LCII Stock Study (6-6-23)

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:

• CNN Business projects 23.1% YOY contraction and 9.1% contraction per year for ’23 and ’22-’24 (based on 15 analysts).
• YF projects YOY contraction of 22.9% and 8.8% for ’23 and ’24, respectively (6 analysts).
• Zacks projects YOY contraction of 22.9% and 8.8% for ’23 and ’24, respectively (3).
• Value Line projects 2.1% annualized growth from ’22-’27.
• CFRA projects contraction of 22.9% YOY and 8.4% per year for ’23 and ’22-’24, respectively (6).
• M* gives a 2-year ACE of 9.3% contraction per year.

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:

• CNN Business projects contraction of 61.8% YOY and 20.2% per year for ’23 and ’22-’24, respectively (based on 15 analysts), along with 5-year annualized growth of 15.0%.
• MarketWatch projects annualized contraction of 39.6% and 15.3% for ’22-’24 and ’22-’25, respectively (7 analysts).
• Nasdaq.com projects 64.1% YOY growth for ’24 (4).
• Seeking Alpha projects 4-year annualized growth of 15.0%.
• YF projects YOY 61.9% contraction and 66.8% growth for ’23 and ’24, respectively (7), along with 5-year annualized growth of 20.0%.
• Zacks projects YOY 61.9% contraction and 64.7% growth for ’23 and ’24, respectively (4).
• Value Line projects 0.4% annualized contraction from ’22-’27 (and 5.0% annualized growth from ’21-’27).
• CFRA projects contraction of 61.8% YOY and 20.2% per year for ’23 and ’22-’24, respectively (8).

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.