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AMGN Stock Study (6-1-23)

Posted by on July 11, 2023 at 06:58 | Last modified: June 1, 2023 11:05

I recently did a stock study on Amgen Inc. (AMGN) with a closing price of $220.65.

M* writes:

     > Amgen is a leader in biotechnology-based human therapeutics, with
     > historical expertise in renal disease and cancer supportive-care
     > products. Flagship drugs include red blood cell boosters Epogen
     > and Aranesp, immune system boosters Neupogen and Neulasta, and
     > Enbrel and Otezla for inflammatory diseases. Amgen introduced its
     > first cancer therapeutic, Vectibix, in 2006 and markets bone-
     > strengthening drug Prolia/Xgeva (approved 2010) and Evenity
     > (2019). The acquisition of Onyx bolstered the firm’s therapeutic
     > oncology portfolio with Kyprolis. Recent launches include Repatha
     > (cholesterol-lowering), Aimovig (migraine), Lumakras (lung
     > cancer), and Tezspire (asthma). Amgen’s biosimilar portfolio
     > includes Mvasi (biosimilar Avastin), Kanjinti (biosimilar
     > Herceptin), and Amjevita (biosimilar Humira).

This large-size company has grown sales and earnings at annualized rates of 3.6% and 6.8% (’17 EPS excluded), respectively, over the past decade. Lines are mostly up and parallel except for sales dips in ’17 and ’19, EPS crash in ’17 (fits the TCJA profile), and EPS dips in ’20 and ’21. PTPM has led peer and industry averages despite tracing an “inverse-U” pattern while going from 28.2% in ’13 to 27.9% in ’22 with a last-5-year mean of 33.0%.

ROE has led peer and industry averages since ’18 when it spiked from 6.0% to 55.4% and hasn’t looked back since. The last-5-year mean is 87.4%, which includes 177% in ’22. Value Line calls this NMF.

Debt-to-Capital explains both the high ROE and Value Line’s NMF description with a last-5-year mean of 80.2%. This has been significantly greater than peer and industry averages and will probably be a deal breaker for some.

Other financial metrics look more encouraging. Quick Ratio is 2.6 and Interest Coverage is 6.2. Value Line rates the company A++ for Financial Strength. M* rates the company Exemplary for Capital Allocation and writes:

     > Amgen possesses a sound balance sheet… $30 billion in net debt (as
     > of the end of 2022) [represents] a net debt/EBITDA ratio around 2,
     > which we think is manageable as we model steady cash flows over the
     > next several years. If the Horizon deal closes later this year, net
     > debt/EBITDA could rise to around 3, but we still view this as very
     > manageable given annual expected free cash flows above $10 billion.

M* also awards the company a Wide Economic Moat.

With regard to sales growth:

I forecast long-term sales growth below the range at 4.0%.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of six: 5.8%) at 4.0% (YF’s 1.7% is curious and not a typo). My initial value will be ’22 EPS of $12.11/share rather than Q1 ’23 $14.71/share (annualized).

My Forecast High P/E is 18. Over the last decade, high P/E has ranged from 16.7 in ’18 to 26.9 in ’21 (71.0 in ’17 excluded) with a last-5-year mean of 21.7. I am forecasting just below the last-5-year-mean average P/E of 18.6.

My Forecast Low P/E is 14. Over the last decade, low P/E has ranged from 12.3 in ’13 to 19.3 in ’21 (54.4 in ’17 excluded) with a last-5-year mean of 15.5. I am forecasting just below the last-10-year median P/E of 14.4.

My Low Stock Price Forecast (LSPF) is the default value of $169.50 (based on initial EPS of $12.11/share). This is 23.2% less than the previous closing price and 20.9% less than the 2022 low.

Over the past decade, Payout Ratio has steadily increased from 28.3% in ’13 to 64.1% in ’22 (171% in ’17 excluded) with a last-5-year mean of 54.3%. I am forecasting conservatively below the range at 28.0%.

These inputs land AMGN in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 5.3%.

PAR (using Forecast Average—not High—P/E) is 3.1%, 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 140 studies over the past 90 days (my study and 42 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 4.0%, 7.9%, 19.4, 14.4, and 52.4%, respectively. I am equal on sales growth and lower on the rest. Value Line projects an average annual P/E of 16.0, which is lower than MS (16.9) and equal to mine.

MS high and low EPS are $19.41/share and $12.11/share where I have $14.73 and $12.11. My high EPS is lower due to a growth rate that significantly lowers the upper end of the forecast stock price range. Q1 ’23 EPS is almost to my high EPS at the beginning of the 5-year period so this will need adjustment if the company stays on its growth trajectory.

MS LSPF of $185.20 is 9.3% greater than mine, implies a low P/E of 15.3 (versus the above-stated 14.4) and is 6.2% greater than the MS default of $12.11 * 14.4 = $174.38. The latter results in more aggressive zoning.

PEG ratio is another value check that I have recently begun to monitor. My forward PEG is 16.0 / 4 = 4.0. A generally accepted upper limit is 1.0 – 1.5, but it’s also good to compare against the industry average [for which I don’t have a number]. Zacks has a forward PEG of 1.74 based on the current P/E and future growth projection. For an apples-to-apples comparison, perhaps the 16.0 [future forecast] is wrong to use. Zacks has P/E listed as 12.2 whereas M* has current P/E listed as 15.0. In this instance, though, my low EPS growth forecast is responsible for the high PEG more than anything else.

MOS seems decent in this study, but the stock is currently too expensive. I would look to re-evaluate under $190/share.

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AVT Stock Study (6-20-23)

Posted by on July 8, 2023 at 06:51 | Last modified: June 20, 2023 09:38

I recently did a stock study on Avnet Inc. (AVT) with a closing price of $48.01. The original study is here.

Value Line writes:

     > Avnet, Inc. is a technology solutions company that markets,
     > sells, and distributes electronic components. The company
     > has two segments: Electronic Components (93% of ’22 sales),
     > which sells electr. components, semiconductors,
     > interconnect, passive and electromechanical components to
     > the world’s leading electronic component manufacturers;
     > Farnell (7%) sells kits, tools, test measurement, and
     > electronic components to customers that are developing and
     > testing their products. Acquired Premier Farnell, ’16.

Excluding ’18 and ’20, this large-size company has posted annualized sales and EPS declines of 2.9% and 1.0% over the past decade. The company recorded goodwill impairment of ~$181M in ’18. COVID-19 shocked the world economy in ’20, which led to widespread losses. Even without these two years, lines are nowhere close to up, straight, and parallel.

For me, the analysis would end now as the company does not clear the barbed wire fence. However, I was introduced to AVT by the Mar ’23 Manifest Investing Roundtable in what was a rather alluring presentation. I will press on to see if “there’s gold in them thar hills” in the form of a potential non-core position.

PTPM decreases from 2.2% in ’13 to 0.9% in ’21 before rebounding to 3.4% in ’22 with a last-5-year mean of 1.1%. This trails peer and industry averages.

ROE falls below 10.0% in ’17 and remains there until ’22 when it spikes to 15.9%. The last-5-year average is 4.2% (including negative numbers for ’18 and ’20). This is disappointingly low and trails peer/industry averages.

As some potential bright spots, Debt-to-Capital has been lower than peer and industry averages with a last-5-year mean of 29.0%. Interest Coverage is 6.1, Quick Ratio is 1.2, and Value Line gives an A rating for Financial Strength.

With regard to sales growth:

I am discounting the one long-term estimate to get a forecast of 2.0%.

With regard to EPS growth:

Two of five long-term estimates are negative. I am forecasting toward the bottom of the range (mean 6.7%) at 2.0%. Also to be conservative, I am using ’22 EPS of $6.94/share as the initial value rather than ’23 Q3 [FY ends June] $9.10 (annualized).

My Forecast High P/E is 11.0. Over the past decade, high P/E has ranged from 7.2 (’22) to 30.3 (’19) with a last-5-year mean (excluding NMF in ’18 and ’20) of 20.4. Last-5-year-mean average P/E is 16.6. I am forecasting near the bottom of the range (only ’22 is lower).

My Forecast Low P/E is 5.0. Over the past decade, low P/E has ranged from 5.1 (’22) to 20.6 (’19) with a last-5-year mean (excluding NMF in ’18 and ’20) of 12.8. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) is the default value of $34.70 (based on $6.94/share initial value). This is 27.7% less than the previous closing price and 2.3% less than the 52-week low.

Since 2014 (and excluding NMF in ’18 and ’20), Payout Ratio has ranged from 14.4% (’22) to 49.1% (’19) with a last-5-year mean of 35.8%. I am forecasting below the entire range at 14.0%.

These inputs land AVT in the HOLD zone with a U/D ratio of 2.7. Total Annualized Return (TAR) is 13.2%.

PAR (using Forecast Average–not High–P/E) is less than I seek at 6.8%. 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 56 studies over the past 90 days (my study and 15 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 5.8%, 6.2%, 11.0, 4.1, and 35.6%, respectively. I am greater than or equal on Forecast High/Low P/E and lower on the other three inputs. Value Line projects an average annual P/E of 11.0, which is higher than MS (7.6) and mine (8.0).

MS high and low EPS are $11.61/share and $8.46/share versus my $7.66 and $6.94. My high EPS is lower due to a lower EPS growth rate. My low EPS is lower because many studies used initial values of Q2 or Q3 ’23, which is more aggressive.

MS LSPF of $29.40 implies a low P/E of 3.5 (vs. the above-stated 4.1). This is 15.3% less than the $8.46 * 4.1 = $34.69 default value [and my LSPF as well], which results in more conservative zoning.

PEG ratio is another value check I have recently begun to monitor. PEG is 0.44 (Zacks) where 1.50 is generally regarded as the upper limit. This is the first time I have seen a number below 1.00. I will continue to monitor to get a feel for the range.

Despite the low MS sample size and my comparable P/E range, MOS seems robust in the current study.

Two things give me pause about stock purchase in the BUY zone under $47/share. First, contraction is projected over the next 1-2 years. I discounted ’23 EPS growth from my analysis but a case could be made to discount more, which might further lower the BUY threshold. Second, any holding would speculative because the company did not pass the visual inspection. A smaller position size would therefore be prudent.

With the stock up ~18.0% in the last 30 days and near 52-week highs, I would wait for a [arbitrary] 10% pullback to invest.

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TDY Stock Study (5-31-23)

Posted by on July 7, 2023 at 06:34 | Last modified: May 31, 2023 12:41

I recently did a stock study on Teledyne Technologies Inc. (TDY) with a closing price of $396.52.

M* writes:

     > Teledyne Technologies Inc sells technologies for industrial markets.
     > Roughly a fourth of Teledyne’s revenue comes from contracts with
     > the United States government. The firm operates in four segments:
     > instrumentation, digital imaging, aerospace and defense electronics,
     > and engineered systems. The instrumentation segment provides
     > monitoring instruments primarily for marine and environmental
     > applications. The digital imaging segment contributes the largest
     > proportion of revenue, and includes image sensors and cameras for
     > industrial, government, and medical customers. The aerospace and
     > defense electronics segment provides electronic components and
     > communication products for aircraft. The engineered systems
     > segment provides solutions for defense, space, environmental,
     > and energy applications.

This medium-size company has grown sales and earnings at annualized rates of 9.5% and 13.4%, respectively, over the past decade. Lines are mostly up, straight, and parallel except for dips in ’15, ’16, and ’20 [and ’21 for EPS only]. PTPM has increased from 9.6% in ’13 to 16.6% in ’22 with a last-5-year mean of 14.4% but mostly trails peer and industry averages.

ROE is about even with peer and industry averages over the past decade but has decreased from 14.0% in ’13 to 10.1% in ’22 with a last-5-year mean of 11.9%. I would be more impressed with a number in the high teens to over 20.0%.

Debt-to-Capital has been about even with peer and industry averages over the past decade. The last-5-year average is 27.7%. Per M*, Quick Ratio is 1.2 and Interest Coverage is 11.6. Value Line rates the company A+ for Financial Strength.

With regard to sales growth:

I forecast long-term sales growth just below the range at 3.0%.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of five: 6.6%) at 5.0%. My initial value will be Q1 ’23 EPS of $15.80/share (annualized) rather than ’22 EPS of $16.53.

My Forecast High P/E is 28. Over the last decade, high P/E has ranged from 19.0 in ’14 to 46.3 in ’21 with a last-5-year mean of 34.9. The last-10-year median is 28.8. I am forecasting just below the last-5-year-mean average P/E of 28.5.

My Forecast Low P/E is 18. Over the last decade, low P/E has ranged from 13.5 in ’13 to 34.8 in ’21 (possible outlier) with a last-5-year mean of 22.1. I am forecasting just below the last-10-year median of 18.5.

My Low Stock Price Forecast (LSPF) is the default value of $284.40 (based on initial EPS of $15.80/share). This is 28.3% less than the previous closing price and 12.5% less than the 52-week low.

These inputs land TDY in the HOLD zone with a U/D ratio of 1.5. Total Annualized Return (TAR) is 7.3%.

PAR (using Forecast Average—not High—P/E) is 3.2%, 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] 18 studies over the past 90 days (my study and 5 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 6.8%, 8.9%, 30.0, and 18.3, respectively. I am lower across the board. Value Line has a projected average annual P/E ratio of 24.5, which is higher than MS (24.2) and mine (23.0).

MS high and low EPS are $24.81/share and $11.50/share in contrast to my $20.17 and $15.80. My high EPS is probably lower due to a lower growth rate. MS $11.50 seems extreme, however. Going back up to 90 days, the much higher ’22 EPS value of $16.53 would have been published. A closer look reveals five studies with similar inputs using a low EPS of $10.62; this could certainly skew the small sample size. I believe only one study per account will appear, which suggests the $10.62 may have been published somewhere and used by multiple people? Maybe an investment club discussion spurred multiple members to plug in the value? I’ll never know.

MS LSPF of $260.00 implies a low P/E of 22.6 (versus the above-stated 18.3) and is 23.5% greater than the default value of $11.50 * 18.3 = $210.45. Such a big discrepancy may be a consequence of the extreme low EPS number.

PEG ratio is another value check that I have recently begun to monitor. My forward PEG is 23.0 / 5 = 4.6. A generally accepted upper limit is 1.0 – 1.5, but it’s also good to compare against the industry average [for which I don’t have a number].

MOS seems healthy in this study, but the stock is currently too expensive. I would look to re-evaluate under $354/share.

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MEDP Stock Study (5-30-23)

Posted by on July 5, 2023 at 06:40 | Last modified: May 30, 2023 10:32

I recently did a stock study on Medpace Holdings Inc. (MEDP) with a closing price of $203.55. My original MEDP study is here.

CFRA writes:

     > Medpace Holdings, Inc. provides clinical research-based drug and medical
     > device development services in North America, Europe, and Asia. It
     > offers a suite of services supporting the clinical development process
     > from Phase I to Phase IV in various therapeutic areas. The company also
     > provides clinical development services to the pharmaceutical,
     > biotechnology, and medical device industries; and development plan
     > design, coordinated central laboratory, project management, regulatory
     > affairs, clinical monitoring, data management and analysis,
     > pharmacovigilance new drug application submissions, and post-marketing
     > clinical support services. In addition, it offers bio-analytical
     > laboratory services, clinical human pharmacology, imaging services, and
     > electrocardiography reading support for clinical trials.

This medium-size company has grown sales and earnings at annualized rates of 21.3% and 30.1% (excluding NMF, $0.11, $0.37, and $0.98/share in ’14-’17, respectively, which if included would boost this number higher) for the last 10 years. Lines are up, straight, and parallel since ’15. PTPM was 14.3% in ’13 before dipping negative and recovering over the following three years. Since ’17, PTPM has increased from 13.1% to 19.4% with a last-5-year average of 16.6%. For the last decade, PTPM is about equal with the industry while trailing its peers as neither of the latter two suffered the ’14-’17 dip.

ROE increased from 2.5% in ’16 (initial value on record) to 19.3% in ’21 before catapulting to 64.7% in ’22 (upside outlier). The last-5-year average (excluding ’22) is 15.7%, and as a whole this leads peer and industry averages—both of which cratered in ’17 (possibly due to TCJA). Historical uptrends in both PTPM and ROE are positive signs of economic moat.

Debt-to-Capital declined from 47.8% in ’15 to 5.9% in ’19 before reversing higher to 32.8% in ’22. Overall, this is much lower than peer and industry averages. Last-5-year average is 15.0% and the company has no long-term debt.

The only stick in the mud I see with regard to liquidity ratios is a Quick Ratio (QR) of 0.35. Value Line assigns a Financial Strength rating of B++. A closer look at the 2022 10-K confirms QR, which is chiefly due to two factors. First, advanced billings increased 34%. This means the company got paid upfront: not a bad thing. Second, cash and cash equivalents fell 94%. The report explains this was “due primarily to share repurchases.” On p.29, the company explains repurchase of 5,463,244 + 228,247 shares = 5,691.491 shares under two repurchase programs. I’m not sure why this is so much more than the 1,090,000-share decrease reported by Value Line for ’22, but I can see they have been repurchasing shares.

I forecast long-term sales growth of 11.0% based on the following:

I am forecasting below the range.

I forecast long-term annualized EPS growth of 10.0% based on the following:

I am forecasting below the long-term-estimate range (mean of three: 12.6%). My initial value will be ’22 EPS of $7.28/share rather than Q1 ’23 EPS of $7.90 (annualized).

My Forecast High P/E is 27. Excluding the upside outlier in ’16 (105), high P/E over the last six years has ranged from 32.4 in ’22 to 48.0 in ’21 with a last-5-year average of 37.0. I am forecasting below the last-5-year-average average P/E of 27.9.

My Forecast Low P/E is 16. Excluding the upside outlier in ’16 (71.7), low P/E over the last six years has ranged from 15.3 in ’20 to 27.2 in ’21 with a last-5-year average of 18.8. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast (LSPF) is the default value of $116.50 (based on $7.28/share initial EPS). This is 42.8% less than the previous closing price and 8.2% less than the ’22 low of $126.90.

These inputs land MEDP in the HOLD zone with an U/D ratio of 1.3. Total Annualized Return (TAR) is 9.2%.

PAR (using Forecast Average—not High—P/E) is 4.4%, 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 226 studies over the past 90 days (my study and 61 outliers excluded), averages for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 14.5%, 13.7%, 30.0, and 17.0, respectively. I am lower across the board. Value Line has a projected average annual P/E ratio of 20.0, which is lower than MS (23.5) and mine (21.5).

MS high and low EPS are $14.56/share and $7.32/share in contrast to my $11.72 and $7.28. My high EPS is probably lower due to a lower growth rate.

MS LSPF of $127.00 is very close to the $7.32 * 17.0 = $124.44 default value. It’s also 9.0% greater than mine.

PEG ratio is another value check that I will start tracking. My forward PEG is 21.5 / 10 = 2.2. A generally accepted upper limit is 1.0 – 1.5, but it’s also good to compare against the industry average [for which I don’t have a number].

MOS seems decent in the current study, but the stock is too expensive now. I would look to re-evaluate under $166/share.

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HEI Stock Study (5-29-23)

Posted by on July 3, 2023 at 07:22 | Last modified: May 29, 2023 10:23

I recently did a stock study on HEICO Corp. (HEI) with a closing price of $159.30. My original HEI study is here.

Value Line writes:

     > HEICO Corp. engages in the design, manufacture, and sale of aerospace,
     > defense, and electronics-related products and services. It operates in
     > two segments: The Flight Support Group (57% of 2022 sales) designs and
     > manufactures jet engine and aircraft component replacement parts. The
     > Electronic Technologies Group (43%) manufactures various electronic,
     > microwave, and electro-optical products. Sales by industry: commercial
     > aviation, 43%; defense/space, 39%; medical, electronics, and other, 18%.

This medium-size company has grown sales and EPS at annualized rates of 8.8% and 15.0%, respectively, since 2013. Lines are mostly up, straight, and parallel with a slight pullback in ’20 [and ’21 for EPS]. PTPM leads industry and peer averages while increasing from 17.9% (’13) to 22.2% (’22): good support for its Wide Economic Moat rating from M*. The last-5-year average is 20.9%.

ROE leads peers and lags the industry over the last decade in declining from 17.6% to 14.2% with a last-5-year average of 16.6%. Debt-to-Capital is lower than peer and industry averages in falling from 38.4% (’13) to 10.5% (’22) with a last-5-year average of 20.2%. Interest Coverage is 25.5 and Quick Ratio is 1.27. Value Line gives a B++ rating for Financial Strength.

I forecast long-term sales growth of 11.0% based on the following:

I am forecasting below the long-term estimate.

I forecast long-term annualized EPS growth of 12.0% based on the following:

I am forecasting below the long-term-estimate range (mean of five: 14.7%). My initial value is ’22 EPS of $2.55/share rather than Q2 ’23 EPS of $2.73 (annualized).

My Forecast High P/E is 48. High P/E has ranged from 32.3 (’15) to 67.4 (’21) over the last 10 years with a last-5-year average of 60.5. The trend continues higher, but I don’t expect this to continue forever. The last-5-year-average average P/E is 48.3. I will use that for the high despite still being outside my comfort zone.

My Forecast Low P/E is 34. Low P/E has trended higher with a range from 19.5 (’13) to 49.8 (’22) over the last decade. The last-5-year average is 36.1. I am forecasting just under this.

My Low Stock Price Forecast (LSPF) is the default value of $86.70 (based on $2.55/share initial EPS). This is 45.6% less than the previous closing price and 18.5% less than the 2021 low. At first glance, this may seem unreasonably low. However, using a higher price means a higher Forecast Low P/E [seems completely reasonable to me as is].

Payout Ratio has ranged from 5.7% to 7.7% over the last 10 years with a last-5-year average of 6.7%. I am forecasting conservatively at 5.0%.

These inputs land HEI in the HOLD zone with an U/D ratio of 0.8. Total Annualized Return (TAR) is 6.4%.

PAR (using Forecast Average—not High—P/E) is 3.1%, which is less than the 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 116 studies over the past 90 days (39 outliers including mine excluded), averages for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.8%, 12.0%, 43.1, 24.9, and 6.6%, respectively. I am only lower on EPS growth and Payout Ratio. Value Line projects a future average annual P/E of 49.5, which is [dubiously] higher than MS (34.0) and mine (41.0).

MS high and low EPS are $4.53/share and $2.39/share: very close to my $4.49 and $2.55.

MS LSPF of $68.00 implies a low P/E of 28.5 (vs. the above-stated 24.9), is 21.6% less than mine, and is 14.3% greater than the $2.39 * 24.9 = $59.51 default value. This confirms a lack of appreciable MOS behind the current study. Furthermore, the stock is so far above the BUY zone that the aggressive MS LSPF does not even matter right now.

PEG is another check on value that also shows a big disconnect. My forward PEG is 41 / 12 = 3.4. A generally-accepted upper limit is 1.0 – 1.5.

I would look to revisit HEI under $119/share.

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AMWD Stock Study (6-13-23)

Posted by on July 1, 2023 at 06:59 | Last modified: June 13, 2023 15:19

I recently did a stock study on American Woodmark Corp. (AMWD) with a closing price of $69.56.

Value Line writes:

     > American Woodmark Corporation manufactures and distributes kitchen
     > cabinets and vanities for the home construction and remodeling
     > markets. The company offers 550 cabinet lines in a wide variety of
     > designs, materials, and finishes, ranging from low to mid-tier
     > prices under the American Woodmark, Simply Woodmark, and other
     > brands. Acquired RSI Home Products, 12/17. Home Depot and Lowe’s
     > accounted for 48% of sales in fiscal 2021.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 12.8% and 12.6%.

Critical to the analysis is that the latter excludes -$1.79/share ’21 (FY ends April) EPS. With ’21 included, the EPS historical growth rate is -21.8%. I would reject that based on visual inspection. A closer look at the 10-K reveals a major contributor to the down year is a $65.8M pension settlement:

     > Prior to April 30, 2020, the Company had two non-contributory
     > defined benefit pension plans covering many of the Company’s
     > employees hired prior to April 30, 2012. Effective April 30, 2012,
     > the Company froze all future benefit accruals under the Company’s
     > hourly and salaried defined benefit pension plans. Effective April
     > 30, 2020, these plans were merged into one plan. Effective December
     > 31, 2020 the Plan was terminated in a standard termination and
     > benefits were distributed on December 2, 2021.

Adding back this one-time charge results in EPS of $2.33/share, which is at least positive and keeps much of the growth story intact. One thing I don’t like is the company’s “adjusted net income,” non-GAAP presentation, and “add backs” in every 10-K since 2018. Even though the items may be different, breaking this out annually makes me tempted to disregard all of it and just use GAAP, which for this stock does not clear the barbed-wire fence.

“Cost of Sales and Distribution” is also higher in ’21:

     > The decrease in gross profit margin was primarily due to higher
     > material and logistics costs, and increases related to wage and
     > retention programs. This was partially offset by the increase in
     > sales creating leverage of our fixed expenses in our operating
     > platforms.

This $117M impact, for which management may be on the hook, is almost double that of the pension settlement.

I will continue the study with ’21 data excluded. You can decide for yourself, of course.

Even without ’21 EPS, visual inspection is not pristine. Sales are up and mostly straight. EPS are down in ’17, ’19, and ’20, which gives somewhat of a rocky appearance.

Over the past decade, PTPM has gone from 4.6% in ’13 to 10.6% in ’16 before falling back to 5.9% in ’22 for a last-5-year mean of 5.8%. This is mostly below peer and industry averages.

Also over the past decade, ROE has gone from 11.2% in ’13 to 21.5% in ’16 before falling back to 11.1% in ’22 with a last-5-year mean of 10.7%: lower than peer averages and roughly even with the industry. Debt-to-Capital has gone from 10.2% in ’13 to 4.6% in ’16 before spiking to 58.3% in ’17 and trending down to 35.4% in ’22 for a last-5-year mean of 46.1%. This is lower than peer and industry averages.

Interest Coverage is 7.5, Quick Ratio is 0.97, and Financial Strength is B+ according to Value Line who writes:

     > Cash flow is positive. Operating needs are largely covered and
     > the company has ample liquidity ($365 million), providing
     > strategic and capital allocation flexibility. Share buybacks
     > are being considered for fiscal 2023 and/or 2024.

With regard to sales growth:

Only a projected slowdown in ’23 is unanimous. After that, it’s really anyone’s guess what the supposed recovery will look like. I am forecasting less than the one long-term estimate at 1.0%.

With regard to EPS growth:


I am forecasting toward the bottom of the long-term-estimate range (mean of four: 18.7%) at 9.0%.

Seeking Alpha and CNN Business have identical estimates, which is somewhat perplexing because CNN Business uses FactSet data and Seeking Alpha uses S&P Global Intelligence. I see this periodically when doing stock studies.

My Forecast High P/E is 16.0. Over the past decade, high P/E has trended down from 30.5 (’13) to 10.8 (downside outlier in ’22) with a last-5-year mean of 22.8 (’21 is NMF and ’17 is 39.4: possibly due to TCJA). The last-5-year-mean average P/E is 16.3. I am forecasting below the latter (only ’22 is less).

My Forecast Low P/E is 7.0. Over the past decade, low P/E has trended down from 22.8 in ’13 to 7.2 in ’22 with a last-5-year mean of 9.7 (’21 is NMF and ’17 is 20.9: possibly due to TCJA). I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default value of $39.30. This is 43.5% less than the previous closing price and 3.4% less than the 52-week low.

These inputs land AMWD in the HOLD zone with a U/D ratio of 2.3. Total Annualized Return (TAR) is 14.7%.

PAR (using Forecast Average—not High—P/E) is 7.4%, which is less than I like to see for a medium-size company. If a robust margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I usually compare my inputs with those of Member Sentiment (MS) but for this stock the sample size is too small. Based on only 3 studies over the past 60 days (3 outliers including mine excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 11.3%, 12.0%, 24.1, and 13.5, respectively. I am lower across the board. Value Line projects an average annual P/E of 13.0, which is lower than MS (18.8) and higher than mine (11.5).

MS high and low EPS are $9.61/share and $4.34/share compared to my $8.65 and $5.62. My high EPS is lower due to a lower EPS growth rate. As for low EPS, one MS study uses $5.62/share. The two others use $3.57/share and $4.34/share, which are precise matches to ’15 and ’16 EPS, respectively. Interesting…

MS Low Stock Price Forecast (LSPF) of $68.30 implies a low P/E of 15.7 (vs. the above-stated 13.5). This is 16.6% greater than the $4.34 * 13.5 = $58.59 default value, which results in higher-risk zoning. MS LSPF is also 73.8% higher than mine. This is puzzling. Looking closer, all three studies use LSPF higher than the actual closing stock prices on the day they were done. Those would be invalid.

While I cannot legitimately draw any conclusions in comparing with such a small MS sample size, I do think MOS is robust when taking into account growth and valuation projections from Value Line and other analyst estimates.

One thing that gives me pause about this stock is a low Value Line Earnings Predictability score of 55. This also appears in the Audit section as R^2 of 0.10 and 0.60 for the last 5 and 10 years, respectively. Does AMWD have a high probability of growing earnings consistently into the future?

With a high TAR and robust MOS, I would be a buyer under $64/share.

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