FELE Stock Study (6-18-23)

I recently did a stock study on Franklin Electric Company, Inc. (FELE) with a closing price of $100.53.

M* writes:

     > Franklin Electric Co Inc designs, manufactures, and distributes
     > water and fuel pumping systems, composed of submersible motors,
     > pumps, electronic controls, water treatment systems, and
     > related parts and equipment. It has three segments; The Water
     > Systems segment designs, manufactures and sells motors, pumps,
     > drives, electronic controls, monitoring devices, and related
     > parts and equipment for use in groundwater, water transfer, and
     > wastewater, The Fueling Systems segment designs, manufactures
     > and sells pumps, pipe, sumps, fittings, vapor recovery
     > components, electronic controls, monitoring devices, and
     > related parts and equipment for use in fueling system
     > applications and the Distribution segment sells and provides
     > presale support and specifications to the installing contractors.

This medium-size company has grown sales and EPS at annualized rates of 7.9% and 10.4% over the past decade. Lines are mostly up, straight, and parallel except for sales dips in ’15 and ’20 along with EPS dips in ’14 and ’19 (flat in ’17).

Over the past decade, PTPM is above industry but below peer averages while ranging from 8.6% in ’14 to 11.6% in ’13 with a last-5-year mean of 10.2%. ROE is below peer averages but slightly better than the industry while increasing from 14.0% in ’13 to 17.9% in ’22 with a last-5-year mean of 14.5%.

Also over the past decade, Debt-to-Capital has been below peer and industry averages with a last-5-year mean of 18.0%. Quick Ratio is 0.67 ($600M inventory) and Interest Coverage is 19.6. Value Line gives an A rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 10.0% YOY and 7.2% per year for ’23 and ’22-’24, respectively (based on 3 analysts).
• YF projects YOY 6.8% and 3.1% for ’23 and ’24, respectively (5 analysts).
• Zacks projects YOY 6.9% and 4.5% for ’23 and ’24, respectively (2).
• Value Line projects 5.5% annualized growth from ’22-’27.
• CFRA projects 6.8% YOY and 5.1% per year for ’23 and ’22-’24, respectively (5).
• M* provides a 2-year ACE of 5.7% per year.

I am forecasting below the range at 5.0%.

With regard to EPS growth:

• CNN Business reports ACE of 9.3% YOY and 7.4% per year for ’23 and ’22-’24, respectively (based on 3 analysts), along with 5-year annualized growth of 12.0%.
• MarketWatch projects 6.8% YOY and 6.2% per year for ’23 and ’22-’24, respectively (5 analysts).
• Nasdaq.com projects 6.4% YOY for ’24 (3).
• Seeking Alpha projects 4-year annualized growth of 12.0%.
• YF projects YOY 9.3% and 5.5% for ’23 and ’24, respectively (5), along with 5-year annualized growth of 13.4%.
• Zacks projects YOY 8.8% and 6.4% for ’23 and ’24, respectively (3), along with 5-year annualized growth of 12.0%.
• Value Line projects 7.3% annualized growth from ’22-’27.
• CFRA projects 9.8% YOY and 7.6% per year for ’23 and ’22-’24, respectively (3).
• M* projects long-term annualized growth of 12.0%.

I am forecasting below the long-term-estimate range (mean of six: 11.5%) at 7.0%. My initial value is ’22 EPS of $3.97 rather than Q1 ’23 $4.13/share (annualized).

My Forecast High P/E is 23.0. Over the past decade, high P/E has ranged from 23.1 in ’18 to 33.9 in ’20 with a last-5-year mean of 27.9. The last-5-year-mean average P/E is 23.5. I am forecasting below the range.

My Forecast Low P/E is 17.0. Over the past decade, low P/E has ranged from 14.4 in ’16 to 23.8 in ’14 with a last-5-year mean of 19.1. I am forecasting toward the bottom of the range [only ’16 and ’15 (15.1) are lower].

My Low Stock Price Forecast (LSPF) is the default value of $70.20 (based on $3.97/share initial value). This is 30.2% less than the previous closing price and 2.6% above the 52-week low.

Over the past decade, Payout Ratio has ranged from 18.2% in ’13 to 29.0% in ’20 with a last-5-year mean of 23.9%. I am forecasting conservatively below the range at 18.0%.

These inputs land FELE in the HOLD zone with a U/D ratio of 0.8. Total Annualized Return (TAR) is 5.7%.

PAR (using Forecast Average—not High—P/E) is 3.0%, which is less than the current yield of T-bills. 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 13 studies over the past 90 days (my study and 4 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 8.4%, 7.3%, 25.9, 18.7, and 23.9%, respectively. I am lower across the board. Value Line projects an average annual P/E of 25.0, which is higher than MS (22.3) and mine (20.0).

MS high and low EPS are $5.81/share and $3.98/share versus my $5.57 and $3.97. My high EPS is lower due to a lower EPS growth rate.

MS LSPF of $68.10 implies a low P/E of 17.1 (vs. the above-stated 18.7). This is 8.5% less than the $3.98 * 18.7 = $74.43 default value, which results in lower-risk zoning. MS LSPF is also 3.0% less than mine.

PEG ratio is another value check that I have recently begun to monitor. PEG is 1.92 per Zacks where 1.50 is generally regarded as the upper limit. Granted we are now in a bull market, but I remain uncertain how useful PEG will be.

Due to the low MS sample size, I don’t want to base much on that comparison alone. Because I also selected conservative inputs at every turn relative to ranges and analyst estimates, I feel MOS is robust in the current study.

With the stock up 13.7%, 22.0%, and 42.9% in the last 3, 6, and 12 months, respectively, I am not surprised to see it out of the BUY zone at this time. I would look to re-evaluate under $82/share.