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ETSY Stock Study (4-30-24)

Posted by on May 8, 2024 at 06:33 | Last modified: May 1, 2024 14:28

I recently did a stock study on Etsy Inc. (ETSY, $68.88). Previous studies are here and here.

M* writes:

     > Etsy operates a top-10 e-commerce marketplace operator in the
     > U.S. and the U.K., with sizable operations in Germany, France,
     > Australia, and Canada. The firm dominates an interesting niche,
     > connecting buyers and sellers through its online market to
     > exchange vintage and craft goods. With $13.2 billion in 2023
     > consolidated gross merchandise volume, Etsy has cemented itself
     > as one of the largest players in a quickly growing space,
     > generating revenue from listing fees, commissions on sold items,
     > advertising services, payment processing, and shipping labels.
     > As of the end of 2023, the firm connected more than 96 million
     > buyers and 9 million sellers on its marketplace properties:
     > Etsy, Reverb (musical equipment), and Depop (clothing resale).

This medium-size company has grown sales at an annualized rate of 38.0% over the past decade.

EPS is complex. I am excluding negative/fractional EPS in 2013-2016 [otherwise resulting in an inflated growth rate] to start with $0.68/share in ’17. The company takes a goodwill impairment charge of $1.0 billion in ’22 due to Depop and Elo7 acquisitions that slashes EPS to -$5.48 thereby precluding future growth rate projections. If this is overwritten with CFRA’s “normalized” EPS of $4.61 value, then the result is a 38.5% EPS growth rate since 2017.

For ’17-’22, [sales and EPS] lines are mostly up and narrowing despite an EPS dip in ’18. ’23 will be discussed below.

PTPM is above peer and industry averages while increasing from 7.3% in ’17 to 10.7% in ’23 with a last-5-year mean (excluding ’22) of 15.5%. ROE is above peer and industry averages while decreasing from 23.8% in ’17 to -43.1% in ’23 with a last-5-year mean (excluding ’22) of 27.9%.

Debt-to-Capital has risen above peer and industry averages by climbing from 15.0% in ’17 to 129.5% in ’23. Despite being remarkably high, Value Line gives a “B” rating for Financial Strength and writes in a previous report:

     > Although debt represented over 100% of capital at the end of 2022,
     > cash and short-term investments totaled $1.2 billion and the
     > company has only modest debt due over the next five years.
     > Additional funds can be sourced from the company’s $200 million
     > undrawn revolver and $29.1 million in long-term investments that
     > can be liquidated on short notice.

M* rates the company “Wide” for Economic Moat, gives a “Standard” rating for Capital Allocation and, in a previous report, is also not concerned about debt:

     > With our forecast for just 0.8 times average net leverage over the next
     > five years (net debt/adjusted EBITDA), a paucity of near-term debt
     > maturities, and a highly cash generative mode… balance sheet risk
     > appears minimal for the marketplace operator. We believe that Etsy
     > should encounter no difficulties in funding its investments in headcount
     > and platform development with internally generated funds, while
     > retaining substantial flexibility to invest in brand marketing and
     > strategic acquisitions. With no principal maturities until 2026, we
     > view Etsy’s balance sheet health as strong, despite the firm carrying
     > $2.3 billion in gross debt as of the end of the first quarter of 2023.

Quick Ratio is 2.0 and Interest Coverage is 21.8.

With regard to sales:

I am forecasting near the bottom of the range at 3.0% per year.

With regard to EPS:

My 5.0% forecast is below the long-term-estimate range (mean of five: 12.9%).

Initial value—pivotal for any stock study—depends on EPS that is very hard to decipher for this company. From the M* website, I get diluted earnings for ’20-’23, respectively: $2.69, $3.40, -$5.48, and $2.24/share. M* website also gives normalized EPS of $3.31, $4.03, $4.21, and $4.28/share for ’20-’23: three years of consecutive growth with the ’22 goodwill impairment charge excluded. CFRA reports normalized EPS of $3.19, $4.32, $4.61, and $4.99/share: three years of consecutive growth. Value Line reports $2.69, $3.40, $2.46, and $2.24/share. Despite a footnote indicating the $1B goodwill impairment charge excluded for ’22 ($2.46/share), it still reports YOY EPS declines for ’22 and ’23. BI website gives something altogether different with $2.69, $3.40, $4.61, and $2.24: YOY decline only for ’23. Since BI gets data from M*, why is this different from the other two sets of data from the M* website?

Excluding a negative as a nonrecurring expense to smooth out data and enable future projection makes logical sense to me.

In this case, excluding the negative results in consistently growing profits (i.e. M* and CFRA normalized EPS), EPS contraction (Value Line), or delayed EPS contraction (BI website). The waters are muddy.

The BI website pairs a low ’23 EPS with a 17.8% growth rate. This seems too low given my 5.0% growth rate.

In contrast, I feel the ’23 normalized EPS numbers are too high.

As a compromise, I will use M* 2020 normalized EPS of $3.31/share as ’23 initial value. $3.31 * (1.05 ^ 5) = $4.22/share high EPS. Since the BI website uses $2.24 initial value, I need to enter a 13.5% growth rate to get $4.22.

My Forecast High P/E is 30.0. Since 2017, high P/E ranges from 32.1 in ’17 to 96.5 in ’19 with a last-5-year mean of 75.2. The last-5-year-mean average P/E is 52.5. I am forecasting below the range.

My Forecast Low P/E is 14.0. Since 2017, low P/E ranges from 11.1 in ’20 to 52.3 in ’19 with a last-5-year mean of 29.8. I am forecasting toward the bottom of the range [’20 and ’17 (13.8) are lower].

My Low Stock Price Forecast (LSPF) of $46.30 is default based on $3.31/share initial value. This is 32.8% less than the previous close and ~20% less than the 52-week low.

These inputs land ETSY in the HOLD zone with a U/D ratio of 2.6. Total Annualized Return (TAR) is 12.9%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-size company at 6.1%. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on the 12.9% Total Annualized Return (TAR) instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on a tiny sample of 13 studies (my study and 7 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%, 5.0%, 48.7, and 29.3, respectively. I am equal to or lower for all. Value Line projects an average annual P/E of 35.0, which is less than MS (39.0) and much higher than mine (22.0).

MS high / low EPS are $2.86/ $2.24 versus my $4.22/ $3.31 (per share). My higher EPS range is due to a higher initial value. I think the analyst earnings data confuses most people just like it has me. Value Line’s high EPS is in the middle at $3.50/share.

MS Low Stock Price Forecast (LSPF) of $57.10 implies a Forecast Low P/E of 25.5: less than the above-stated 29.3. MS LSPF is 13.0% less than the default $2.24/share * 29.3 = $65.63 resulting in more conservative zoning. MS LSPF is 23.3% greater than mine, however.

TAR (over 15.0% preferred) is less than MS 15.0%. I don’t want to conclude too much because of the small MS sample, but I believe MOS is at least moderate in the current study if not healthy.

With regard to valuation, PEG is 4.8 and 5.9 per Zacks and my projected P/E, respectively: both extremely high and probably not immune to the EPS confusion. Relative Value [(current P/E) / 5-year-mean average P/E] is cheap at 0.6.

ETSY makes for an extremely challenging stock study. It’s close to or in the BUY zone if recent, normalized EPS is used. PAR is less than T-bills if $2.24/share is used with a conservative growth rate. The stock is probably best left at the foot of the barbed wire fence or at least limited to a speculative position size because the case for “up, straight, and parallel” may be weak depending on what EPS data is used.

I have ETSY a BUY under $66/share. A further [10% perhaps] discount may be warranted because of all the uncertainty.

Categories: BetterInvesting® | Comments (0) | Permalink

V Stock Study (4-29-24)

Posted by on May 6, 2024 at 07:22 | Last modified: April 29, 2024 10:16

I recently did a stock study on Visa Inc. (V) with a closing price of $227.96. The previous study is here.

CFRA writes:

     > Visa Inc. (V) operates the world’s largest retail electronic
     > payments network, connecting consumers, businesses, banks,
     > and governments in more than 200 countries and territories,
     > enabling them to use digital currency instead of cash and
     > checks. Visa’s core products include credit, debit, and prepaid
     > cards, and related business services. Its processing
     > infrastructure, VisaNet, processes approximately 750 million
     > transactions per day. Visa’s customers include nearly 15,000
     > financial institutions that issue Visa-branded products and
     > nearly 130 million merchant locations. There are over 4.4
     > billion Visa cards currently in circulation.

This large-size company has grown sales and EPS at annualized rates of 10.7% and 16.4%, respectively, over the last 10 years. Lines are mostly up, straight, and parallel except for EPS dip in ’16 and sales + EPS dip in ’20.

Over the past decade, PTPM outpaces peer and industry averages while ranging from 53.1% in ’16 (possible outlier) to 66.6% in ’21 with a last-5-year mean of 64.2%. ROE is just ahead of peer and industry averages while increasing from 19.4% (’14) to 43.9% (’23) with a last-5-year mean of 39.6%. Debt-to-Capital is less than peer and industry averages despite increasing from zero (’14-’15) to 34.6% (’23) with a last-5-year mean of 36.3%.

Interest Coverage is 36.2 and Quick Ratio is 1.0. M* categorizes the company “Wide” for economic moat and gives a “Standard” rating for Capital Allocation. Value Line gives an A++ rating for Financial Strength.

With regard to sales:

I am forecasting below both long-term estimates at 9.0% per year.

With regard to EPS:

My 11.0% forecast is just below the long-term-estimate range (mean of five: 13.7%). I am using ’23 EPS of $8.28/share as the initial value rather than 2023 Q2 EPS of $8.95 (annualized). FY ends Sep 30.

My Forecast High P/E is 29.0. Over the past decade, high P/E ranges from 27.3 in ’14 to 44.9 in ’21 with a last-5-year mean of 37.7 and a last-5-year-mean average P/E of 31.7. I am forecasting toward the low end of the range [only ’13 is less].

My Forecast Low P/E is 24.0. Over the past decade, low P/E ranges from 18.9 in ’15 to 31.8 in ’21 with a last-5-year mean of 25.6. The last-10-year median is 24.4. I am forecasting in the lower part of the range.

My Low Stock Price Forecast (LSPF) of $198.70 is default based on $8.28/share initial value. This is 27.6% less than the previous closing price and 8.1% less than the 52-week low.

Over the past decade, Payout Ratio ranges from 18.6% in ’14-’15 to 24.5% in ’20 with a last-5-year mean of 21.8%. I am forecasting below the range at 18.0%.

These inputs land V in the HOLD zone with a U/D ratio of 1.7. Total Annualized Return (TAR) is 8.7%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-size company at 6.8%. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 577 studies over the past 90 days (my study and 251 other 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 10.0%, 12.4%, 33.0, 24.8, and 21.7%, respectively. I am lower across the board. Value Line projects an average annual P/E of 28.0, which is lower than MS (28.9) and higher than mine (26.5).

MS high / low EPS are $16.45/ $8.49 versus my $13.95 / $8.28 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is in the middle at $14.85.

MS LSPF of $205.30 implies a Forecast Low P/E of 24.2: less than the above-stated 24.8. MS LSPF is 2.5% less than the default $8.49/share * 24.8 = $210.55 resulting in more conservative zoning. MS LSPF is also 3.2% less than mine.

TAR (over 15.0% preferred) is much lower than MS 13.6%. MOS is robust in the current study.

With regard to valuation, PEG is 1.9 and 2.5 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is fairly valued at 1.0.

From reading analyst reports and seeing presentations from the BI community, Visa may be a COST-like juggernaut. Back-up-the-truck opportunities to purchase stock may be slim to none. Should the consistency remain, it wouldn’t hurt to buy, hold, and watch the investment grow. Personally, I will wait until U/D gets closer to 3.0 with the realization it may never get there.

V is a BUY under $250/share. With a forecast high price ~$327, my TAR criterion will be met when the stock drops to ~$164.

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PYPL Stock Study (4-29-24)

Posted by on May 2, 2024 at 07:10 | Last modified: April 29, 2024 09:32

I recently did a stock study on PayPal Holdings Inc. (PYPL) with a closing price of $65.96. The previous study is here.

M* writes:

     > PayPal Holdings, Inc. operates a technology platform that
     > enables digital and mobile payments by consumers and merchants
     > throughout the world. It offers a wide range of payment
     > solutions under the brands: PayPal, PayPal Credit, Venmo, Xoom,
     > Paydiant, and Braintree. Has more than 425 million active
     > users. In 2023, approximately 25.0 billion transactions were
     > completed on its platform. From 2002 to July 2015, PayPal was
     > a wholly-owned subsidiary of eBay.

Over the past nine years, this large-size company has grown sales and EPS at annualized rates of 16.4% and 17.4% [24.6% including $0.31/share in ’14], respectively. Lines are mostly up, straight, and parallel except for EPS dips in ’21 and ’22.

Over the past decade, PTPM trails peer and industry averages while ranging mostly (excluding 23.6% in ’20 and 12.2% in ’22) from 15.0% in ’16 to 18.2% in ’23 with a last-5-year mean of 17.4%. ROE trails peer and industry averages despite increasing from 9.3% in ’15 to 20.9% in ’23 with a last-5-year mean of 17.7%. Debt-to-Capital is less than peer and industry averages despite increasing from 15.2% in ’14 to 31.5% in ’23 with a last-5-year mean of 29.7%.

Quick Ratio is 1.2 and Interest Coverage is 16.6. M* gives a “Standard” rating for Capital Allocation while Value Line gives a B++ (down from A about eight months ago) grade for Financial Strength.

With regard to sales:

I am forecasting below both long-term estimates at 4.0% per year.

With regard to EPS:

My 9.0% annualized forecast is below the long-term-estimate range (mean of five: 13.0%). I will use ’23 EPS of $3.84/share as the initial value. Compared to ’21, $3.84/share is normalized (4.4% growth rate) despite being 83.7% greater YOY.

My Forecast High P/E is 23.0. Since 2015, high P/E increases from 42.5 in ’15 to 93.8 in ’22 before falling to 23.1 in ’23 for a last-5-year mean of 66.5 and a last-5-year-mean average P/E of 49.1. I am forecasting below the entire range.

My Forecast Low P/E is 13.0. Since 2015, low P/E ranges from 13.1 in ’23 to 50.9 in ’21 with a last-5-year mean of 31.7. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $49.90 is default based on initial value of $3.84/share. This is 24.3% less than the previous close and near the 52-week low of $50.30.

These inputs land PYPL in the BUY zone with a U/D ratio of 4.4. Total Annualized Return (TAR) is 15.6%.

PAR (using Forecast Average—not High—P/E) is 10.0%, which is less than I seek in a large-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I start by comparing my inputs with those of Member Sentiment (MS). Based on 222 studies (my study and 90 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 7.5%, 10.0%, 25.0, and 15.0, respectively. I am lower across the board. Value Line’s projected average annual P/E of 25.0 is higher than MS (20.0) and higher than mine (18.0).

MS high / low EPS are $6.18 / $3.75 versus my $5.91 / $3.84 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is in the middle at $6.05.

MS LSPF of $49.90 implies a Forecast Low P/E of 13.3: lower than the above-stated 15.0. MS LSPF is 11.3% less than the default $3.75/share * 15.0 = $56.25 resulting in more conservative zoning. MS LSPF is equal to mine.

TAR meets my 15% criterion despite being lower than MS 21.4%. MOS is robust in the current study.

With regard to valuation, PEG is 1.0 and 1.8 per Zacks and my projected P/E, respectively: the latter slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is extremely cheap at 0.35.

The 0.35 reflects severe P/E compression between ’21-’22 and 2023. Compression is mainly due to stock price decrease with ’23 EPS and ’21 EPS roughly equal. Coincidently, analyst estimates are much lower today than my first study nine months ago. Going forward, I believe whether P/E remains compressed or expands consequent to rebounding growth [estimates] will strongly influence where the stock price heads next.

Either way, PYPL is a BUY under $71/share.

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