VRSN Stock Study (5-3-24)

Posted by Mark on May 16, 2024 at 07:11 | Last modified: May 3, 2024 10:54

I recently did a stock study on Verisign, Inc. (VRSN) with a closing price of $168.34.

M* writes:

     > Verisign is the sole authorized registry for several generic top-level
     > domains, including the widely utilized .com and .net top-level domains.
     > The company operates critical internet infrastructure to support the
     > domain name system, including operating two of the world’s 13 root
     > servers that are used to route internet traffic. In 2018, the firm
     > sold off its Security Services business, signaling a renewed focus
     > on the core registry business.

Over the last 10 years, this medium-size company has grown sales and earnings at annualized rates of 4.1% and 13.9%, respectively. Lines are mostly up, somewhat straight, and parallel/narrowing except for YOY EPS declines in ’21 and ’22.

Over the past decade, PTPM leads peer/industry averages while increasing from 47.8% (’14) to 65.4% (’23) with a last-5-year mean of 61.4%. ROE trails peer/industry averages and is negative throughout with a last-5-year mean of -49.1%. Debt-to-Capital is higher than peer/industry averages [and perhaps unacceptably high for some] with a last-5-year mean of 599%.

Despite what appears to be an upside-down balance sheet with Quick Ratio 0.77, Interest Coverage is 14.2. Value Line gives an “A” grade for Financial Strength and M* an “Exemplary” rating for Capital Allocation. Even CFRA, who has a SELL rating on the stock, writes: “VRSN maintains a healthy balance sheet of total cash and short-term investments of $924M, and nearly $1.8B in debt. Its closest debt maturity is April 2025 for $500M.”

M* assigns the company a “Wide” Economic Moat as a partial monopoly.

With regard to sales growth:

• YF projects YOY 4.7% and 5.1% for ’24 and ’25, respectively (based on 2 analysts).
• Value Line projects 10.0% per year from ’23-’28.
• CFRA projects 5.2% YOY and per year for ’24 and ’23-’25, respectively.
• M* provides a 2-year ACE of 5.1% per year and projects 5.0% per year for the next five years in its analyst note.

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

With regard to EPS growth:

• MarketWatch projects 10.8% and 10.3% per year for ’23-’25 and ’23-’26, respectively (based on 4 analysts).
• YF projects YOY 9.4% and 9.5% for ’24 and ’25, respectively (2 analysts), along with 5-year annualized growth of 8.0%.
• Value Line projects 12.1% per year from ’23-’28.
• CFRA projects 0.4% YOY contraction and 5.8% growth per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 6.0%.
• M* projects long-term annualized growth of 8.7%.

My 6.0% per year forecast is below the three-long-term-estimate range (mean 9.6%). My biggest concern is the lack of analyst coverage/estimates. Otherwise, I might feel comfortable going 1.0% higher. I will use ’23 EPS of $7.90/share as the initial value rather than 2024 Q1 EPS of $8.14 (annualized).

My Forecast High P/E is 25.0. Over the past decade, high P/E ranges from 25.0 in ’14 to 43.1 in ’19 with a last-5-year mean of 36.2 and a last-5-year-mean average P/E of 30.5. I am at the bottom of the range.

My Forecast Low P/E is 16.0. Over the past decade, low P/E trends up from 18.4 (’14) to 23.9 (’23) with a last-5-year mean of 24.8. I am below the range.

My Low Stock Price Forecast (LSPF) is the default of $126.40 based on $7.90/share initial value. This is 24.9% less than the previous close and 18.6% less than the 2022 low.

These inputs land VRSN in the HOLD zone with a U/D ratio of 2.5. Total Annualized Return (TAR) is 10.1%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a medium-size company at 5.8%. 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). Unfortunately, this stock has been largely overlooked by the community. Based on only seven studies done in the past 90 days (excluding two outliers including my own), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 6.0%, 8.6%, 30.0, and 23.3, respectively. I am lower across the board. Value Line projects a future average annual P/E of 24.0 that is lower than MS (26.7) and higher than mine (20.5).

MS high / low EPS are $11.99 / $7.71 versus my $10.89 / $7.90 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS of $12.80 is greater than both.

MS LSPF of $163.90 implies a Forecast Low P/E of 21.3 versus the above-stated 23.3. MS LSPF is 8.8% less than the default $7.71/share * 23.3 = $163.90, which results in more conservative zoning. MS LSPF is 29.7% greater than mine, however.

TAR (over 15.0% preferred) is much less than MS 14.4%. Despite the tiny MS sample, I attempt to forecast conservatively at every turn. Especially given the company’s consistent revenue model, I believe MOS to be robust in the current study.

With regard to valuation, PEG is 3.3 per my projected P/E: significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is cheap at 0.68.

I won’t pound the table too hard because of the debt (much used to acquire treasury stock). What few analysts weigh in are also split with CFRA’s SELL, M* giving four stars, and Value Line claiming solid long-term potential. At the very least, I think the business model/monopoly is fascinating and theoretically able to justify M*’s “Wide” Economic Moat.

VRSN is a BUY under $162/share. With a forecast high price ~$272, my personal TAR criterion will be satisfied around $136.

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