UI Stock Study (8-22-23)

Posted by Mark on November 4, 2023 at 06:56 | Last modified: August 22, 2023 12:41

I recently did a stock study on Ubiquiti Inc. (UI) with a closing price of $156.97.

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 past decade, this medium-size company has grown sales and earnings at annualized rates of 19.2% and 25.2%, respectively. Lines are mostly up and parallel with a sales decline in ’22 and EPS declines in ’15, ’18, and ’22. 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 32.7%.

Also over the past decade, ROE is above peer and industry averages until ’20 when share repurchases cause a stockholders’ deficit. The last-5-year mean is -200%. Debt-to-Capital is mostly less than peer and industry averages until ’18 and ’19, respectively, after which it soars into triple digit percentages for a last-5-year mean of 120.4%.

Interest Coverage is 11.1, Current Ratio is 3.2, and Quick Ratio is 0.8. Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 11.8% YOY and 13.8% per year for ’23 and ’22-’24, respectively (based on 2 analysts).
• YF projects YOY 14.0% and 10.0% for ’23 and ’24, respectively (2 analysts).
• Zacks projects YOY 14.9% and 14.8% for ’23 and ’24, respectively (2).
• Value Line projects 9.8% per year for ’22-’27.
• CFRA projects YOY 14.2% and 14.4% for ’23 and ’24, respectively.
• M* gives a 2-year annualized ACE of 14.4%.

I am forecasting below the range at 9.0% per year.

With regard to EPS growth:

• CNN Business projects 12.0% YOY and 24.4% per year for ’23 and ’22-’24, respectively (based on 2 analysts), along with 5-year annualized growth of 32.9%.
• MarketWatch projects 17.9% YOY and 27.7% per year for ’23 and ’22-’24, respectively (3 analysts).
• Nasdaq.com projects 54.8% YOY and 39.8% per year for ’24 and ’23-’25, respectively (1).
• YF projects YOY 11.5% and 30.9% for ’23 and ’24, respectively (2), along with 5-year annualized growth of 20.4%.
• Zacks projects YOY 16.5% and 54.6% for ’23 and ’24, respectively (1).
• Value Line projects 10.3% per year from ’22-’27.
• CFRA projects 11.5% YOY and 20.8% per year for ’23 and ’22-’24, respectively.

I am forecasting toward the bottom of the long-term-estimate range (mean of three: 21.2%) at 12.0% per year. I question the CNN Business long-term estimate, but even without I am a few percentage points below the remaining arithmetic mean. I will use ’22 EPS of $6.13/share as the initial value rather than 2023 Q3 (FY ends Jun 30) EPS of $6.56 (annualized).

Over the past decade, high P/E trends up from 23.5 in ’13 to 56.2 in ’22 with a last-5-year mean of 41.3 and a last-10-year median P/E of 34.5. The last-5-year-mean average P/E is 31.3. 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 17.0. Over the past decade, low P/E trends up from 8.8 in ’13 to 35.6 in ’22 with a last-5-year mean of 21.2. The last-10-year median is 13.7. For me, this is a relatively aggressive forecast.

My Low Stock Price Forecast (LSPF) of $104.20 is default based on $6.13/share initial value. This is 33.6% less than the previous close, 32.9% less than the 52-week low, and 30.9% less than the 2021 low.

Over the past decade, the lowest nonzero Payout Ratio is 11.7% in ’15 and the last-5-year mean is 24.6%. I am forecasting below the range at 11.0%.

These inputs land UI in the HOLD zone with a U/D ratio of 1.7. Total Annualized Return (TAR) is 10.1%.

PAR (using Forecast Average—not High—P/E) is 7.1%, which is less than I seek for a medium-size 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 24 studies (my study and 12 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 13.9%, 14.6%, 30.0, 16.1, and 20.1%. I am lower on everything but Forecast Low P/E. Value Line’s projected average annual P/E of 27.0 is higher than MS (23.1) and mine (20.0).

MS high / low EPS are $12.42 / $6.43 vs. my $10.80 / $6.13 (per share). My high EPS is lower due to a lower EPS growth rate. As another data point, Value Line—the lowest of three long-term estimates—projects a high P/E of $10.00/share (with a future P/E range that is 35.0% higher than mine).

MS LSPF of $134.70 implies a Forecast Low P/E of 20.9, which is higher than the above-stated 16.1. MS LSPF is 30.1% greater than the default $6.43/share * 16.1 = $103.52, which results in substantially more aggressive zoning [this is when the manual overrides get me concerned]. MS LSPF is also 29.3% greater than mine.

My TAR (over 15.0% preferred) is less than the 19.8% from MS.

Despite the small MS sample size, MOS backing the current study seems robust.

I track a few different valuation metrics. PEG per my projected P/E is overvalued at 1.8. Relative Value per M* is undervalued at 0.8 [(current P/E) / 5-year-mean average P/E]. Kim Butcher’s “quick and dirty DCF” has the stock overvalued by 15.9% with a fair value of 22.0 * [$10.45 – ($4.00 + $0.45)] = $132.00.

UI is a BUY under $140/share. With a forecast high price of $248.50, I would estimate TAR to qualify at or below $124.