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FTNT Stock Study (7-9-24)

Posted by on August 24, 2024 at 08:36 | Last modified: July 11, 2024 10:40

I recently did a stock study on Fortinet, Inc. (FTNT) with a closing price of $60.11. The previous study is here.

Value Line writes:

     > Fortinet, Inc. provides cyber security solutions to businesses
     > and government agencies. Its flagship solution, FortiGate,
     > includes integrated security and networking functions to protect
     > data, applications, users from network- and content-level
     > security threats across firewall, software defined networking
     > (SD-WAN), Wifi and switch (LAN Edge) and secure access edge
     > (SASE). It sells products and services to distributors.

Over the past 10 years, this medium-size company has grown sales and earnings at annualized rates of 23.1% and 33.3%, respectively (excludes ’14-’17 EPS ranging from $0.01-$0.05/share that otherwise results in 73.5% annualized EPS growth rate). Lines are up, straight, and parallel except for an EPS dip in ’19. Value Line gives an Earnings Predictability score of 80.

PTPM over the last decade is generally above peer but below industry averages while increasing from 8.0% (’14) to 25.1% (’23) with a last-5-year mean of 20.8%. Stock repurchases really take off since ’20 thereby driving ROE negative in ’22 and over 1000% in ’23. Repurchases raise Debt-to-Capital > 100% the last couple years as stockholders’ equity turns into deficit.

Quick Ratio is 1.0 and Interest Coverage is 66.7 per M* who gives a “Standard” rating for Capital Allocation and assigns a “Wide” Economic Moat. Value Line grades the company B++ for Financial Strength.

High Interest Coverage suggests solid financial footing that is consistent with other data. Retained Earnings have been negative 6 out of the last 7 years. However, the negative stockholders’ equity is not due to increased debt or incurred losses. Net cash is higher over the last decade and has been positive throughout. Net income has been positive and climbing since ’18. Net profit margin has been climbing since ’21 and is at an all-time high.

With regard to sales growth:

These estimates are ~40% lower than my previous study 13 months ago. I am forecasting below the range at 9.0% per year.

With regard to EPS growth:

Except for M*, these estimates are ~40% lower than previous. I am below the long-term-estimate range at 10.0% per year (mean of five: 14.4%). I will use ’23 EPS of $1.46/share as the initial value rather than 2024 Q1 $1.53 (annualized).

My Forecast High P/E is 44.0. High P/E from ’14-’17 is in the triple digits (i.e. NMF). Since then, the lowest high P/E is 48.5 in ’18 and the last-5-year-mean high P/E is 58.9 (excluding 102 in ’21). The last-5-year-mean average P/E is 46.2. I am below the range but above my comfort zone.

My Forecast Low P/E is 30.0. Low P/E from ’14-’17 is in the triple digits (i.e. NMF). Since then, the lowest low P/E is 22.8 in ’18 and the last-5-year-mean low P/E is 33.4. I am forecasting toward the bottom of the range (only ’18 is less).

My Low Stock Price Forecast (LSPF) is the default of $43.80 based on initial value given above: 27.1% less than the previous closing price and 0.7% less than the 52-week low.

These inputs land FTNT in the HOLD zone with a U/D ratio of 2.7. Total Annualized Return (TAR) is 11.5%.

PAR (using Forecast Average—not High—P/E) of 7.7% is less than I seek for a medium-size company. 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 171 studies in the past 90 days (my study along with 65 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 12.0%, 13.0%, 49.7, and 31.8, respectively. I am lower across the board. Value Line projects a future average annual P/E of 45.0 that is greater than MS (40.8) and greater than mine (37.0).

MS high / low EPS are $2.81 / $1.49 versus my $2.35 / $1.46 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $2.60 is in the middle.

MS LSPF of $45.90 implies a Forecast Low P/E of 30.8: less than the above-stated 31.8. MS LSPF is 3.1% less than the default $1.49/share * 31.8 = $47.38 resulting in more conservative zoning. MS LSPF is 4.8% greater than mine, however.

With regard to valuation, PEG is 2.5 and 3.6 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly low at 0.85.

MOS is robust in the current study because my inputs—especially EPS growth—are below MS and near or below respective analyst/historical ranges. MS TAR of 18.1% is 6.6% per year greater than mine.

Per U/D, FTNT is a BUY under $58/share. Given forecast high price ~$104, stock under $52 meets the BI TAR criterion.

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