FIVE Stock Study (2-9-23)

I recently* did a stock study on Five Below Inc. (FIVE) with a closing price of $199.04.

Value Line writes:

     > Five Below, Inc. offers a broad range of merchandise targeted
     > to the teen and pre-teen customer. Most products are priced
     > at $5 or below, with some in the $6-$10 range (Five Beyond).
     > Products are in the following category worlds: Style, Room,
     > Sports, Tech, Create, Party, Candy, and Now.”

This medium-sized company has grown sales and earnings at annualized rates of 22.5% and 26.6% over the last 10 and nine (excluding a loss in ’12) years, respectively. Lines are mostly up, straight, and parallel except for an EPS decline in ’20. PTPM over the last decade has ranged from 7.8% (’20) to 12.9% (’21) with a last-5-year average of 11.5%. This is higher than peer and industry averages.

ROE has fallen from 35.9% (’13) to 26.7% (’21) with a last-5-year average of 25%, which is better than peer and industry averages. The debt-to-capital ratio has averaged 33% over the last five years, which is lower than peer and industry averages. FIVE has zero total debt and a Current Ratio of 1.5.

I assume long-term annualized sales growth of 12% based on the following:

• CNN Business projects 10.7% YOY and 13.4% per year for ’22 and ’21-’23, respectively (based on 23 analysts).
• YF projects YOY 7.4% and 17.2% for ’23 and ’24, respectively (23 analysts).
• Zacks projects YOY 7.4% and 17.4% for ’23 and ’24, respectively (9).
• Value Line projects 17.9% annualized from ’21-’26.
• CFRA projects 7.1% YOY and 12% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 12.4% and a 10-year estimate of 13% (analyst note).

I assume long-term annualized EPS growth of 17.3% based on the following:

• CNN Business projects a 5.5% YOY contraction and 6.7% growth per year for ’22 and ’21-’23, respectively (based on 23 analysts), along with a 5-year annualized growth rate of 20.5%.
• MarketWatch projects annualized rates of 6.7% and 11.7% for ’22-’24 and ’22-’25, respectively (26 analysts).
• Nasdaq.com projects annualized rates of 20.6% and 25.7% for ’23-’25 and ’23-’26, respectively [8, 6, and 1 analyst(s) for ’23, ’24, and ’25].
• Seeking Alpha projects 4-year annualized growth of 24.8%.
• YF projects YOY 5.5% contraction and 20.7% growth for ’23 and ’24, respectively (24), along with 5-year annualized growth of 12.2%.
• Zacks projects YOY 5.5% contraction and 20.1% growth for ’23 and ’24, respectively (11), along with a 5-year annualized growth rate of 19%.
• Value Line projects annualized growth of 17.3% from ’21-’26.
• CFRA projects 6.9% YOY contraction and 6.9% growth per year for ’23 and ’22-’24, respectively, along with a 3-year annualized growth rate of 37% [after inquiring, CFRA changed this to NMF due to misleading base effects].
• M* provides a long-term estimate of 18.3%.

2022 earnings are in decline and because I believe this to be an isolated event, I will look to exclude the recent quarters. I can do this by projecting from the 2021 data point with my desired 13% growth rate. This is equivalent to projecting from the last quarterly data point ($4.11/share) with a 17.3% growth rate. Doing the latter keeps with the default approach, which will probably be more commonly applied in Member Sentiment (see MS below) studies.

While this type of manual override is more aggressive than my usual methodology, I am still lower than all but one (YF) of six long-term analyst estimates (mean 19.5%).

My Forecast High P/E is 36. Since 2013, High P/E has ranged from 39.5 (’15) to 93.7 (’13) with a last-5-year average of 55.3. I expect that to come down to earth at some point.

My Forecast Low P/E is 25. Since 2013, Low P/E has ranged from 20.2 (’17) to 58.7 (’13) with a last-5-year average of 25.1. I would typically project 20 in such a case, but I’m electing to be more aggressive.

My Low Stock Price Forecast is the default value of $102.80. Although more than the 20% “rule of thumb” below the previous closing price [-48%], I think it reasonable being only 6.1% less than the 52-week low. Raising the Low Stock Price Forecast would effectively be raising the Forecast Low P/E, which is already at my upper limit of comfort.

All this computes to an U/D ratio of 1.3, which makes FIVE a HOLD. The Total Annualized Return (TAR) computes to 10.5%.

PAR, which is based on Forecast Average (not High) P/E, is 6.9%: lower than I want to see for a medium-sized company.

I use MS to assess margin of safety (MOS) by getting an idea how likely the company may be to outperform my estimates. Out of 345 studies over the past 90 days (my own and two others with projected low prices above last closing price excluded), projected sales, projected EPS, Forecast High P/E, and Forecast Low P/E average 15.2%, 16.1%, 39.2, and 25, respectively. My inputs are not substantially different, which means my study has negligible MOS. Value Line projects an average annual P/E of 30, which is just lower than mine (30.5) and lower than MS (32.1).

I will look to revisit FIVE under $159/share.

*—Publishing in arrears as I’ve been doing one daily stock study while posting only two blogs per week.