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GNRC Stock Study (6-12-23)

Posted by on July 31, 2023 at 06:54 | Last modified: June 14, 2023 15:35

I recently did a stock study on Generac Holdings Inc. (GNRC) with a closing price of $117.66. The original study is here.

Value Line writes:

     > Generac Holdings Inc. designs and manufactures a wide range
     > of generators and other engine-powered products for the
     > residential, light commercial, industrial, and construction
     > markets. Its products are fueled by natural gas, liquid
     > propane, diesel, and Bi-Fuel. Acquired Ottomotores, 12/12;
     > Tower Light, 8/13; Country Home Prod., 8/15; and Pramac
     > Group, 3/16. Generac’s products are sold through indep.
     > dealers, retailers, wholesalers, and equipment rental cos.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 13.8% and 17.5%, respectively. Lines are mostly up, straight, and parallel except for sales/EPS declines in ’14 and ’15 and an EPS decline in ’22. PTPM has led peer and industry averages despite going from 18.8% in ’13, down, up, and back down to 11.1% in ’22 with a last-5-year mean of 15.5%.

Over the past decade, ROE also leads peer and industry averages. Excluding an upside outlier of 66.9% in ’13, ROE goes from 38.3% in ’14 down, up, and back down to 14.4% in ’22 [may prove to be a downside outlier] for a last-5-year mean of 26.1%. Debt-to-Capital has trended lower from 79.1% in ’13 to 43.6% in ’22 with a last-5-year mean of 45.4%. This is above peer and industry averages although it does cross below the latter in ’19. Interest Coverage is 6.6 and Quick Ratio is 0.69. M* rates the company Standard for Capital Allocation and Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

With sources projecting near-term contraction, I am halving the one long-term estimate to get my 6.0% forecast.

With regard to EPS growth:

I’m as perplexed by the lowest long-term estimate as I am the highest. Excluding both, the 4-estimate mean is 8.1% with the lowest at 7.0%. I am forecasting 6.0%—just below the latter—and using ’22 EPS of $5.42/share as an initial value rather than Q1 ’23 $3.92 (annualized) since most analysts project contraction limited to near-term.

My Forecast High P/E is 25.0. Over the last decade, high P/E has ranged from 17.1 in ’18 to 65.3 in ’22 with a last-5-year mean of 43.0. The last-5-year-mean average P/E is 29.6. I am forecasting below the latter.

My Forecast Low P/E is 15.0. Over the last decade, low P/E has ranged from 12.0 in ’19 to 26.8 in ’21 with a last-5-year mean of 16.1. I am forecasting below the 10-year median of 15.5.

My Low Stock Price Forecast (LSPF) is the default of $81.30 based on ’22 EPS. This is 30.9% less than the previous closing price and 5.8% less than the 52-week low.

These inputs land GNRC in the HOLD zone with a U/D ratio of 1.8. Total Annualized Return (TAR) is 9.2%.

At 4.4%, PAR (using Forecast Average—not High—P/E) is too low for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 278 studies done in the past 90 days (my study along with 105 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 9.3%, 10.0%, 28.0, and 14.8. I am lower across the board. Value Line projects a future average annual P/E of 26.0, which is higher than MS (21.4) and mine (20.0). MOS seems to be robust.

With regard to other data, MS high and low EPS are $8.22/share and $5.14/share compared to my $7.25 and $5.42. My high EPS is lower due to a lower EPS growth rate. My low EPS is higher because 88 studies used $3.92 (Q1 ’23) as low EPS. MS has a LSPF of $75.90, which is 6.6% less than mine. This is consistent with the default value of $5.14 * 14.8 = $76.07.

GNRC is a BUY under $106/share.

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SCHW Stock Study (7-5-23)

Posted by on July 28, 2023 at 06:16 | Last modified: July 5, 2023 10:49

I recently did a stock study on Charles Schwab Corp. (SCHW) with a closing price of $57.72.

M* writes:

     > Charles Schwab operates in brokerage, wealth management, banking,
     > and asset-management businesses. The company runs a large network
     > of brick-and-mortar brokerage branch offices, a well-established
     > online investing website, and has mobile trading capabilities. It
     > also operates a bank and a proprietary asset management business
     > and offers services to independent investment advisors. The
     > company is among the largest firms in the investment business,
     > with over $7 trillion of client assets at the end of December
     > 2022. Nearly all of its revenue is from the United States.

Over the past decade, this large-size company has grown sales and EPS at annualized rates of 15.8% and 18.0%, respectively. Lines are mostly up, straight, and parallel except for an EPS dip in ’20. PTPM leads peer and industry averages while trending higher from 31.4% in ’13 to 45.2% in ’22 with a last-5-year mean of 42.8%.

Over the past decade, ROE mostly leads peer and industry averages while increasing from 11.0% in ’13 to 24.3% in ’22 with a last-5-year mean of 17.5%. Debt-to-Capital is lower than peer and industry averages despite trending higher from 15.5% in ’13 to 50.9% in ’22 with a last-5-year mean of 30.1%.

Return on Average Assets has increased from 0.7% in ’13 to 1.1% in ’22 with a last-5-year mean of 1.0%.

M* gives an Exemplary rating for Capital Allocation and Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

I am forecasting near the bottom of the range at 3.0%.

With regard to EPS growth:

The mean of six long-term estimates is 8.7% per year. I am forecasting below the range at 5.0%. I will use ’22 EPS of $3.50 as the initial value rather than ’23 Q1 EPS of $3.66/share (annualized).

My Forecast High P/E is 20.0. Over the past decade, high P/E has trended down from 33.4 in ’13 to 27.5 in ’22 with a last-5-year mean of 25.4. The last-5-year-mean average P/E is 20.4. I am forecasting near the bottom of the range [19.3 in ’19].

My Forecast Low P/E is 12.0. Over the past decade, low P/E has ranged from 13.0 in ’19 to to 24.7 in ’15 with a last-5-year mean of 15.3. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default $42.00 based on $3.50/share initial value. This is 27.2% less than the previous closing price and 6.7% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 18.8% in ’18 to 34.0% in ’20 with a last-5-year mean of 25.5%. I am forecasting below the entire range at 18.0%.

These inputs land SCHW in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 10.0%.

PAR (using Forecast Average—not High—P/E) of 5.5% is less than I seek for a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 398 studies over the past 90 days (my study along with 142 other outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.9%, 8.4%, 23.4, 14.9, and 24.8% respectively. I am lower across the board. Value Line projects an average annual P/E of 22.0, which is higher than MS (19.2) and mine (16.0).

MS high/low EPS is $5.39/$3.49 versus my $4.47/$3.50 (per share). My high EPS is lower due to a lower forecast growth rate.

MS LSPF of $44.40 implies a Forecast Low P/E of 12.7 in contrast to the above-stated 14.9. This is 14.6% lower (more conservative zoning) than the default value of $3.49/share * 14.9 = $52.00. MS LSPF remains 5.7% greater than mine.

MOS seems robust in the current study.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two valuation metrics I have recently begun to monitor. Zacks reports PEG of 3.3 (1.5 is generally regarded as an upper limit) while Relative Value (M* data) is 0.75. The former (latter) suggests the stock to be overvalued (undervalued).

I would look to re-evaluate SCHW under $53/share.

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INMD Stock Study (6-14-23)

Posted by on July 27, 2023 at 06:34 | Last modified: June 14, 2023 14:03

I recently did a stock study on InMode Ltd. (INMD) with a closing price of $35.82. The original study is here.

M* writes:

     > InMode Ltd provides minimally and non-invasive surgical
     > aesthetic and medical treatment solutions in the United
     > States. Its products and solutions address three energy-
     > based treatment categories that include face & body
     > contouring, medical aesthetics, and women’s health. INMD
     > has developed products using its technology for plastic
     > surgery, dermatology, gynecology, and ophthalmology.

Since 2018, this small-size company has grown sales and EPS at annualized rates of 47.0% and 52.9% [inclusion of ’17, a low base, increases growth rates to 52.6% and 68.7%]. Lines are mostly up, straight, and parallel except for an EPS dip in ’22. PTPM leads peer/industry averages, increasing from 18.3% in ’17 to 44.3% in ’22 with a last-5-year mean of 38.3%.

ROE averages 33.7% over the last four years. This leads the industry and is roughly equal to peer averages. The company has minimal uncapitalized, annual rentals and no long-term debt. As a result, Debt-to-Capital averages 0.5% over the last five years. Quick Ratio is over 10.0.

With regard to sales growth:

Consensus for the next two years is at least 15.0% per year. I am conservatively discounting that by 30% to get a long-term forecast of 10.0%.

With regard to EPS growth:

I am forecasting just under the long-term-estimate range (mean of two: 11.5%) at 10.0%. I will use ’22 EPS of $1.89 as the initial value rather than Q1 ’23 ($2.09/share annualized).

My Forecast High P/E is 24.0. High P/E over the last four years has ranged from 29.9 (’20) to 51.7 (’21) with a mean of 39.0. The last-4-year-mean average P/E is 24.3. I am forecasting just below the latter.

My Forecast Low P/E is 9.0. Low P/E over the last four years has ranged from 7.4 (’20) to 11.8 (’21). I am forecasting just below the mean (9.6) and median (9.5).

My Low Stock Price Forecast (LSPF) is the default value of $17.00 based on ’22 EPS. This is 52.5% less than the previous close and 19.8% less than the 52-week low. I almost think this to be excessively low, but the stock is also up 17.5% in less than three months.

These inputs land INMD in the HOLD zone with a U/D ratio of 2.1. Total Annualized Return (TAR) is 15.3%.

PAR (using Forecast Average, not High, P/E) is 7.0%: less than I seek for a small-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Out of 300 studies (my study along with 63 outliers excluded) done in the last 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E, average 15.0%, 12.3%, 25.0, and 9.4, respectively. I am lower across the board although the P/E range is roughly equal. MOS seems decent in the current study.

MS average high and low EPS are $3.54/share and $1.97/share compared to my $3.04 and $2.01. My high EPS is lower due to a lower EPS growth rate.

MS LSPF of $19.10 is 12.4% greater than mine and implies a Forecast Low P/E of 9.7: very close to the above-stated 9.4. Being higher than mine means higher-risk zoning, but it’s still well below the previous closing stock price.

I would look to buy under $31/share, which is exactly where I ended up in my original study.

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PKG Stock Study (6-12-23)

Posted by on July 25, 2023 at 06:43 | Last modified: June 12, 2023 10:28

I recently did a stock study on Packaging Corp. of America. (PKG) with a closing price of $130.80. My original study is here.

M* writes:

     > Packaging Corp of America is the third-largest containerboard
     > and corrugated packaging manufacturer in the United States.
     > It produces over 4 million tons of containerboard annually.
     > The company’s share of the domestic containerboard market
     > is about 10%. The firm differentiates itself from larger
     > competitors by focusing on smaller customers and operating
     > with a high degree of flexibility.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 6.8% and 9.8%, respectively. Lines are mostly up and parallel except for a sales decline in ’15 and sales + EPS declines in ’14, ’19, and ’20. PTPM has been higher than peer and industry averages, trending up from 11.3% to 16.1% with a last-5-year mean of 13.4%.

Also over the past decade, ROE has trended lower from 39.9% in ’13 to 24.9% in ’22 with a last-5-year mean of 22.8%: roughly equal to peer and industry averages. Debt-to-Capital is lower than peer and industry averages and has trended down from 66.2% in ’13 to 43.2% in ’22 with a last-5-year mean of 45.5%. Quick Ratio and Interest Coverage are 1.8 and 20.4, respectively. M* gives a Standard rating for Capital Allocation while Value Line gives an A rating for Financial Strength.

With regard to sales growth:

I am forecasting conservatively below the long-term range at 1.0%.

With regard to EPS growth:

I am forecasting below the mean (0% for six long-term estimates) at -1.0%. I will use Q1 ’23 EPS of $10.42/share (vs. ’22 EPS of $11.03) as the initial value.

My Forecast High P/E is 14.0. Over the past decade, high P/E has ranged from 14.4 (’13) to 28.7 (upside outlier in ’20) with a last-5-year mean (excluding the outlier) of 16.4. The last-5-year-mean average P/E is 13.8.

My Forecast Low P/E is 10.0. Over the past decade, low P/E has ranged from 8.5 (’13) to 14.7 (’20) with a last-5-year average of 12.0. I am forecasting toward the lower end of the range (10-year median is 11.6).

My Low Stock Price Forecast (LSPF) is $94.20. Since high EPS is based on 1.0% annualized contraction, I will arbitrarily use 2.0% annualized contraction x5 years to calculate low EPS of $9.42/share. This LSPF is 27.8% less than the last closing price and 14.8% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 33.8% (’13) to 69.6% (upside outlier in ’20) with a last-5-year mean (excluding the outlier) of 42.5%. I am forecasting toward the lower end of the range at 34.0%.

These inputs land PKG in the SELL zone with a U/D ratio of 0.2. Total Annualized Return (TAR) is 3.6%.

PAR (using Forecast Average—not High—P/E) is 0.9%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 36 studies over the past 90 days (my study along with 10 other outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 4.7%, 5.0%, 16.8, 11.5, and 45.8%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 19.0. This is [much] higher than MS (14.2) and mine (12.0). MOS is robust in the current study.

MS high and low EPS are $14.02/share and $9.67/share in contrast to my $9.91 and $9.42. My high EPS is lower due to a lower EPS growth rate.

MS LSPF of $108.50 is 15.2% greater than mine and implies a low P/E of 11.2, which is relatively consistent with the above-stated 11.5. MS LSPF is only 4.9% less than the $9.67 * 11.8 = $114.11 default value: also relatively consistent. Being just 17.0% less than the previous close, however, is somewhat aggressive from a zoning standpoint.

I would look to re-evaluate the stock under $105/share. PKG is going to be a tough buy for me until I can clearly see some growth. This will be more likely once the FY concludes and ’22 EPS is off my books.

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ASGN Stock Study (6-27-23)

Posted by on July 22, 2023 at 06:49 | Last modified: June 27, 2023 14:31

I recently did a stock study on ASGN Inc. (ASGN) with a closing price of $71.97. The original study is here.

M* writes:

     > ASGN Inc is a provider of information technology (IT) services
     > and professional solutions, including technology, creative,
     > and digital, across the commercial and government sectors.
     > It operates through two segments, Commercial and Federal
     > Government. The Commercial Segment, which is their largest
     > segment, provides consulting, creative digital marketing, and
     > permanent placement services to Fortune 1000 clients and mid-
     > market companies. The Federal Government Segment provides
     > mission-critical solutions to the Department of Defense,
     > intelligence agencies, and civilian agencies.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 12.6% and 19.5%, respectively. Lines are mostly up, straight, and parallel except for an EPS dip in ’15 and sales dip in ’20. PTPM is about even with peers while lagging industry averages, increasing from 5.7% in ’13 to 7.9% in ’22 with a last-5-year mean of 6.9%.

Also over the past decade, ROE is slightly better than peers while trailing industry averages, increasing from 8.9% in ’13 to 13.8% in ’22 with a last-5-year mean of 13.2%. Debt-to-Capital has been slightly higher than peers and much lower than industry averages with a last-5-year mean of 41.8%. Interest Coverage is 7.6 and Quick Ratio is 2.3. Value Line gives ASGN a B+ rating for Financial Strength.

With regard to sales growth:

I am discounting the one long-term estimate available to arrive at my forecast of 3.0% per year.

With regard to EPS growth:

All long-term estimates besides Value Line are the exact same number (5.1%), which makes me suspicious of data duplication under the guise of different data sources (mean of five: 5.0%). It almost seems like we have just two long-term estimates with a mean of 4.8%. I am forecasting below the range at 3.0% and using ’23 Q1 EPS of $4.90/share (annualized) as the initial value rather than ’22 EPS of $5.21.

I think it noteworthy that for my 2/16/23 study on this stock, the mean of five long-term estimates was 10.8%: more than double the current value.

My Forecast High P/E is 21.0. Over the past decade, high P/E has trended lower from 35.7 in ’13 to 25.3 in ’22 with a last-5-year mean of 26.5. The last-5-year-mean average P/E is 21.5. I am forecasting just below the range.

My Forecast Low P/E is 11.0. Over the past decade, low P/E has ranged from 7.7 (downside outlier in ’20) to 22.7 in ’15 with a last-5-year mean (excluding ’20) of 16.5. This is also trending lower. I am forecasting below the range (outlier excluded).

My Low Stock Price Forecast (LSPF) is the default value of $53.90 based on $9.74/share initial value. This is 25.1% less than the previous closing price and 14.8% less than the 52-week low.

These inputs land ASGN in the HOLD zone with a U/D ratio of 2.6. Total Annualized Return (TAR) is 10.6%.

PAR (using Forecast Average—not High—P/E) is less than the current yield on T-bills at 4.8%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 75 studies over the past 90 days (19 outliers and my study excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 6.0%, 8.5%, 23.9, and 14.2, respectively. I am lower across the board. Value Line projects an average annual P/E of 17.0, which is lower than MS (19.1) and higher than mine (16.0).

MS high/low EPS are $7.65/$4.66 [per share] versus my $5.68/$4.90. My high EPS is lower due to a lower EPS growth rate.

MS LSPF of $60.90 implies a Forecast Low P/E of 13.1 (vs. the above-stated 14.2). This is 8.0% less than the default value $4.66 * 14.2 = $66.17, which results in more conservative zoning. It remains 13.0% higher than mine, however.

MOS seems robust in the current study.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are other valuation metrics I have recently begun to monitor. Zacks reports PEG of 2.44 where 1.50 is generally regarded as the upper limit. Relative Value (M* data) is 0.68. In this case, the latter looks attractive whereas the former does not.

ASGN is a BUY under $70/share, but I would like a higher TAR for a medium-size company. I would look to re-evaluate under $66/share.

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FTNT Stock Study (6-12-23)

Posted by on July 21, 2023 at 07:03 | Last modified: June 11, 2023 15:02

I recently did a stock study on Fortinet, Inc. (FTNT) with a closing price of $68.01.

Value Line writes:

     > Fortinet, Inc. provides cyber security solutions to businesses
     > and government agencies. Its flagship solution, FortiGate,
     > includes integrated security and networking functions to protect
     > data, applications, users from network- and content-level
     > security threats across firewall, software defined networking
     > (SD-WAN), Wifi and switch (LAN Edge) and secure access edge
     > (SASE). It sells products and services to distributors.

Over the last 10 years, this medium-size company has grown sales and earnings at annualized rates of 23.3% and 31.1%, respectively (excluded ’13-’17 EPS ranging from $0.01-$0.05/share, which would otherwise result in a 61.5% annualized EPS growth rate). Lines are up, straight, and parallel except for an EPS dip in ’19.

PTPM over the last decade is generally above peer but below industry averages while increasing from 8.3% in ’17 to 21.6% in ’22 with a last-5-year mean of 18.6%.

ROE over the last decade is also generally above peer but below industry averages while increasing from 3.4% in ’17 to 52.6% in ’21. Excluding ’22, the last-5-year-mean is 45.5%. ROE turned negative in ’22 because “repurchase & retirement of common stock” ($1.45B) caused retained earnings to go negative. Stock repurchases have really taken off since 2020 with large numbers in Q4 ’21, Q1 ’22, and Q2 ’22.

Debt-to-Capital is zero until ’21 when it increases to 55.8% and then 139.7% in ’22 when it jumps above peer and industry averages. While extremely high, Interest Coverage and Quick Ratio are 60.9 and 1.2, respectively. Value Line rates the company B++ for Financial Strength, and M* gives a Standard rating for Capital Allocation.

M* also gives a Wide rating for Economic Moat.

With regard to sales growth:

This may be the most extensive analyst coverage I have seen for a medium-size company. I am forecasting conservatively below the range at 17.0%.

With regard to EPS growth:

I am forecasting conservatively below the long-term-estimate range (mean of six: 18.5%) at 17.0%. I will use ’22 EPS of $1.06/share as the initial value rather than Q1 ’23 $1.21 (annualized).

My Forecast High P/E is 44.0. Excluding 102 in ’21, the last-5-year-mean high P/E is 57.1 with a low value of 48.5 in ’18. The last-5-year-mean average P/E is 43.8. I am forecasting near the latter, which is above my usual comfort zone.

My Forecast Low P/E is 30.0: just below the last-5-year mean of 31.9 [range 22.8 (’18) to 40.2 (’22)]. While this is aggressive for me (lower end of the range preferred), low P/E has mostly been trending higher.

My Low Stock Price Forecast (LSPF) is the default value of $31.80 based on ’22 EPS of $1.06/share. This is 53.2% less than the previous closing price and 25.4% less than the 52-week low.

These inputs land FTNT in the HOLD zone with a U/D ratio of 1.0. Total Annualized Return (TAR) is 8.8%.

PAR (using Forecast Average—not High—P/E) is 5.1%, which is too low for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 8.8% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 237 studies over the past 90 days (my study along with 43 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 19.6%, 17.0%, 54.0, and 31.8, respectively. I am equal on EPS growth and lower for the rest. Value Line projects a future average annual P/E of 45.0. This is higher than MS (42.9) and mine (37.0).

MS high and low EPS of $2.43/share and $1.07/share are mostly in agreement with my $2.32 and $1.06. The robust MOS in this study is due to a lower P/E range.

MS LSPF of $36.80 is 15.7% greater than mine and implies a low P/E of 34.4 in contrast to the above-stated 31.8. MS LSPF is also 8.2% greater than the $1.07 * 31.8 = $34.03 default value. When these two are different, I prefer to see LSPF less than the default value thereby biasing in favor of lower risk. That is overshadowed in this study being ~50% less than the previous close, which makes MS LSPF sufficiently conservative for me.

I would look to re-evaluate the stock under $49/share. This level was last seen in mid-January, which isn’t too long ago. Patience is a virtue!

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CLFD Stock Study (6-9-23)

Posted by on July 19, 2023 at 06:35 | Last modified: June 11, 2023 11:40

I recently did a stock study on Clearfield Inc. (CLFD) with a closing price of $44.62.

M* writes:

     > Clearfield Inc mainly designs, manufactures, and distributes
     > fiber protection, fiber management and fiber delivery solutions
     > for communications networks. It provides a range of products
     > including copper assemblies, cassettes, box enclosures, fiber
     > connectors, frames, microduct, terminals, vaults, pedestal
     > inserts, FieldSmart, WaveSmart, and CraftSmart. The company
     > has a global presence with the majority of the revenue derived
     > from the United States. The company has two reportable segments
     > namely Clearfield segment and Nestor cables segment. The
     > majority of revenue is derived from Clearfield segment.

Over the last 10 years, this small-size company has grown sales and earnings at annualized rates of 15.2% and 20.2%, respectively. Lines are exponential, jagged, and narrowing including a sales dip in ’17 and declining EPS in ’15 and ’17.

My 3/7/23 First Cut was not submitted as I was waited for a Value Line email response about suspect data.

In revisiting the numbers last night, the initial decision was to reject the stock outright. Maybe I’m wrong, though. I will force myself through this and highlight areas of doubt and curiosity.

My first challenge is the visual inspection. Lines are not up, straight, and parallel. EPS from 2013 increases, falls, and is finally eclipsed seven years later by EPS of $0.53/share. This (+55.9% YOY) is when the growth phase really appears to begin and it does so in exponential fashion. Sales growth appears more linear through ’20 before going exponential in ’21 and ’22.

Should ’21 and ’22 be excluded as outliers? Keep reading to see analyst estimates. If excluded, then the gaudy annualized growth rates reported above shrink to 8.1% for sales and 1.2% for earnings.

PTPM over the last decade drops from 14.1% in ’13 to 7.6% in ’17 before trending higher in ’20-’22 to 23.6%. This is above peer but below industry averages, and the last-5-year mean is 13.2%.

ROE traces a similar pattern ranging from 6.0% in ’17 to 35.9% in ’22. This has been higher than peer and industry averages with a last-5-year mean of 15.8%. Debt-to-Capital is zero until ’20 (3.3%), has a last-5-year mean of 5.1%, and is much lower than peer and industry averages. Interest Coverage and Quick Ratio are a laudable 105 and 4.9, respectively, and Value Line rates the company B+ for Financial Strength.

With regard to sales growth:

Except for Value Line, most of these estimates have collapsed since my original study three months ago. Value Line’s latest sales estimate is annualized growth of 0.8% from ’22-’24 followed by 26.0% from ’24-’27. Is that reasonable?

Can Value Line can be trusted without confirmation from another long-term estimate. They do make a case in the text section for why the company is “well positioned to recover.” To believe in this one analyst, though, who has dramatically changed tune just one quarter later feels like a big ask.

I am [arbitrarily] taking a 50% haircut from Value Line to get my forecast of 7.0% per year. I will use ’22 annual EPS as my initial value given the short-term analyst projections of contraction despite growth in the first two quarters of ’23.

With regard to EPS growth:

The Value Line [long-term] estimate is shocking and a big reason I decided last night to pass on this study. Besides the long-term sales projection, many of Value Line’s other estimates have also collapsed. If I open both quarterly reports as .pdf files and mouse back and forth from one to the other, I can see the big changes in front of my very eyes: quite shocking! Among others, EPS growth from ’20-’22 to ’26-’28 decreases from 26.5% in the March report to 8.5% in June [interesting that CNN Business, the other long-term estimate, remains unchanged at 6.0%].

I can’t help but raise an eyebrow upon seeing Value Line’s strong long-term sales growth projection in the face of negative EPS growth—not to mention the analyst’s discussion of being “well positioned to recover.”

One sign of future recovery I do see is in MarketWatch’s ’22-’25 projection. This suggests substantial recovery in ’25. Despite “number of ratings: 5,” high/low/average values all being equal for the ’25 projection suggest just one analyst for that $7.24/share. This is a 260.2% YOY increase from the ’24 high estimate [even greater percent change from the ’24 average or low estimate]. I wonder what exactly is supposed to happen for CLFD in 2025?!

My 1.0% EPS forecast [was 6.0% in March] is just below the average of both long-term estimates (1.3%). Given the near-term negative estimates, I will use the ’22 annual EPS ($3.55) rather than Q2 ’23 ($3.81 annualized) as the initial value.

My Forecast High P/E is 27.0. Over the last decade, high P/E has ranged from 31.9 (’21) to 77.1 (’17) with a last-5-year mean of 42.0. The last-5-year-mean average P/E is 30.9, but the current P/E is 11.8. From a valuation perspective, the stock appears to be in the midst of a crash. Can we explain it mathematically? ’22 EPS is 401% greater than the highest EPS seen in the first 8 years of the 10-year window. That huge number is going to put downward pressure on P/E. While this is somewhat offset by a higher stock price, the latter overlaps with ’21 stock prices when EPS was 61% lower [than Q2 2023].

It’s hard to wrap my head around these big numerical differences. 11.8 seems way too low, but 42.0 seems way too high. Splitting the difference undercuts the last-5-year-mean average P/E. I am [arbitrarily] selecting that as my forecast.

My Forecast Low P/E is 7.0. Over the last decade, low P/E has ranged from 11.1 (’13) to 40.4 (’17) with a last-5-year mean of 19.7. I am forecasting conservatively below the entire range.

My Low Stock Price Forecast (LSPF) is $24.80. This assumes zero growth from ’22 EPS. The short-term projections are unanimously negative and I could decrease low EPS for that reason [thanks to Carol Theine of the Puget Sound Chapter for this discussion]. I will stick with my existing method. If EPS falls in subsequent quarters, then low EPS will decrease by default. In the meantime, my LSPF is 44.4% less than the previous closing price and 17.3% less than the 52-week low.

These inputs land CLFD in the HOLD zone with a U/D ratio of 2.8. Total Annualized Return (TAR) is 17.5%.

PAR (using Forecast Average—not High—P/E) is 7.1%, which is lower than I like to see for a small-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 316 studies over the past 90 days (my study along with 100 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 15.0%, 12.0%, 26.8, and 13.0, respectively. I am lower across the board.

Value Line projects a future average annual P/E of 20.0. This is higher than MS (19.9) and mine (17.0). This is also higher than the 15.0 displayed in the previous Value Line report. When I emailed in March, I wrote:

     > What catches my eye is the ’26-’28 Avg Annual P/E Ratio of 15,
     > which is well below anything in the last decade. Your lowest
     > number in the last 10 years is 19.7 in ’22, but Morningstar
     > shows this to be 24.5. Your 22.6 from ’21 matches their 22.65…
     > I just wanted to confirm the 15 because it’s so much lower than
     > anything coming before it in the statistical array.

I got no response, but I’m glad to see something more reasonable now [as I write with current P/E ~11. Oh the irony!].

MS high (low) EPS are $6.74 ($3.76) compared to my $3.73 ($3.55). My high EPS is lower due to a lower EPS growth rate.

Overall, MOS in the current study seems robust.

MS LSPF of $30.40 is 22.6% greater than mine. It implies an MS low P/E of 8.1 in contrast to the above-stated 13.0 and is 37.8% less than the $3.76 * 13.0 = $48.88 default value [which would be INVALID today]. I do like that the disconnect biases toward lower-risk by stretching the BUY zone down.

Value Line gave me a big headache by projecting negative future growth and talking bullishly about recovery. In the end, they write: “the risk and reward scenario doesn’t look overly attractive even at these depressed price levels.” Surprisingly to this junior analyst [especially with the stock up $6 since the report date], I don’t think it’s all that far away!

CLFD is a BUY under $43/share.

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STRL Stock Study (6-7-23)

Posted by on July 17, 2023 at 07:09 | Last modified: June 7, 2023 14:05

I recently did a stock study on Sterling Infrastructure Inc. (STRL) with a closing price of $51.68.

Value Line writes:

     > Sterling Infrastructure, Inc. operates through a variety of
     > subsidiaries, providing design, engineering, and construction
     > services on projects such as highways, bridges, roads, data
     > centers, e-commerce distribution centers, warehousing, energy,
     > and more. The company reports sales in three segments;
     > EInfrastructure Solutions (51% of total revenues in 2022),
     > Transportation Solutions (31%), and Building Solutions (18%).

Over the last decade, this medium-size company has grown sales 14.3% per year. Earnings have increased 32.7% per year since 2018 [previous years excluded due to fractional and/or negative EPS that otherwise artificially inflate growth rate]. Lines are mostly up, straight, and parallel except for a sales dip in ’15. PTPM has trended higher from -12.4% to 7.9% with a last-5-year mean of 4.5%. Peer averages have been roughly on par over the decade while industry averages have been slightly ahead despite themselves trending lower.

Since turning positive in ’17, ROE has mostly led peer and industry averages while also trending higher; the last-5-year mean is 19.3%. Debt-to-Capital has been higher than peer and industry averages—peaking at 67.0% in ’19 and falling to 50.9% in ’22 with a last-5-year mean of 53.5%.

Interest Coverage and Quick Ratio are 7.1 and 1.3, respectively. Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

I am forecasting conservatively below the range at 6.0%.

With regard to EPS growth:

At worst, data duplication means what I hope to be a diverse set of estimates may actually represent a much smaller sample. In this instance, I find it interesting that five different long-term estimates are either 11.0% or 18.0%. With only 2-4 analysts reported per data source, perhaps more duplication is taking place than I usually see.

To avoid such concerns, I am forecasting at the bottom of the long-term-estimate range at 11.0% (mean of 6: 16.0%).

My Forecast High P/E is 10.5. Since EPS turned positive in 2017, high P/E has fallen from 44.0 to 10.6 with a last-5-year mean of 13.6. The last-5-year-mean average P/E is 10.5. I am using the latter.

My Forecast Low P/E is 6.5. Since EPS turned positive in 2017, low P/E has fallen from 18.0 to 6.5 with a last-5-year mean of 7.3. I am forecasting at the ’22 low P/E (only ’20 is lower at 4.5).

My Low Stock Price Forecast (LSPF) is the default value of $20.30. This is 60.7% less than the previous closing price. That seemed extreme until I realized the 52-week low is only 1.0% greater.

These inputs land STRL in the SELL zone with a U/D ratio of 0.1. Total Annualized Return is 1.4%.

PAR (using Forecast Average—not High—P/E) is -2.8%. Even with a healthy margin of safety (MOS), this stock is far from the BUY zone, which is not a surprise for a stock up ~60% over the past 12 months.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 32 studies over the past 90 days (my study and 11 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 9.6%, 14.0%, 13.1, and 7.3, respectively. I am lower across the board. Value Line projects an average annual P/E of 12.0, which is higher than MS (10.2) and mine (8.5). MOS seems robust in the current study.

MS high and low EPS are $6.09/share and $2.90/share compared to my $5.27 and $3.13. My high EPS is lower due to a lower EPS growth rate.

MS LSPF of $21.70 is only 6.7% greater than mine. It implies an MS low P/E of 7.5: consistent with the above-stated 7.3. This is relatively good consensus despite a small MS sample size.

PEG ratio is another value check I have recently begun to monitor. With 1.0 – 1.5 generally considered the upper limit, STRL’s PEG is 0.82. Value Line concurs: “The equity currently offers about average capital appreciation potential over the 3- to 5-year investment horizon.”

What doesn’t agree is this study, which pegs the stock as substantially overvalued. I would consider a BUY under $29.

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AEM Stock Study (6-26-23)

Posted by on July 14, 2023 at 07:05 | Last modified: June 28, 2023 19:57

I recently did a stock study on Agnico Eagle Mines Ltd. (AEM) with a closing price of $49.11.

M* writes:

     > Agnico Eagle is a gold miner with mines in Canada, Mexico, Finland,
     > and Australia. Agnico operated just one mine, LaRonde, as recently
     > as 2008 before bringing its other mines online in rapid succession
     > in the following years. It merged with Kirkland Lake Gold in 2022,
     > acquiring the Detour Lake and Macassa mines in Canada along with
     > the high-grade, low-cost Fosterville mine in Australia. It produced
     > more than 3.1 million gold ounces in 2022 and had about 15 years
     > of gold reserves at end 2022. Agnico Eagle is focused on increasing
     > gold production in lower-risk jurisdictions and bought the
     > remaining 50% of its Canadian Malartic mine along with the
     > Wasamac project and other assets from Yamana Gold in 2023.

Over the past decade, this medium-size company has grown sales at an annualized rate of 12.2%. EPS has grown at an annualized rate of 16.9% since 2016 (’14 and ’15 excluded due to low fractional EPS that would artificially inflate growth rate and 2018 d$1/40/share excluded as a downside outlier). PTPM lags industry averages over the last 10 years despite trending up recently with a last-5-year mean of 17.1%.

Over the past decade, ROE has been roughly equal to industry averages despite recently trending down with a last-5-year mean of 5.2%. Debt-to-Capital has been less than industry averages and trending down in recent years with a last-5-year mean of 21.5%. Interest Coverage is over 47 and Quick Ratio is 0.9. M* gives a Standard rating for Capital Allocation and Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

I am forecasting toward the lower end of the range at 6.0%.

With regard to EPS growth:

I am forecasting toward the bottom of the long-term-estimate range (mean of four: 4.3%) at 0%. My initial value is ’23 Q1 EPS of $5.08 (annualized). For low EPS, I am arbitrarily choosing to bypass ’22 EPS of $1.53/share because it seems curiously low [Value Line and CFRA’s normalized EPS reflect less than a 10% YOY decrease for ’22 versus M*’s GAAP reporting of a 31% YOY decrease]. I will use ’21 EPS of $2.22/share instead.

My Forecast High P/E is 25.0. Over the past decade, high P/E has ranged from 32.6 in ’19 to 317 in ’15. The last-5-year mean high P/E is 38.4 and the last-5-year-mean average P/E is 29.7. I am forecasting below the range.

My Forecast Low P/E is 13.0. Over the past decade, low P/E has ranged from 14.8 in ’20 to 191 in ’15 with a last-5-year mean of 19.8. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default value of $28.90 based on $2.22/share initial value. This is 41.1% less than the previous closing price and 21.3% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 27.6% in ’19 to 291% in ’15 with a last-5-year mean of 60.1% (’22 is 105%). I am forecasting below the entire range at 27.0%.

These inputs land AEM in the BUY zone with a U/D ratio of 3.9. Total Annualized Return (TAR) is 22.0%.

PAR (using Forecast Average—not High—P/E) is 15.9%, which is phenomenal. This is among the highest PAR values ever seen in one of my stock studies.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 52 studies over the past 90 days (24 outliers and my study excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 12.0%, 11.2%, 33.2, 19.8, and 43.7%, respectively. I am lower across the board. Value Line projects an average annual P/E of 20.0, which is lower than MS (26.5) and higher than mine (19.0).

MS high and low EPS are $4.38/share and $2.12/share vs. my $5.08 and $2.22. My high EPS is based on the last quarterly value that was not available for some studies done in the past 90 days. I am basically sacrificing growth rate for a higher initial value, but my P/E range remains significantly lower. MOS seems healthy in this study.

MS LSPF of $36.70 implies a Forecast Low P/E of 17.3 (versus the above-stated 19.8). This is 12.6% less than the default value $2.12 * 19.8 = $41.98, which represents more conservative zoning. It still remains 27.0% higher than mine, though.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are other valuation metrics I have recently begun to monitor. Zacks reports PEG of 21.9 based on a 5-year EPS growth rate of 1.0% (upper limit generally regarded to be 1.5). Relative Value (M* data) is 0.33. The latter seems attractive whereas the former does not.

I sense some disconnect that may only really be understood by digging into the corporate filings. ’22 GAAP EPS is much different from [CFRA or Value Lines’] normalized. Value Line’s long-term growth estimate soars high above the other three (with YF solidly negative). ’23 Q1 EPS (annualized) is 232% greater than ’22. Perhaps part of the disconnect is seeing [at least one] long-term estimate(s) for the new, combined company (with Kirkland Lake Gold and/or Yamana Gold) vs. historical results from AEM alone.

Maybe I arbitrarily knock 5-10% off my max buy price to account for whatever it is I’m missing (part of “the 20%,” as Ann Cuneaz would say). Otherwise, I’d be a buyer under $53/share.

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LCII Stock Study (6-6-23)

Posted by on July 13, 2023 at 07:09 | Last modified: June 6, 2023 11:19

I recently did a stock study on LCI Industries Inc. (LCII) with a closing price of $115.85.

M* writes:

     > LCI Industries Inc supplies domestically and internationally components
     > for the original equipment manufacturers of recreational vehicles and
     > adjacent industries including buses; trailers used to haul boats,
     > livestock, equipment and other cargo. It has two reportable segments
     > the original equipment manufacturers segment and the aftermarket
     > segment. The OEM Segment manufactures or distributes components for
     > the OEMs of RVs and adjacent industries, including buses; trailers
     > used to haul boats, livestock, equipment and other cargo; trucks;
     > pontoon boats; trains; manufactured homes; and modular housing. Its
     > products are sold primarily to major manufacturers of RVs such as Thor
     > Industries, Forest River, Winnebago and other RV OEMs, and to
     > manufacturers in adjacent industries.

Over the last decade, this medium-size company has grown sales and earnings 18.9% and 21.7% per year, respectively. Lines are mostly up, straight, and parallel except for a sales dip in ’19. PTPM trails peers and is just below the industry with a range from 7.5% in ’20 to 11.9% in ’16 and a last-5-year mean of 8.4%.

ROE has trailed peers and the industry over the last decade while trending up from 14.4% in ’13 to 27.7% in ’22 with a last-5-year mean of 22.4%. Debt-to-Capital has been lower than peers and the industry despite increasing from zero in ’13 to 49.9% in ’22 with a last-5-year mean of 46.6%.

Interest Coverage and Quick Ratio are 9.6 and 0.8, respectively. Current Ratio is 3.1. Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

While I want to believe in the turnaround story, with negative sales projected over the next couple years I think 0% is a conservative and reasonable long-term forecast.

With regard to EPS growth:

I typically interpret EPS estimates as projections from the last completed fiscal year. With the earnings cliff projected for ’23, however, I find it hard to believe the three positive long-term estimates are projections from a ’22 EPS that has already spiked ~37% YOY. It seems more reasonable that the positive estimates use ’23 EPS as an initial value whereas the negative estimate (Value Line) uses ’22.

I will forecast in-line with the most conservative: 15.0% per year from estimated ’23 EPS to get a high EPS of $10.34/share. This is equivalent to 0.1% long-term growth projected from the trendline with ’21 and ’22 earnings excluded.

My Forecast High P/E is 17.0. Over the last decade, high P/E has trended down from 25.9 in ’13 to 10.4 in ’22 with a last-5-year mean of 17.6. The last-5-year-mean average P/E is 13.5. I like to forecast conservatively at or below the latter. In this case, ’21 and ’22 are extremes (14.4 and 10.4, respectively) probably due to the EPS spike. Being projected to return closer to trend in ’23, P/E will probably increase. I will therefore go with 17.0 instead of 13.0—still a conservative forecast that is less than all but ’21 and ’22.

My Forecast Low P/E is 10.0. Over the last decade, low P/E has trended down from 15.6 in ’13 to 5.8 in ’22 with a last-5-year mean of 9.4. This pops up to 10.2 if I exclude the 5.8.

My Low Stock Price Forecast (LSPF) is the default of $62.70 based on an initial value of 2020 EPS ($6.27/share). This is 45.9% less than the previous closing price and 29.8% less than the 52-week low.

Since a dividend was instituted in 2016, Payout Ratio has ranged from 26.2% in ’22 to 44.7% in ’20 with a last-5-year mean of 37.1%. I am forecasting conservatively at 26.0%.

These inputs land LCII in the HOLD zone with a U/D ratio of 1.2. Total Annualized Return (TAR) is 10.7%.

PAR (using Forecast Average—not High—P/E) is 6.2%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 139 studies over the past 90 days (my study and 66 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.6%, 10.0%, 16.4, 10.0, and 37.3%, respectively. I am lower on sales growth and Payout Ratio. My Forecast High P/E is actually higher while my Forecast Low P/E is the same. My EPS growth rate (as derived above) is not going to make for an apples-to-apples comparison (see next paragraph). Value Line projects an average annual P/E of 12.0, which is lower than MS (13.2) and mine (13.5).

MS high and low EPS are $21.43/share and $10.01/share compared to my $10.34 and $6.27. Value Line projects a high EPS of $15.20/share. With my P/E range slightly higher and EPS range substantially lower, MOS behind this study is robust.

MS LSPF of $78.40 is 25.0% greater than mine. It implies a low P/E of 7.8 (versus the above-stated 10.0) and is 21.7% less than the MS default of $10.01 * 10.0 = $100.10. Such a large discrepancy may indicate confusion about the initial value chosen, but at least it is in the conservative direction to decrease risk of any decision to buy.

PEG ratio is another value check I have recently begun to monitor. With a fractional EPS growth rate in the denominator, this number will be NMF (also displayed by Zacks). If ’23 is indeed the end of the earnings cliff then this can be revisited next year.

I would look to invest under $91/share.

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