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TTC Stock Study (10-3-23)

Posted by on December 30, 2023 at 06:29 | Last modified: October 3, 2023 11:09

I recently did a stock study on the Toro Co. (TTC) with a closing price of $82.85. The original study is here.

M* writes:

     > The Toro Co manufactures turf maintenance and landscaping equipment.
     > The company produces reel and rotary riding products, trim cutting and
     > walking mowers, greens rollers, turf sprayer equipment, underground
     > irrigation systems, heavy-duty walk-behind mowers, and sprinkler systems
     > used for professional turf and landscape maintenance and construction.
     > Its products are marketed through a network of distributors and dealers
     > to primarily professional users maintaining turfs and sports fields such
     > as golf courses. Its operating segments are Professional and
     > Residential. The company also produces snow plowers and ice
     > management products. Its largest end market is the United States.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 8.8% and 13.0%, respectively. Lines are mostly up, straight, and parallel without a single YOY decline. PTPM lags peers and leads industry averages while ranging from 10.3% in ’19 to 14.2% in ’18 with a last-5-year mean of 12.3%.

Also over the past decade, ROE leads peer and industry averages despite falling from 39.3% (’13) to 33.9% (’22) with a last-5-year mean of 33.9%. Debt-to-Capital is higher than peer and industry averages with a last-5-year average of 40.9%.

Interest Coverage is 9.3 and Quick Ratio is 0.59. Value Line rates the company B++ for Financial Strength.

With regard to sales growth:

I am forecasting below the long-term estimates at 5.0% per year.

With regard to EPS growth:

I am forecasting below the long-term estimate range (mean of three: 10.2%) at 8.0% per year. I will use 2023 Q3 EPS of $3.58/share (annualized) as the initial value rather than ’22 EPS of $4.20.

My Forecast High P/E is 24.0. Over the past decade, high P/E ranges from 21.4 in ’15 to 31.3 in ’21 with a last-5-year mean of 28.8. The last-5-year-mean average P/E is 24.2. I am forecasting just under the latter.

My Forecast Low P/E is 18.0. Over the past decade, low P/E ranges from 15.4 in ’13 to 21.7 in ’21 with a last-5-year mean of 19.7. I am forecasting below the latter.

My Low Stock Price Forecast (LSPF) of $64.40 is default based on $3.58/share initial value. This is 22.3% less than the previous closing price and 17.8% less than the 52-week low. While this is substantially lower than the latter, I stick to the 20.0% guideline; a small denominator is an easy way to bias U/D in favor of BUY.

Over the past decade, the lowest Payout Ratio is 21.4% in ’13 and the last-5-year mean is 31.4%. I am forecasting below the range at 21.0%.

These inputs land TTC in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 8.7%.

PAR (using Forecast Average—not High—P/E) of 5.9% is less than I seek in 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 74 studies (my study and 19 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 7.7%, 9.1%, 27.1, 18.7, and 31.3%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 18.0 is less than MS (22.9) and less than mine (21.0).

MS high / low EPS are $6.80 / $4.48 versus my $5.02 / $3.58 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is greater than both at $7.00.

MS LSPF of $73.70 implies a Forecast Low P/E of 16.5: less than the above-stated 17.8. MS LSPF is 12.0% less than the default $4.48/share * 18.7 = $83.78 [invalid on today’s date]. This results in more conservative zoning. MS LSPF is still 14.4% greater than mine.

My TAR (over 15.0% preferred) is much less than the 15.4% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 3.1 per my projected P/E: significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is neutral at 0.95. Kim Butcher’s “quick and dirty DCF” prices the stock at 16.0 * [$7.95 – ($1.56 + $1.00)] = $86.24, which suggests it to be 3.9% undervalued.

TTC is a BUY under $78. With a forecast high price of $120.50, TAR should meet my 15% criterion closer to $60/share.

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LFUS Stock Study (9-28-23)

Posted by on December 28, 2023 at 06:19 | Last modified: September 28, 2023 11:05

I recently did a stock study on Littelfuse Inc. (LFUS) with a closing price of $243.51. Previous studies are here and here.

M* writes:

     > Littelfuse is a primary provider of circuit protection products
     > (such as fuses and relays) into the transportation, industrial,
     > telecommunications, and consumer electronics end markets. The
     > firm is also increasing its power semiconductor business, where
     > it predominantly serves industrial end markets and is breaking
     > into electric vehicle charging infrastructure.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 13.6% and 13.8%, respectively. Lines are generally up and parallel with sales declines in ’19 and ’20 along with EPS declines in ’15, ’19, and ’20. PTPM leads peer and industry averages while appearing cyclical with a last-5-year mean of 13.6%.

Also over the past decade, ROE leads peer averages and is roughly even with the industry by decreasing from 13.4% (’13) to 8.5% (’20) and recovering to 17.7% (’22) for a last-5-year mean of 12.3%. Debt-to-Capital is lower than industry averages while exceeding peers by increasing from 24.2% (’13) to 32.4% (’22) for a last-5-year mean of 30.6%.

Interest Coverage is 11.6 and Quick Ratio is 1.7. Value Line rates the company B++ for Financial Strength and M* gives a “Standard” rating for Capital Allocation, writing that the company has a sound balance sheet and low net debt.

With regard to sales growth:

I am discounting the long-term estimate by nearly half to 2.0% per year due to the negative short-term projections.

With regard to EPS growth:

Value Line is a downside outlier of six long-term EPS projections. Its left-margin table says 14.5% annualized from ’20-’22 to ’26-’28, but the statistical array projects as stated above.

I wonder about data duplication with companies covered by few analysts. Three of the six long-term estimates here are exactly 12.0% (not 11.8%, 12.1%, etc.) despite coming from three different data sources; could those be the same analysts?

The mean of 6 long-term estimates is 9.5%. If I count the duplicate estimates just once, then the mean (4 estimates) is 8.3%. I am cutting this by ~40% to get my 5.0% per year forecast. I will use 2023 Q2 EPS of $13.09/share (annualized) as the initial value rather than ’22 EPS of $14.94 to be conservative.

My Forecast High P/E is 21.0. Over the past decade, high P/E goes from 24.1 in ’13 to 48.5 in ’20 then back to 21.9 in ’22. The last-5-year mean high P/E is 34.6 and the last-5-year-mean average P/E is 27.7. I am forecasting below the entire range.

My Forecast Low P/E is 14.0. Over the past decade, low P/E goes from 15.3 in ’13 to 28.2 in ’17 before retreating to 12.9 in ’22. The last-5-year mean is 20.7. I am forecasting near the bottom of the range (only ’22 is lower).

My Low Stock Price Forecast (LSPF) of $183.30 is default based on $13.78/share EPS. This is 24.7% less than the previous closing price and 4.6% less than the 52-week low.

Over the past decade, Payout Ratio ranges from 15.1% in ’22 to 36.3% in ’20 with a last-5-year average of 25.2%. I am forecasting just below the range at 15.0%.

These inputs land LFUS in the HOLD zone with a U/D ratio of 1.8. Total Annualized Return (TAR) is 8.3%.

PAR (using Forecast Average—not High—P/E) of 4.6% 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 114 studies (my study and 43 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 7.8%, 8.3%, 26.0, 17.8, and 26.5%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 22.0 is just higher than MS (21.9) and much higher than mine (17.5).

MS high / low EPS are $19.68 / $13.28 versus my $16.71 / $13.09 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is $19.25. I am lowest of the three.

MS LSPF of $189.30 implies a Forecast Low P/E of 14.3: less than the above-stated 17.8. MS LSPF is 19.9% less than the default $13.28/share * 17.8 = $236.38, which results in more conservative zoning. MS LSPF is still 3.3% greater than mine.

My TAR (over 15.0% preferred) is much less than the 16.1% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 1.7 and 3.5 per Zacks and my projected P/E, respectively: the latter significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is cheap at 0.7. Kim Butcher’s “quick and dirty DCF” prices the stock at 16.0 * [$24.20 – ($3.00 + $4.20)] = $272.00, which suggests the stock to be 10.5% undervalued.

LFUS is a BUY under $225. With a forecast high price at $350.80, TAR should meet my 15% criterion around $175/share.

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AL Stock Study (10-16-23)

Posted by on December 27, 2023 at 06:41 | Last modified: October 16, 2023 13:35

I recently did a stock study on Air Lease Corp. (AL) with a closing price of $35.74. Previous studies are here and here.

M* writes:

     > Air Lease Corp is an aircraft leasing company based in the
     > United States. However, it derives its revenue from the Asia
     > region. Its business involves purchasing aircraft from
     > renowned manufacturers such as The Boeing Company
     > (Boeing) and Airbus S.A.S and leasing them to airline
     > companies across the world. Its suite of aircraft entails
     > single-aisle narrow-bodied jets and twin-aisle wide-bodied
     > aircraft. The company’s primary source of revenue
     > originates from the leasing of aircraft and to a
     > certain extent from the provision of fleet management
     > services to investors and owners of aircraft portfolios.

Over the past decade, this medium-size company has grown sales 11.1% per year. Earnings have grown 11.3% per year from ’13-’21. I am excluding the 2022 GAAP loss of $1.24/share due to aircraft in Russia. From the 2022 10-K:

     > In response to the sanctions, in March 2022 we terminated
     > all of our leasing activities in Russia, consisting of 24
     > aircraft in our owned fleet, eight aircraft in our managed
     > fleet and the leasing activity relating to 29 aircraft that
     > that had not yet delivered from our orderbook, all of which
     > have been subsequently placed. In the first quarter of
     > 2022, we also canceled five aircraft in our orderbook that
     > were slated for delivery in Russia.
     >
     > While we or the respective managed platform maintain title
     > to the aircraft, we determined that it is unlikely we or
     > they will regain possession of the aircraft that are
     > detained in Russia. As a result, we recorded a write-off of
     > our interests in our owned and managed aircraft that are
     > detained in Russia, totaling approximately $802.4 million
     > for the three months ended March 31, 2022. The 21 aircraft
     > that remained in Russia were removed from our fleet as of
     > March 31, 2022.

Excluding ’22, sales are up and mostly straight while earnings peak in ’19 (excluding ’17 when EPS spikes ~100% due to TCJA). PTPM is higher than peer and industry averages by increasing from 34.2% in ’13 to 40.9% in ’16 before heading down to 25.9% in ’21 for a last-5-year mean (excluding ’22) of 33.2%.

ROE is slightly better than peer averages and mostly lower than the industry in going from 7.5% in ’13 to 11.4% in ’18 (’17 excluded due to TCJA) before falling to 6.2% in ’21 for a last-5-year mean (excluding ’22) of 9.1%. This is slightly better than peer averages and mostly less than than the industry.

Debt-to-Capital averages 71.8% over the last five years, which is less than than peer and industry averages but still uncomfortably high. M* lists Interest Coverage as 13.0 and Quick Ratio as 0.37. FCF has been negative since at least ’20.

Despite the red flags, M Ramirez writes in this SA article:

     > The main negative point for the market is that Air Lease is
     > a finance company and as such needs a lot of debt to operate
     > on a large scale with the assets it holds. Leverage is
     > currently high (about 2.5 debt/equity), although in no case
     > is the amount of debt greater than the total value of the
     > company’s assets… although a priori the debt seems exorbitant,
     > the company finances more than 95% of the debt at a fixed rate
     > (…close to 3%), which, together with the high predictability
     > of its cash flows, makes it practically impossible for the
     > company to go bankrupt. The company could stop aircraft
     > purchases for 5 years and with the cash flows repay half of
     > the debt without increasing rents to the lessees.

With regard to sales growth:

I am forecasting below the range at 11.0% per year.

With regard to EPS growth:

Three of four long-term estimates are 9.8% with the fourth extremely high. I am disregarding the latter in case it was calculated off a negative base and forecasting below the former at 7.0%. Sans write-off (discussed above), I calculate ’22 earnings at $5.67/share rather than -$1.24. This results in high EPS of $7.95/share.

My Forecast High P/E is 9.0. From ’13-’21, high P/E ranges from 7.2 in ’17 to 18.6 in ’13 with a last-5-year mean of 11.7. The last-5-year-mean average P/E is 9.5. I am forecasting near the bottom of the range (only ’17 is lower).

My Forecast Low P/E is 5.5. From ’13-’21, low P/E ranges from 5.0 in ’17 (1.9 in ’20 excluded due to COVID-19) to 14.6 in ’14 with a last-5-year mean of 7.4 . I am forecasting near the bottom of the range (only ’17 is lower).

My Low Stock Price Forecast (LSPF) of $24.80 is default based on $4.50/share initial value. This is 30.6% less than the previous close and 18.2% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 4.8% in ’17 to 18.6% in ’21 with a last-5-year mean of 13.1% (2022 NMF excluded). I am forecasting conservatively at 5.0%.

These inputs land AL in the BUY zone with a U/D ratio of 3.3. Total Annualized Return (TAR) is 15.4%.

PAR (using Forecast Average—not High—P/E) of 10.7% 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 185 studies over the past 90 days (my study and 72 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 11.6%, 11.9%, 11.0, 6.0, and 9.0%, respectively. I am lower across the board.

MS high/low EPS is $7.53/$4.20 vs. my $7.93/$5.67 (per share). My high EPS is higher due to the higher initial value. As evidenced by MS mean EPS growth of 39.0%,others have also dealt with significant confusion in figuring out how to deal with negative EPS in ’22. This somewhat obscures my ability to determine MOS because MS data are highly scattered.

MS LSPF of $27.70 implies a Forecast Low P/E of 6.6 vs. the above-stated 6.0. MS LSPF is 9.9% greater than the default value of $4.20/share * 6.0 = $25.20, which results in more aggressive zoning. MS LSPF is also 11.7% greater than mine.

My TAR (over 15.0% preferred) is less than MS 17.5%. Despite a higher EPS range, MOS seems robust in the current study.

I track a few different valuation metrics. PEG is 0.8 and 1.4 per Zacks and my projected P/E, respectively: both quite reasonable. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is also reasonable at 0.9. For once, these metrics are in relative agreement with each other.

AL is a BUY under $36. With a forecast high price at $71.30, TAR should meet my 15% criterion right about now.

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DORM Stock Study (9-27-23)

Posted by on December 26, 2023 at 06:43 | Last modified: September 27, 2023 11:37

I recently did a stock study on Dorman Products Inc. (DORM) with a closing price of $73.66.

M* writes:

     > Dorman Products Inc is a supplier of original equipment parts
     > for automobiles. The company produces automotive and heavy-
     > duty replacement parts, automotive hardware, brake parts, and
     > fasteners for the automotive and heavy-duty aftermarket. The
     > products are sold under the Dorman brand and its sub-brands
     > OE Solutions, Help!, Conduct-Tite, and HD Solutions through
     > aftermarket retailers, regional and local warehouse
     > distributors, specialty markets, and salvage yards. It
     > operates as a single reportable operating segment, namely,
     > the sale of replacement and upgrades parts in the motor
     > vehicle aftermarket industry, serving passenger cars, light-,
     > medium-,and heavy-duty trucks as well as specialty vehicles.
     > The company operates primarily in the United States.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 9.4% and 5.8%, respectively. Lines are up, somewhat straight, and [I stretch to say] parallel. Admittedly, visual inspection is not great due to EPS declines in ’19 (big) and ’22 making growth look inconsistent [’23 looks to be challenging as well: see below]. PTPM leads peer and industry averages despite falling from 19.2% (’13) to 9.0% (’22) with a last-5-year mean of 12.5%.

Also over the past decade, ROE is roughly even with the industry and higher than peer averages while falling from 20.8% (’13) to 11.9% (’22) with a last-5-year mean of 13.7%. Debt-to-Capital is less than peer and industry averages despite increasing from 0% (through ’18) to 44.4% in ’22 with a last-5-year mean of 15.2%.

Interest Coverage is 4.0 and Quick Ratio is 0.9. Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

I am forecasting below the long-term estimate at 6.0% per year.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of three: 14.1%) at 10.0% per year.

Determining the initial value is a bit more complex. 2023 EPS are tracking much lower than ’22 for the first six months. According to the 10-Q:

     > The increase in SG&A as a percentage of net sales was
     > primarily due to the impact of higher interest rates on
     > our customer accounts receivable factoring programs and
     > the addition of SuperATV, which has higher SG&A expenses
     > as a percentage of net sales than the Company average.
     > SG&A expenses as a percentage of net sales also increased
     > in the three months ended April 1, 2023 as a result of a
     > charge recorded related to a customer bankruptcy filing.

The bankruptcy filing is a nonrecurring event. SuperATV (recent takeover target) seems recurring. I don’t know if “factoring programs” are ongoing or nonrecurring and I don’t know how much of each contributes to the total difference.

Given the uncertainty, I feel the need to use the depressed EPS for initial value in an effort to be conservative. I do find it odd that no short- or long-term EPS projections are negative when 2023 Q1 and Q2 are tracking significantly below ’22 values. Nevertheless, I will use 2023 Q2 EPS of $2.76/share (annualized) as the initial value rather than ’22 EPS of $3.85.

My Forecast High P/E is 24.0. Over the past decade, high P/E ranges from 20.7 in ’15 to 38.0 in ’19 with a last-5-year mean of 30.4. The last-5-year-mean average P/E is 24.7. I am forecasting below the latter [only ’15 (20.7) and ’18 (22.7) are lower].

My Forecast Low P/E is 13.0. Over the past decade, low P/E ranges from 13.1 in ’16 to 26.3 in ’19 with a last-5-year mean of 19.0. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) is $58.00. The default LSPF of $35.90 is 51.3% less than the previous close and 51.0% less than the 52-week low. I find this unreasonable. With the stock currently at the 52-week low, I am discounting 21.3% to get my LSPF. This implies a Forecast Low P/E of 58 / 2.76 = 21.0.

These inputs land DORM in the HOLD zone with a U/D ratio of 2.1. Total Annualized Return (TAR) is 7.7%.

PAR (using Forecast Average—not High—P/E) of 2.2% 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 32 studies (my study and 8 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 8.7%, 10.6%, 25.8, and 16.6, respectively. I am lower across the board [except perhaps for my implied Forecast Low P/E that has been effectively raised by overriding LSPF; I’ll see below whether MS has done the same]. Value Line’s projected average annual P/E of 20.0 is lower than MS (21.2) and mine (18.5).

MS high / low EPS are $5.50 / $2.78 vs. my $4.44 / $2.76 (per share). My EPS range is lower and my low EPS is lower. Value Line has high EPS at $8.85/share: much higher than both.

MS LSPF of $53.60 implies a Forecast Low P/E of 19.3, which is greater than the above-stated 16.6 [not nearly as big a difference as my implied Forecast Low P/E]. MS LSPF is 16.2% greater than the default $2.78/share * 16.6 = $46.15, which results in more aggressive zoning. MS LSPF is more conservative than mine, however, being 7.6% less.

My TAR (over 15.0% preferred) is much less than the 12.1% from MS.

Despite raising LSPF to something that seems reasonable at the moment, MOS seems robust in this study. My final buy/sell decisions are based more on TAR/PAR than they are upside/downside ratio. While the latter will qualify a potential BUY, I use the former to finalize it.

I track a few different [usually conflicting] valuation metrics. PEG of 2.4 based on my projected P/E suggests the stock to be overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* agrees at 1.1. Kim Butcher’s “quick and dirty DCF” prices the stock at 16.0 * [$11.40 – ($0.00 + $1.30)] = $161.60, which suggests the stock to be 54.4% undervalued [this strikes me as NMF as I continue to evaluate the utility of this metric].

DORM is a BUY under $70. With a forecast high price at $106.60, TAR should meet my 15% criterion around $53/share.

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NAPA Stock Study (10-10-23)

Posted by on December 23, 2023 at 06:14 | Last modified: October 10, 2023 10:53

I recently did a stock study on Duckhorn Portfolio Inc. (NAPA) with a closing price of $9.87. The original study is here.

Value Line writes:

     > The Duckhorn Portfolio, Inc. produces and sells wines in North America.
     > It offers wines under a portfolio of brands, including Duckhorn
     > Vineyards, Decoy, Goldeneye, Paraduxx, Migration, Canvasback, Calera,
     > Kosta Browne, Greenwing, and Postmark. The company sells wines to
     > distributors, and directly to retail accounts and consumers. The
     > company was formerly known as Mallard Intermediate, Inc. and changed
     > its name to The Duckhorn Portfolio, Inc. in February 2021. The Duckhorn
     > Portfolio, Inc. was founded in 1976 and is headquartered in Saint
     > Helena, California. The Duckhorn Portfolio, Inc. operates as a
     > subsidiary of Mallard Holding Company, Llc.

This small-size company went public in 2021 and has financials available since 2019. Over that time, Duckhorn has grown sales and EPS at 14.4% and 33.4% per year, respectively. Lines are mostly up, straight, and parallel.

Over the past five years, PTPM leads (trails) peer (industry) averages while increasing from 12.4% (’19) to 23.4% (’23) with a last-5-year mean of 19.3%. Debt-to-Capital is down from 40.1% (’19) to 21.2% (’23) with a last-5-year mean of 28.8%.

ROE is lower than industry averages and about even with peers with a last-3-year mean of 7.3%.

Current Ratio is 5.2, Quick Ratio is 0.7, and Interest Coverage is 9.1. Value Line assigns a B+ rating for Financial Strength.

With regard to sales growth:

I am forecasting conservatively below the range at 4.0% per year.

With regard to EPS growth:

I am forecasting conservatively below the long-term-estimate range (mean of five: 7.3%) at 5.0% per year and using 2023 EPS of $0.60/share as the initial value.

My Forecast High P/E is 30.0. High P/E over the last three years (only data available) is 47.2, 48.6, and 32.3 (mean 42.7). The last-3-year-mean average P/E is 35.5. I am forecasting below the range.

My Forecast Low P/E is 12.0. Low P/E over the last three years (only data available) is 31.1, 33.1, and 20.7 (mean 28.3). I am forecasting well below the range.

My Low Stock Price Forecast (LSPF) of $7.20 is default based on $0.60/share initial value. This is 27.1% less than the previous close and 22.6% less than the 52-week low.

These inputs land NAPA in the BUY zone with a U/D ratio of 4.9. Total Annualized Return (TAR) is 18.5%.

PAR (using Forecast Average—not High—P/E) of 10.4% is 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). Based on only three studies (my study excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 8.0%, 7.0%, 41.7, and 23.0, respectively. I am lower across the board. Value Line’s projected average annual P/E of 25.0 is lower than MS (32.4) and higher than mine (21.0).

MS high / low EPS are $0.76 / $0.50 versus my $0.77 / $0.60 (per share). My range is probably higher due to a higher initial value (the recently-released 2023 EPS). Value Line’s high EPS is $0.85: highest of the three.

MS LSPF of $11.70 (invalid on today’s date) implies a Forecast Low P/E of 23.4: greater than the above-stated 23.0. MS LSPF is 1.7% greater than the default $0.50/share * 23.0 = $11.50, which is also invalid on today’s date. MS LSPF is 62.5% greater than mine. The small sample size is not helping MS here as one study with questionable judgment (e.g. about one week ago) can substantially affect the average.

My TAR (over 15.0% preferred) is less than the 19.7% from MS. While I cannot use MS as a valid comparison due to the tiny sample size, I think MOS seems robust in the current study. My growth rates are less than analyst estimates and my P/E range is lower than brief history.

I track a few different [usually conflicting] valuation metrics. PEG is 2.0 and 3.1 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is very low at 0.5.

NAPA is a BUY under $11 and TAR meets my 15% criterion right now. The stock is down nearly 25% since July (also explains MS LSPF), but fundamentals don’t seem affected. The biggest knock against this company may be its short data history.

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MYRG Stock Study (9-26-23)

Posted by on December 22, 2023 at 06:32 | Last modified: September 26, 2023 11:07

I recently did a stock study on MYR Group, Inc. (MYRG) with a closing price of $136.97.

M* writes:

     > MYR Group Inc is a U.S.-based holding company that provides
     > specialty electrical construction services through its
     > subsidiaries. The company operates through two segments.
     > The transmission and distribution segment provides designing,
     > engineering, procurement, construction, upgrade, maintenance,
     > and repair services on transmission and distribution network
     > and substation facilities. The commercial and industrial
     > segment provides services such as the design, installation,
     > maintenance, and repair of commercial and industrial wiring,
     > installation of traffic networks, and the installation of
     > bridges. MYR Group generates the majority of its sales from
     > the United States and Canada.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 15.1% and 16.1%, respectively. Lines are mostly up, straight, and parallel except for EPS declines in ’15, ’16, and ’22. PTPM roughly matches industry averages but trails peers as it declines from 6.1% (’13) to 3.8% (’22) with a last-5-year mean of 3.5%.

Also over the past decade, ROE leads peer and industry averages by increasing from 12.0% (’13) to 15.2% (’22) with a last-5-year mean of 13.4%. Debt-to-Capital is far below peer and industry averages, ranging from 0% (through ’15) to 34.3% in ’19 with a last-5-year mean of 16.7%.

Interest Coverage is 29.7 and Quick Ratio is 1.3. Value Line gives a B+ rating for Financial Strength and M* assigns the company a “Narrow” economic moat.

With regard to sales growth:

I am discounting the long-term estimate to 9.0% per year based on lower short-term growth projections.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of four: 19.0%) at 14.0%. I will use ’22 EPS of $4.91 rather than 2023 Q2 EPS of $5.26/share (annualized).

My Forecast High P/E is 20.0. Over the past decade, high P/E ranges from 16.8 in ’14 to 34.2 in ’17 with a last-5-year mean of 20.7 and last-10-year median of 22.3. My forecast is below these averages. The last-5-year-mean average P/E is 16.1.

My Forecast Low P/E is 13.0. Over the past decade, low P/E ranges from 4.7 (downside outlier in ’20) to 18.0 in ’17 with a last-5-year mean of 13.1 (excluding the outlier). I am forecasting just below the latter.

My Low Stock Price Forecast (LSPF) is $77.00. The default based on $4.91/share initial value is $63.80, which is 53.4% less than the previous close. I am overriding this to the 52-week low price that is still 43.8% less than the previous close and implies a Forecast Low P/E of 15.7.

These inputs land MYRG in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 6.7%.

PAR (using Forecast Average—not High—P/E) of 4.3% 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 72 studies (my study and 22 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 11.7%, 12.1%, 21.5, and 12.5, respectively. My EPS growth rate and Forecast Low P/E are both higher. Value Line’s projected average annual P/E of 18.0 is higher than MS (17.0) and mine (17.5).

MS high / low EPS are $9.23 / $4.74 versus my $9.45 / $4.91 (per share). These are roughly equal and far below Value Line’s $12.80 high EPS.

MS LSPF of $69.50 implies a Forecast Low P/E of 14.7: greater than the above-stated 12.5. MS LSPF is 17.3% greater than than the default $4.74/share * 12.5 = $59.25, which results in more aggressive zoning. MS LSPF is still 9.7% less than mine.

My TAR (over 15.0% preferred) is slightly less than the 7.0% from MS. MOS seems weak in the current study. While selecting inputs, I noticed this when choosing Forecast High P/E, Forecast Low P/E, and LSPF.

I track a few different valuation metrics. PEG is 1.6 per my projected P/E (based on what may be a relatively high EPS growth rate): slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is about as expensive as I have ever seen at 1.6. Kim Butcher’s “quick and dirty DCF” prices the stock at 13.0 * [$16.85 – ($0.00 + $6.25)] = $137.80, which suggests the stock to be 0.6% undervalued.

MYRG is a BUY under $105. With a forecast high price of $189.10, TAR should meet my 15% criterion around $95/share.

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ARW Stock Study (9-21-23)

Posted by on December 20, 2023 at 07:00 | Last modified: September 21, 2023 14:46

I recently did a stock study on Arrow Electronics, Inc. (ARW) with a closing price of $127.90.

Value Line writes:

     > Arrow Electronics, Inc. is a global distributor of electronic
     > components and computer products to industrial and commercial
     > customers. Has over 220 selling locations and 43 distribution
     > centers in more than 90 countries and territories. Semiconductor
     > and computer products in ’22 accounted for 78% and 22%, resp.,
     > of sales. Geographic sales: Americas, 39%; Europe, 30%;
     > Asia/Pacific, 31%. Acquired: Circle IT, ’21; eInfochips, ’18;
     > EE times, ’16; immixGroup, ’15; Nu Horizons, ’11.

Over the past decade, this large-size company has grown sales and EPS at annualized rates of 6.0% and 18.0%, respectively (I am excluding ’19 EPS of -$2.44 from my analysis as Value Line and CFRA both normalize as a nonrecurring event). Lines are up, straight, and narrowing except for sales dips in ’19 and ’20 and EPS declines in ’17 and ’20. PTPM is greater than peer and industry averages and recently trending higher, increasing from 2.7% (’13) to 5.1% (’22) with a last-5-year mean of 3.8%.

Also over the past decade, ROE leads peer and industry averages while trending up from 9.6% (’13) to 24.6% (’22) with a last-5-year mean of 17.3%. Debt-to-Capital is higher than peer and industry averages, however, ranging from 30.7% in ’20 to 40.5% in ’22 with a last-5-year mean of 36.4%.

Interest Coverage is 6.7 and Quick Ratio is 2.1. Value Line gives an A rating for Financial Strength.

With regard to sales growth:

I am discounting the long-term estimate to 0% due to unanimous projection of short-term contraction.

With regard to EPS growth:

Three of five long-term estimates are negative (mean: -1.9%). I am forecasting below at -3.0% per year. I will use 2023 Q2 EPS of $19.65/share (annualized) as the initial value for high EPS rather than ’22 EPS of $21.80. For low EPS, I will use ’21 EPS of $15.10 (arbitrary).

My Forecast High P/E is 9.0. Over the past decade, high P/E ranges from 6.3 in ’22 to 18.9 in ’17 with a last-10-year median of 12.7 and a last-5-year-mean average P/E of 7.9. The last-5-year mean is 9.9. I am forecasting below the latter (not particularly conservative).

My Forecast Low P/E is 6.0. Over the past decade, low P/E ranges from 4.1 in ’22 to 15.3 in ’17 with a last-5-year mean of 5.9. I am forecasting just above the latter (not conservative).

My Low Stock Price Forecast (LSPF) of $90.60 is default based on $15.10/share initial value. This is 29.2% less than the previous closing price but 1.3% above the 52-week low.

These inputs land ARW in the HOLD zone with a U/D ratio of 0.7. Total Annualized Return (TAR) is 3.6%.

PAR (using Forecast Average—not High—P/E) is negative, which is likely a SELL anytime I see it. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead but even that is less than the current yield on T-bills.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 4 studies (my study and 2 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 5.0%, 5.1%, 9.6, and 7.7, respectively. I am lower across the board. Value Line’s projected average annual P/E of 8.0 is lower than MS (8.7) but higher than mine (7.5).

MS high/low EPS are $28.25/$19.66 vs. my $16.87/$15.10 (per share). Value Line’s high EPS is $28.50. I am far below either.

MS LSPF of $68.50 implies a Forecast Low P/E of 3.5, which is substantially less than the above-stated 7.7. MS LSPF is 54.8% less than the default $19.66/share * 7.7 = $151.38 (invalid on today’s date), which results in more conservative zoning. MS LSPF is also 32.3% less than mine. This does not give me confidence in MS estimates given the tiny sample size (4).

My TAR (I prefer >15.0%) is much less than the 14.9% from MS. Again, this shouldn’t factor much into my MOS assessment due to the tiny sample size.

I categorize MOS as moderate. My inputs are at or below the averages. My initial values seem adequately discounted.

I track a few different valuation metrics. PEG is 2.0 and 2.2 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is undervalued at 0.82. Kim Butcher’s “quick and dirty DCF” prices the stock at 6.5 * [$33.30 – ($0.00 + $2.50)] = $200.20, which suggests the stock to be 36.1% undervalued. These last two metrics are encouraging [if I could believe in them; the three metrics rarely align].

Based on this study, ARW is a BUY under $105/share. To meet my personal TAR criterion, I need closer to $76. As I said the other day with regard to MKSI, for me to feel good about investing in this stock I need to see a more convincing outlook for EPS growth, which I don’t currently have.

I think an argument can be made to terminate the analysis upon seeing a negative mean long-term-EPS-growth projection. Just like we require passing of visual inspection for a core position, we should expect to see a positive EPS outlook. If that is not available, then it’s certainly not a “high-quality growth stock” and maybe it’s just not the right time to invest. For cyclical industries, I would think every negative quarter that passes is one quarter closer to growth.

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MPWR Stock Study (9-21-23)

Posted by on December 18, 2023 at 06:19 | Last modified: September 21, 2023 13:55

I recently did a stock study on Monolithic Power Systems, Inc. (MPWR) with a closing price of $457.78.

M* writes:

     > Monolithic Power Systems is an analog and mixed-signal chipmaker,
     > specializing in power management solutions. The firm’s mission is
     > to reduce total energy consumption in end systems, and it serves
     > the computing, automotive, industrial, communications, and
     > consumer end markets. MPS uses a fabless manufacturing model,
     > partnering with third-party chip foundries to host its
     > proprietary BCD process technology.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 23.4% and 23.2%, respectively. Lines are up, straight, and narrowing except for an EPS dip in ’15. PTPM leads peer averages but trails the industry despite increasing from 10.1% in (’13) to 29.3% (’22) with a last-5-year mean of 22.0%.

Also over the past decade, ROE leads peer averages but trails the industry despite increasing from 7.1% (’13) to 27.9% (’22) with a last-5-year mean of 19.2%. Debt-to-Capital is far below peer and industry averages by remaining debt-free except for 0.3% in ’19 and ’20 for a last-5-year mean of 0.1%.

[As a result] Interest Coverage is NMF (indeterminate) and Quick Ratio is an amazing 4.5. M* rates the company “Standard” for Capital Allocation, and Value Line gives an A+ rating for Financial Strength.

With regard to sales growth:

I am forecasting below the two long-term estimates at 10.0% per year.

With regard to EPS growth:

I am forecasting near the bottom of the 5-long-term estimate range (mean 17.8%) at 12.0% per year. I will use ’22 EPS of $9.05/share as the initial value rather than 2023 Q2 $9.32 (annualized).

My Forecast High P/E is 50.0. Over the past decade, high P/E ranges from 56.9 in ’14 to 115 in ’21 with a last-5-year mean of 84.2. The last-5-year-mean average P/E is 64.0. I am forecasting below the entire range.

My Forecast Low P/E is 33.0. Over the past decade, low P/E ranges from 33.3 in ’22 to 59.7 in ’21 with a last-5-year mean of 43.7. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) of $298.70 is default based on the initial value of $9.05/share. This is 34.8% less than the previous closing price and 1.0% less than the 52-week low.

Since 2014, Payout Ratio ranges from 33.1% (’22) to 93.0% (’15) with a last-5-year mean of 51.2%. I am forecasting conservatively below the range at 33.0%.

These inputs land MPWR in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 12.1%.

PAR (using Forecast Average—not High—P/E) is 8.2%, which is less than I seek in 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 198 studies (my study and 86 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 15.0%, 16.0%, 60.0, 41.0, and 54.8%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 40.0 is lower than MS (50.5) and lower than mine (41.5).

MS high / low EPS are $19.41 / $8.36 vs. my $15.95 / $9.05 (per share). My high EPS is lower due to a lower growth estimate. Value Line projects $19.00/share for high EPS, which is greater than mine.

MS LSPF of $301.70 implies a Forecast Low P/E of 36.1: less than the above-stated 41.0. MS LSPF is also 12.0% less than the default $8.36/share * 41.0 = $342.76, which results in more conservative zoning. MS LSPF remains 1.0% greater than mine.

My TAR (I prefer >15.0%) is less than MS 19.5%. MOS in the current study appears to be robust.

I track a few [usually conflicting] valuation metrics. PEG is 2.2 and 3.2 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is undervalued at 0.78. Kim Butcher’s “quick and dirty DCF” prices the stock at 36.0 * [$20.20 – ($5.00 + $3.00)] = $439.20, which suggests the stock to be fairly valued.

MPWR is a BUY under $423/share. To meet my personal TAR criterion, I probably need a price under $400.

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MED Stock Study (10-9-23)

Posted by on December 15, 2023 at 06:17 | Last modified: October 9, 2023 15:20

I recently did a stock study on Medifast, Inc. (MED) with a closing price of $73.87. Previous studies are here and here.

M* writes:

     > Medifast Inc is a US-based company that produces, distributes
     > and sells products concerning weight loss, weight management,
     > and healthy living. The company generates its revenue from
     > point of sale transactions executed over an e-commerce platform
     > for weight loss, weight management, and other consumable
     > health and nutritional products.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 23.5% and 32.4%, respectively. Lines are mostly up, straight, and parallel except for a 2-3-year dip between ’13 and ’16 and EPS in ’22. PTPM trails peers and [slightly] industry averages by increasing from 9.6% (’13) to 11.5% (’22) with a last-5-year mean of 13.4%.

Also over the past decade, ROE leads peer and industry averages by increasing from 20.4% (’13) to an eye-popping 92.0% (’22) with a last-5-year mean of 72.8%. The company has zero long-term debt. That means Debt-to-Capital [as uncapitalized leases] is far below peer and industry averages with a last-5-year mean of 9.3%.

Quick Ratio is 1.3 and Value Line gives a Financial Strength rating of A.

With regard to sales growth:

I am forecasting below the single long-term estimate at 6.0% contraction per year.

With regard to EPS growth:

This is about as scant as analyst coverage can be, which makes a long-term forecast difficult. I basically have -6.7% and +20.0%. The former is possibly duplicated (both actually show as 20.00%) and both are only one analyst. Surprisingly, the negative estimate is Value Line, which predicts 90-185% stock appreciation over the next five years.

With EPS popping 60.0% YOY in ’21, I will [arbitrarily] select $6.43/share from 2019 to be low EPS. My -6.0% forecast growth rate amounts to a high EPS of $12.73/share * (0.94 ^ 5) = $9.34/share.

My Forecast High P/E is 16.0. Over the past decade, high P/E ranges from 17.0 in ’13 to 32.7 in ’17 (56.5 outlier in ’18 excluded) with a last-5-year mean (excluding the outlier) of 22.6 and a last-5-year-mean average P/E of 16.4. I am forecasting below the range.

My Forecast Low P/E is 9.0. Over the past decade, low P/E ranges from 5.6 in ’20 to 18.2 in ’16 with a last-5-year mean of 10.1. I am forecasting near the bottom of the range [only ’20 and ’22 (7.5) are lower].

My Low Stock Price Forecast (LSPF) of $57.90 is default based on $6.43/share. This is 21.6% less than the previous closing price and 17.9% less than the 52-week low. $57.90 is a stock price not seen since 2020.

After dividend inception in ’15, Payout Ratio ranges from 40.9% in ’21 to 71.8% in ’16 with a last-5-year mean of 48.9%. I am forecasting conservatively at 30.0%.

These inputs land MED in the BUY zone with a U/D ratio of 4.7. Total Annualized Return (TAR) is 17.0%.

PAR (using Forecast Average—not High—P/E) of 12.0% is decent 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 138 studies (my study and 42 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 11.5%, 10.5%, 22.0, 11.6, and 50.4%, respectively. I am lower across the board. Value Line’s projected average P/E of 20.0 is higher than MS (15.8) and much higher than mine (12.5).

MS high / low EPS are $20.98 / $11.74 versus my $9.34 / $6.43 (per share). My high EPS is lower due to a lower growth rate. Despite projecting substantial stock appreciation, even Value Line’s $9.00 [high EPS] is lower than mine.

MS LSPF of $92.80—invalid on today’s date—implies a Forecast Low P/E of 7.9: less than the above-stated 11.6. MS LSPF is 31.9% less than the default $11.74/share * 11.6 = $136.18 (also invalid on today’s date), which results in more conservative zoning. MS LSPF is 60.3% greater than mine.

My TAR (over 15.0% preferred) is much less than the 42.5% from MS. Although the latter seems too good to be true, MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is not available since Zacks has no long-term estimate and my negative growth rate results in a negative number. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is extremely low at 0.4. Kim Butcher’s “quick and dirty DCF” prices the stock at 18.0 * [$10.10 – ($7.15 + $0.90)] = $36.90, which suggests the stock to be 100.2% overvalued (the high dividend cuts significantly into cash flow).

MED is a BUY under $78 while meeting my TAR criterion right now.

Although the stock seems like a great buy, I am concerned for the future. I have a very low forecast P/E range and very low forecast EPS numbers for a company has historically been good quality. Looking ahead, sparse analyst estimates project a multi-year pullback—not just the next 12-24 months.

Also giving me pause is Medifast’s multi-level-marketing (MLM) business model. Some refer to MLMs as “pyramid schemes” because many have been fraudulent in the past. This is not always the case. Examples of long-standing MLM companies include Amway, Herbalife, Tupperware, Avon, and Mary Kay.

My final objection is the Medifast diet itself. Based on one article, I’m not sure the weight loss is sustainable because the food intake is so low. As a single article written by nutritionists trying to sell their own services, I must take that opinion with a “grain of salt.” Besides, MED has sold well in the past. Whether it will sell well again in the future is the big mystery.

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MKSI Stock Study (9-20-23)

Posted by on December 14, 2023 at 07:06 | Last modified: September 20, 2023 14:42

I recently did a stock study on MKS Instruments Inc. (MKSI) with a closing price of $88.42. The original study is here.

Value Line writes:

     > MKS Instruments is a leading global developer, manufacturer, and
     > supplier of instruments and components used to measure, control,
     > and analyze gases used in semiconductor manufacturing. Also
     > produces instruments for manufacturers of fiber optics, flat-panel
     > displays, gas lasers, and solar cells. Products include pressure-
     > and flow-measurement and control instruments, gauges, injection
     > systems, vacuum-measurement instruments, and valves.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 20.5% and 24.2%, respectively. Lines are mostly up and parallel but EPS looks more cyclical with declines in ’16, ’19 (along with sales), and ’22. PTPM leads peer and industry averages while trending sideways with a last-5-year mean of 17.1%.

Also over the past decade, ROE is about even with peer and industry averages while increasing from 3.6% (’13) to 8.9% (’22) with a last-5-year mean of 14.6%. Debt-to-Capital is lower than peer and industry averages despite increasing from 0% (’13) to 53.5% (’22) with a last-5-year mean of 31.6%.

Interest Coverage is over 25 (Value Line) and Quick Ratio is 1.7 (M*). Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

I am forecasting below the range at 3.0%.

With regard to EPS growth:

The 4-long-term estimate mean is 1.4% contraction per year [the estimate of highest magnitude is by far YF, and being negative that sinks the whole analysis] and I am forecasting just under at 2.0% contraction per year. I will use ’22 EPS of $5.66/share as the initial value for high EPS and 2023 Q2 EPS of $2.58 (annualized and arbitrary) for low EPS.

My Forecast High P/E is 22.0. Over the past decade, high P/E ranges from 17.4 in ’15 to 46.3 in ’13 with a last-5-year mean of 28.2. The last-5-year-mean average P/E is 19.6 and the last-10-year median is 22.6. I am forecasting below the latter.

My Forecast Low P/E is 10.0. Excluding outliers of 36.8 in ’13 and 24.6 in ’19, low P/E over the past decade ranges from 7.9 in ’18 to 15.8 in ’16 with a last-5-year mean of 11.0. I am forecasting below the latter.

My Low Stock Price Forecast (LSPF) is $64.80. The default based on $2.58/share would be $28.40, which is too extreme. This is a rare instance where I am overriding default and going with a 52-week low that is 26.7% less than the previous close.

Over the past decade, Payout Ratio ranges from 8.7% in ’21 to 95.5% in ’13 with a last-5-year mean of 15.9%. I am forecasting below the entire range at 8.0%.

These inputs land MKSI in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 4.9%.

PAR (using Forecast Average—not High—P/E) is -0.8%, which to me translates to SELL. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead. Even TAR is less than the current risk-free rate (T-bills), though.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 106 studies over the past 90 days (my study and 32 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 9.3%, 10.0%, 20.3, 11.0, and 15.0%. I am lower on everything but Forecast High P/E. Value Line projects an average annual P/E of 27.5: greater than MS (15.7) and greater than mine (16.0).

MS high/low EPS is $28.86/$7.14 versus my $7.88/$6.48 (per share). I initially went with $2.58/share for low EPS, but selecting a higher LSPF effectively raises this.

I think MS high EPS is unreasonably high. The vast majority of MS studies have high EPS in double digits with half over $20.00/share. Yes, MS projects a much higher EPS growth rate, but where are the initial values coming from? Starting with ’22 EPS, $5.56/share * (1.1 ^ 5) = $8.95/share, which is not [even close to] double digits. With 2023 Q1/Q2 EPS lower, they would have to go back—to the ’21 cyclical high? $9.90/share * (1.1 ^ 5) = $19.91/share, which is close to the $20 mentioned. But why skip ’22 and go back to ’21?

I also find MS low EPS to be unreasonable. The mean is negative (-$1.45) because many studies use ’23 Q2 EPS of -$26.21. I can’t accept a negative number for LSPF or low EPS. This may occur due to a nonrecurring expense or temporary condition of which decreased demand in a cyclical industry could be one. However, analyst estimates projecting contraction are not projecting losses. That’s a big difference. An extended period of negative EPS is not representative of a quality stock amenable to the SSG methodology especially because the math becomes convoluted and invalid.

While the previous discussion is suggestive to me of widespread confusion, the MS LSPF median of $64.80 is identical to mine and the 52-week low price. Of course, this makes complete sense! The MS mean is -$7.50 due to 26 studies with LSPF in the negative triple digits but—I’m going to ignore that and focus on what I consider to be small victories for us all.

My TAR (over 15.0% preferred) is just a fraction of MS 39.2%. Due largely to the triple-digit high EPS numbers, I’ve never seen TAR so high. Comparatively speaking, MOS looks gigantic but I think that’s fooling myself as deep down I consider MS TAR to be NMF. And to be completely honest, I did not feel I was being all that conservative in choosing my inputs (e.g. some are slightly under the average but not below the entire range, my Forecast High P/E is not below the historical average P/E, etc.). I would categorize MOS to be moderate in the current study.

I track a few [wildly conflicting] valuation metrics. PEG is 3.1 and 1.7 per Zacks and my projected P/E, respectively: both overvalued [interestingly, the latter is positive because both projected P/E and growth rate are negative]. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is NMF at -0.2 due to negative EPS in most recent quarter. Kim Butcher’s “quick and dirty DCF” prices the stock at 19.0 * [$14.10 – ($0.92 + $2.80)] = $123.05, which suggests the stock to be 55.2% undervalued. I don’t even know where to go with that. NMF? Cash flow is good?!

For what it’s worth, I have MKSI a BUY under $76/share. To meet my 15.0% TAR criterion, I would need a price closer to $55.

More than anything else, for me to feel good about investing in this stock I need to see a more convincing outlook for EPS growth, which we don’t currently have.

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