FTNT Stock Study (6-12-23)

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:

• CNN Business projects 25.0% YOY and 21.5% per year for ’23 and ’22-’24, respectively (based on 29 analysts).
• YF projects YOY 23.8% and 19.3% for ’23 and ’24, respectively (35 analysts).
• Zacks projects YOY 23.6% and 18.7% for ’23 and ’24, respectively (14).
• Value Line projects 21.6% annualized growth from ’22-’27.
• CFRA projects 24.6% YOY and 21.8% per year for ’23 and ’22-’24, respectively.
• M* provides 2-year annualized ACE of 21.3% and projects 19.0% per year for the next five years in its analyst note.

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:

• CNN Business projects 22.7% YOY and 20.6% per year for ’23 and ’22-’24, respectively (based on 29 analysts), along with 5-year annualized growth of 19.0%.
• MarketWatch projects 22.7% and 23.0% per year for ’22-’24 and ’22-’25, respectively (35 analysts).
• Nasdaq.com projects 17.6% YOY and 23.3% per year for ’24 and ’23-’25 (15, 14, and 4 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 18.7%.
• YF projects YOY 22.7% and 19.2% for ’23 and ’24, respectively (32), along with 5-year annualized growth of 19.3%.
• Zacks projects YOY 22.7% and 17.1% for ’23 and ’24, respectively (16), along with 5-year annualized growth of 18.0%.
• Value Line projects 17.8% annualized growth from ’22-’27.
• CFRA projects 23.3% YOY and 22.5% per year for ’23 and ’22-’24, respectively, along with 3-year CAGR of 20.0%.
• M* projects long-term annualized growth of 18.1%.

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!