UI Stock Study (5-20-24)

Posted by Mark on June 18, 2024 at 07:15 | Last modified: May 20, 2024 10:35

I recently did a stock study on Ubiquiti Inc. (UI) with a closing price of $146.37. The previous study is here.

M* writes:

     > Ubiquiti Inc is a wireless and wireline network equipment provider
     > for small Internet service providers and small- and midsize-
     > business integrators. Its product is based on two primary categories
     > namely Service Provider Technology and Enterprise Technology. The
     > company generates maximum revenue from Enterprise Technology.
     > Geographically, it derives a majority of revenue from North America
     > and also has a presence in Europe, the Middle East and Africa; Asia
     > Pacific and South America.

Over the last 10 years, this medium-size company has grown sales and earnings at annualized rates of 16.2% and 20.3%, respectively (FY ends 6/30). Lines are mostly up and parallel with a sales decline in ’22 and EPS declines in ’15, ’18, and ’22.

Over the past decade, PTPM leads industry and peer averages while ranging from 24.5% in ’15 to 38.3% in ’21 with a last-5-year mean of 31.5%. ROE is above peer and industry averages until ’20 when a stockholders’ deficit appears; the last-5-year mean is -257%. Debt-to-Capital is mostly less than peer and industry averages until ’18 and ’19, respectively, when it soars to triple-digit percentages for a last-5-year mean of 131%.

Interest Coverage is 6.5, Current Ratio is 3.9, and Quick Ratio is 1.1. Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

• YF projects YOY 0.6% and 12.3% for ’24 and ’25, respectively (based on 2 analysts).
• Zacks projects YOY 1.0% and 16.1% for ’24 and ’25, respectively (2 analysts).
• Value Line projects 7.6% per year for ’23-’28.
• CFRA projects YOY 0.9% and 9.4% for ’24 and ’23-’25, respectively.
• M* gives a 2-year annualized ACE of 9.4%.

I am forecasting toward the lower end of the range at 5.0% per year.

With regard to EPS growth:

• MarketWatch projects 24.5% YOY and 9.1% per year for ’23-’25 and ’23-’26, respectively (based on 3 analysts).
• Nasdaq.com projects 6.8% YOY and 4.9% per year for ’25 and ’24-’26, respectively (1 analyst).
• YF projects YOY 13.7% contraction (’24) and 31.9% growth (’25) along with 5-year annualized growth of 9.6% (2).
• Zacks projects YOY 3.2% contraction and 6.8% growth for ’24 and ’25, respectively (1).
• Value Line projects 6.0% per year from ’23-’28.
• CFRA projects 13.7% YOY contraction and 6.7% growth per year for ’24 and ’23-’25, respectively.

I am forecasting below both long-term estimates (mean 7.8%) at 5.0% per year. I will use ’23 EPS of $6.74/share as the initial value rather than 2024 Q3 EPS of $5.78 (annualized).

My Forecast High P/E is 26.0. Over the past decade, high P/E trends up from 28.9 (’14) to 52.0 (’23) with a last-5-year mean of 44.5 and last-5-year-mean average P/E of 33.4. I am forecasting toward the bottom of the range [only ’16 (16.6) and ’17 (20.9) are lower].

My Forecast Low P/E is 16.0. Over the past decade, low P/E trends up from 8.7 (’14) to 23.8 (’23) with a last-5-year mean of 22.2. I am forecasting under the last-10-year median of 17.6.

My Low Stock Price Forecast (LSPF) of $107.80 is default based on $6.74/share. This is 24.4% less than the previous close and 4.7% greater than the 52-week low.

The last-5-year mean Payout Ratio (PR) is 26.8%. I am forecasting below the range at 16.0%.

These inputs land UI in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 9.5%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a medium-size company at 5.1%. 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 only 4 studies done in the past 90 days (my study and 3 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 6.3%, 8.5%, 29.0, 19.1, and 24.3%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 27.0 that is greater than MS (24.1) and mine (21.0).

MS high / low EPS are $9.46 / $6.15 versus my $8.60 / $6.74 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $9.00 is in the middle.

MS LSPF of $97.10 implies a Forecast Low P/E of 15.8 versus the above-stated 19.1. MS LSPF is 17.3% less than the default $6.15/share * 19.1 = $117.47, which results in more conservative zoning. MS LSPF is also 9.9% less than mine.

TAR (over 15.0% preferred) is much less than MS 19.1%. Even though my LSPF is relatively high (I often decrement Forecast Low P/E to coincide with the 52-week low), I believe MOS to be robust in the current study. Analyst estimates are as scant as the MS sample size, but I am more conservative on every input.

With regard to valuation, PEG is 4.8 per my projected P/E: substantially overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is somewhat cheap at 0.76.

I am not a fan of the negative ROE. It appears to be fueled by PR (starting 2019) and stock buybacks that have decreased share count by about 20% over the last several years. Ideally these activities would be funded via cash flow from operations. Taking on debt is a negative that, in my opinion, can offset a resultant positive. Stockholders’ deficit grows further in 2023. Although CFRA does not seem concerned about this (calling the balance sheet “solid”) and Value Line doesn’t mention it, I would like to a path back to equity in order to feel more comfortable.

UI is a BUY under $136/share. With a forecast high price ~$224, my personal TAR criterion would be met ~$112. I am more likely to hold out for the latter given the stockholders’ deficit and debt load.

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