that some savvy fund managers were profiting from this upward trend.

So, are shares in Cabcharge worth buying? Here are a few considerations.

Context

The first thing to consider is context. Cabcharge might be up 35% over the last 3 months but it’s still down over 80% from its $13 peak in 2007.

Valuation

Valuation metric Cabcharge Australia Market
Price to Earnings (PE) ratio 12 17
Price to Sales (P/S) ratio 1.86 1.90
Price to Book (PB) ratio 1.46 1.61

As you can see above, based on some traditional valuation metrics, Cabcharge shares are cheaper than the overall market.

Growth rates

When you look at how the business has performed, you will notice that Cabcharge has experienced declining sales, earnings and cash flow for each of the last 1 year, 5 years and 10 years.

Looking ahead

Stepping away from the numbers and just considering the prospects of the business going forward, I think there are still a considerable amount of challenges for Cabcharge to overcome. The elephant in the room remains the threat posed by ride-sharing tech companies such as Uber.

Foolish Takeaway

While based on some metrics Cabcharge shares look cheap, the overall prospects of the business don’t look promising and further technological advancements could disrupt the business. I would focus my attention on more promising businesses such as these four stocks.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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