QLYS Stock Study (7-10-23)

Posted by Mark on September 7, 2023 at 06:43 | Last modified: July 10, 2023 20:09

I recently did a stock study on Qualys Inc. (QLYS) with a closing price of $129.20. The original study is here.

M* writes:

     > Qualys Inc. is a cloud security and compliance solutions
     > provider that helps businesses identify and manage their
     > security risks and compliance requirements. The California-
     > based company has more than 10,000 customers worldwide,
     > the majority of which are small- and medium-sized businesses.

Over the past decade, this small-size company has grown sales and EPS at 17.8% and 16.3% per year [fractional EPS years of ’13, ’15, and ’16 excluded that would otherwise inflate rate to 38.6%], respectively. Lines are mostly up, straight, and parallel except for EPS spike in ’14 along with EPS dips in ’15 and ’21. PTPM generally trails the industry and leads peer averages by rallying from 2.0% in ’13 to 27.3% in ’22 with a last-5-year mean of 24.4%.

Also over the past decade, ROE trails the industry and leads peer averages by rallying from 1.6% in ’13 to 28.8% in ’22 with a last-5-year mean of 20.2%. Having no long-term debt, Debt-to-Capital has been much lower than peer and industry averages with a last-5-year mean of 9.5% (uncapitalized leases).

Quick Ratio is 1.23. M* gives a Standard rating for Capital Allocation while Value Line assigns a B+ for Financial Strength.

With regard to sales growth:

• CNN Business projects 13.1% YOY and 12.6% per year for ’23 and ’22-’24, respectively (based on 15 analysts).
• YF projects YOY 13.1% and 11.9% for ’23 and ’24, respectively (18 analysts).
• Zacks projects YOY 13.2% and 12.4% for ’23 and ’24, respectively (7).
• Value Line projects 12.9% annualized growth from ’22-’27.
• CFRA projects 13.1% YOY and 12.6% per year for ’23 and ’22-’24, respectively (19).
• M* gives a 2-year ACE of 13.0% annualized growth while projecting 12.0% for the next five years in its analyst note.

I am forecasting conservatively below the range at 9.0%.

With regard to EPS growth:

• CNN Business projects 14.0% YOY and 12.8% per year for ’23 and ’22-’24, respectively (based on 15 analysts), along with 5-year annualized growth of 5.3%.
• MarketWatch projects 14.3% and 12.1% per year for ’22-’24 and ’22-’25, respectively (19 analysts).
• Nasdaq.com projects 14.1% YOY and 12.6% per year for ’24 and ’23-’25 (4, 4, and 2 analysts for ’23, ’24, and ’25).
• YF projects YOY 13.4% and 11.1% for ’23 and ’24, respectively (18), along with 5-year annualized growth of 8.0%.
• Zacks projects YOY 13.7% and 10.9% for ’23 and ’24, respectively (8).
• Value Line projects 10.4% annualized growth from ’22-’27.
• CFRA projects 54.0% YOY and 30.8% per year for ’23 and ’22-’24, respectively (19).
• M* projects long-term growth of 16.5% per year.

I am forecasting near the bottom of the long-term-estimate range (mean of four: 10.1%) at 6.0%. I will use ’22 EPS of $2.74/share as the initial value rather than ’23 Q1 $2.89 (annualized).

I don’t give much weight to the shorter-term estimates but I do find CFRA’s upside outliers to be notable especially since they report 19 analysts. This is a big spike that would probably command an outsized P/E.

My Forecast High P/E is 50.0. The lowest high P/E over the last decade is 50.3 in ’14. The last-5-year mean is 65.9, and the last-5-year-mean average P/E is 53.1. I am forecasting just under the latter, which is below the entire last-decade range.

The top of my comfort zone is around 35, but that results in a future high price only a few points higher than the previous close. Being a small company, perhaps Qualys still has years of “outlandish” P/E remaining. I will have to watch this closely.

My Forecast Low P/E is 31.0. The lowest low P/E over the past decade is 22.2 in ’14. The last-5-year average and last-10-year median is 40.3. I am forecasting near the bottom of the range [only ’14 and ’20 (28.3) are lower].

My Low Stock Price Forecast (LSPF) is the default $84.90 based on $2.74/share initial value. This is 34.3% less than the previous close, 16.0% less than the 52-week low, and 6.0% less than the 2021 low.

These inputs land QLYS in the HOLD zone with a U/D ratio of 1.5. Total Annualized Return (TAR) is 8.0%.

PAR (using Forecast Average—not High—P/E) of 3.6% 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 188 studies over the past 90 days (39 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 13.0%, 11.4%, 54.1, and 35.9, respectively. I am lower across the board.

MS high/low EPS is $4.94/$2.66 vs. my $3.67/$2.74 (per share). My high EPS is lower due to a lower forecast growth rate.

MS LSPF of $90.30 implies a Forecast Low P/E of 33.9 vs. the above-mentioned 35.9. MS LSPF is 5.4% lower than the default value of $2.66/share * 35.9 = $95.49, which results in more conservative zoning. MS LSPF remains 6.4% greater than mine.

Although Value Line does not provide a future average annual P/E projection, its high EPS of $4.50/share is much greater than mine. Based on this and MS comparisons, I deem MOS in the current study to be robust.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two valuation metrics I have recently begun to monitor. The former is 41 / 6 = 6.8 (substantially overvalued) while the latter is 0.81 (undervalued).

I am also starting to familiarize myself with Kim Butcher’s “quick and dirty DCF.” According to this method, the stock should be valued at 35 * [$6.00 – ($0.00 + $0.75)] = $183.75 (i.e. stock undervalued by 30.0%).

I would look to re-evaluate QLYS under $109/share.

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