STM Stock Study (5-22-23)

I recently did a stock study on STMicroelectronics N.V. (STM) with a closing price of $45.04.

Value Line writes:

     > STMicroelectronics N.V. is a large multinational firm that designs,
     > develops, and manufactures semiconductors. Active markets include
     > telecom, networking, autos, industrial products, and consumer
     > devices. Offers thousands of products to over 100,000 customers.

This large-size company has grown sales and earnings at annualized rates of 8.3% and 29.6% over the last 9 and 5 years, respectively [’13-’16 EPS excluded due to negative and/or small fractional values that otherwise artificially inflate the growth rate]. Lines are generally up, straight, and narrowing except for EPS dip in ’19. PTPM has trailed peer and industry averages despite increasing from 1.4% in ’14 to 27.8% in ’22 with a last-5-year average of 17.1%.

ROE has also trailed peer and industry averages despite rallying from 2.3% in ’14 to 34.7% in ’22 with a last-5-year average of 21.7%. Debt-to-Capital has been lower than peer and industry averages, falling from 26.5% in ’14 to 18.7% in ’22 with a last-5-year average of 22.6%. Interest coverage is an eye-popping 231 and quick ratio is 1.76. Value Line rates the company B++ for Financial Strength while M* assigns a Standard rating for Capital Allocation.

I forecast long-term sales growth of 5% based on the following:

• CNN Business projects 7.5% YOY and 5.7% per year for ’23 and ’22-’24 (based on 23 analysts).
• YF projects YOY 7.3% and 2.7% for ’23 and ’24, respectively (10 analysts).
• Zacks projects YOY 7.0% growth and 0.5% contraction for ’23 and ’24, respectively (2).
• Value Line projects 6.5% annualized growth from ’22-’27.
• CFRA projects growth of 7.9% YOY and 4.7% per year for ’23 and ’22-’24, respectively.
• M* offers a 2-year annualized ACE of 5.1% growth.

I am forecasting less than the long-term estimate.

I forecast long-term annualized EPS growth of 3% based on the following:

• CNN Business projects 1.7% YOY and 2.4% per year for ’23 and ’22-’24, respectively (based on 23 analysts), along with 5-year annualized growth of 5.0%.
• MarketWatch projects 5.3% per year for both ’22-’24 and ’22-’25 (27 analysts).
• Nasdaq.com projects contraction of 6.4% YOY and 9.4% per year for ’24 and ’23-’25, respectively [4, 4, and 1 analyst(s) for ’23, ’24, and ’25].
• Seeking Alpha projects 4-year annualized growth of 12.5%.
• YF projects YOY 1.2% growth and 2.6% contraction for ’23 and ’24, respectively (10), along with 5-year annualized growth of 5.0%.
• Zacks projects YOY 1.4% growth and 6.4% contraction for ’23 and ’24, respectively (4), along with 5-year annualized growth of 5.0%.
• Value Line projects annualized growth of 6.7% from ’22-’27.
• CFRA projects YOY 3.6% contraction and 0.5% per year growth for ’23 and ’22-’24 along with a 3-year CAGR of 6.0%.
• M* projects long-term annualized growth of 2.2%.

I am forecasting conservatively toward the bottom of the long-term-estimate range (mean of six: 6.1%). I am also projecting from the ’22 EPS of $4.19/share rather than the Q1 ’23 (annualized) EPS of $4.50.

My Forecast High P/E is 16. High P/E has fallen from 71.4 in ’14 to 12.3 in ’22 with a last-5-year average of 22.9 (last-5-year-average average P/E is 16.9). With contraction being projected in ’23-’24, I am forecasting toward the lower end of the range (only ’22 is less) while also expecting a future rebound from the current level (10.0).

My Forecast Low P/E is 7. Low P/E has fallen from 44.8 in ’14 to 6.8 in ’22 with a last-5-year average of 10.8. I am forecasting toward the bottom of the range (only ’22 is less).

My Low Stock Price Forecast (LSPF) is the default [using $4.19/share] value of $29.30. This is 34.9% less than the previous close and 3.2% greater than the 52-week low.

Except for 2019, Payout Ratio has decreased every year since ’15. The last-5-year average is 13.9% and the lowest was 5.7% in ’22. I am forecasting conservatively below the range at 5.0%.

These inputs land STM in the HOLD zone with an U/D ratio of 2.1. Total Annualized Return (TAR) is 11.8%.

PAR (using Forecast Average—not High—P/E) is only 4.8%, which is less than I seek for a large 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 34 studies done in the past 90 days (my study and 13 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.0%, 4.1%, 19.4, 10.5, and 13.9%. I am lower across the board. Value Line’s future average annual P/E of 16.0 is higher than both MS (15.0) and mine (11.5).

With regard to other data, MS high and low EPS are $5.12/share and $3.93/share in contrast to my $4.86 and $4.19. My high EPS is lower due to forecast growth rate. MS LSPF of $33.00 implies a Forecast Low P/E of 8.4 (versus the above-stated 10.5), is 25.0% greater than mine, and is 20.0% lower than the $3.93 * 10.5 = $41.27 default. MOS seems robust in this study.

STM is a BUY under $41, but I will look to re-evaluate under $39/share because I want projected return closer to 15.0%.