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WAL Stock Study (10-4-23)

Posted by on December 1, 2023 at 06:47 | Last modified: October 4, 2023 11:25

I recently studied Western Alliance Bancorp (WAL) with a closing price of $41.90. Previous studies are here and here.

M* writes:

     > Western Alliance Bancorporation is a Las Vegas-based holding
     > company with regional banks operating in Nevada, Arizona, and
     > California. The bank offers retail banking services and focuses
     > on mortgages for retail customers and commercial loans, mainly
     > for real estate. The bank also has an investment advisory
     > business that manages investment portfolios for Western clients
     > and clients of other banks.

Over the past decade, this medium-size bank has grown sales and EPS at annualized rates of 22.3% and 24.5%, respectively. Lines are mostly up, straight, and parallel (including total assets). PTPM leads peer and industry averages while trending up from 41.2% (’13) to 57.5% (’22) with a last-5-year mean of 56.6%.

Also over the past decade, ROE leads peer and industry averages while trending up from 16.8% (’13) to 21.0% (’22) with a last-5-year mean of 18.4%. Debt-to-Capital is lower than peer and industry averages despite increasing recently from 13.5% in ’19 to 55.7% in ’22 with a last-5-year mean of 26.2%.

Value Line rates the company B+ for Financial Strength.

ROAA increases from 1.36% in ’13 to 1.69% in ’22 with a last-5-year mean of 1.85%. This has been above 1.50% every year since ’15 until the current reading of 1.36%, which is a 10-year low.

With regard to sales growth:

I am forecasting toward the low end of the range at 4.0% per year.

With regard to EPS growth:

Only one of five long-term estimates is negative and its magnitude is the largest of all. My skepticism is somewhat offset by the fact that it (YF) has not changed in two quarters. My forecast is toward the lower end of the range (mean of five: 3.3%) at 1.0% per year. I will use an initial value of 2023 Q2 EPS $8.33/share (annualized) rather than ’22 EPS of $9.70.

My Forecast High P/E is 10.0. Over the past decade, high P/E has gone from 18.7 (’13) to 12.9 (’22) with a last-5-year mean of 13.4. My forecast—the last-5-year-mean average P/E of 10.0—is below the entire 10-year high P/E range.

My Forecast Low P/E is 3.0. Over the past decade, low P/E has gone from 8.2 (’13) to 5.7 (’22) with a last-5-year mean of 6.7. I am forecasting below the entire range (lowest was 4.1 in ’20).

My Low Stock Price Forecast (LSPF) of $25.00 is default based on $8.33/share initial value. This is 40.3% below the previous close and more than quintuple the 52-week low price of $7.50 seen the week of 3/8/23 (Black Swan, anyone?). Short of failing and having to shudder its doors, I don’t think $7.50 will be tested anytime soon

WAL starts paying a dividend in 2019 with an average Payout Ratio of 14.7% ever since. I am forecasting below the range [10.3% – 19.8%] at 9.0%.

These inputs land WAL in the HOLD zone with a U/D ratio of 2.2. Total Annualized Return (TAR) is 15.4%.

PAR (using Forecast Average—not High—P/E) is 6.4%, 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 237 studies (my study and 95 other 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 11.9%, 10.0%, 11.4, 6.1, and 14.2%, respectively. I am lower across the board.

MS high / low EPS are $14.04 / $8.76 versus my $8.75 / $8.33 (per share). My high EPS is lower due to a lower growth rate.

MS LSPF of $30.10 implies a Forecast Low P/E of 3.4: much less than the above-stated 6.1. MS LSPF is 43.7% less than the default $8.76/share * 6.1 = $53.44 (invalid on today’s date), which results in more conservative zoning. Despite this huge discrepancy, MS LSPF remains 20.4% greater than mine.

My TAR (over 15.0% preferred) is much less than the 28.6% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 0.6 and 5.3 per Zacks and my projected P/E, respectively. I tend to discount calculations with low/fractional component as NMF and the latter uses my extremely low 1.0% growth rate (MS is 10-fold larger). The 0.6 translates to significantly undervalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is 0.53. In this case, two meaningful computations do not conflict.

WAL is a BUY under $40. With a forecast high price of $87.50, TAR should meet my 15% criterion around $43.75/share. Unusually, it’s already there even before crossing above the 3:1 U/D threshold. Especially given the conservative inputs used in this study, I would probably feel comfortable investing right now.

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PKG Stock Study (9-12-23)

Posted by on November 30, 2023 at 06:46 | Last modified: September 12, 2023 13:53

I recently did a stock study on Packaging Corp. of America (PKG $146.26). My other studies are here and here.

M* writes:

     > Packaging Corp of America is the third-largest containerboard
     > and corrugated packaging manufacturer in the United States.
     > It produces over 4 million tons of containerboard annually.
     > The company’s share of the domestic containerboard market
     > is about 10%. The firm differentiates itself from larger
     > competitors by focusing on smaller customers and operating
     > with a high degree of flexibility.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 6.8% and 9.8%. Lines are mostly up and parallel except for a sales decline in ’15 and sales + EPS declines in ’14, ’19, and ’20. PTPM is higher than peer and industry averages, trending up from 11.3% in ’13 to 16.1% in ’22 with a last-5-year mean of 13.4%.

Also over the past decade, ROE is roughly even with industry averages, trending lower from 39.9% in ’13 to 24.9% in ’22 with a last-5-year mean of 22.8%. Debt-to-Capital is lower than peer and industry averages, trending down from 66.2% in ’13 to 43.2% in ’22 with a last-5-year mean of 45.5%.

Quick Ratio and Interest Coverage are 2.0 and 19.6, respectively. M* gives a “Standard” rating for Capital Allocation while Value Line rates the company A for Financial Strength.

With regard to sales growth:

I am forecasting conservatively below the long-term range at 1.0%.

With regard to EPS growth:

My first attempt is to forecast -1.0% per year. This is below the 5-long-term-estimate mean (0%).

Things get tricky with a negative growth rate [which arguably should never happen for a high-quality stock] because I need to ensure high EPS exceeds low EPS. For high EPS, I will use ’21 EPS of $8.83/share: more than a 1% annualized discount for five years off 2023 Q2 EPS of $9.46/share (annualized). Low EPS will be ’19 EPS of $7.34/share.

While this sounds good, it results in a forecast high price lower than the previous close (invalid study).

For my second attempt, I will exclude the highest and lowest estimates. I’m really perplexed by the YF number anyway as its absolute value seems extreme compared to the others. This results in a 3-estimate mean and my forecast of 3.0%. As an initial value, I will use 2023 Q2 $9.46/share (annualized) rather than ’22 EPS of $11.03.

My Forecast High P/E is 14.0. Over the past decade, high P/E ranges from 14.4 (’13) to 28.7 (upside outlier in ’20) with a last-5-year mean (outlier excluded) of 16.4. The last-5-year-mean average P/E is 14.2. I am forecasting below the entire range.

My Forecast Low P/E is 10.0. Over the past decade, low P/E ranges from 8.5 (’13) to 14.7 (’20) with a last-5-year average of 12.0. I am forecasting toward the bottom of the range (10-year median is 11.6).

My Low Stock Price Forecast (LSPF) is $110.60. The default value is $94.60, which is 35.3% less than the previous close and 14.5% less than the 52-week low. Because the analyst reports see headwinds easing by the end of ’23, I don’t see occasion for that much of a haircut. I will therefore use the 52-week low, which is 24.4% less than the previous close.

Over the past decade, Payout Ratio has ranged from 33.8% (’13) to 69.6% (upside outlier in ’20) with a last-5-year mean (excluding the outlier) of 42.5%. I am forecasting toward the lower end of the range at 34.0%.

These inputs land PKG in the SELL zone with a U/D ratio of 0.2. Total Annualized Return (TAR) is 3.6%.

PAR (using Forecast Average—not High—P/E) is 0.7%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 3.4% instead—still much lower than I seek.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 48 studies over the past 90 days (my study along with 16 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 5.3%, 6.6%, 16.8, 11.6, and 45.5%. I am lower across the board. Value Line projects a future average annual P/E of 19.0. This is [much] higher than MS (14.2) and mine (12.0).

MS high / low EPS are $14.00 / $9.83 vs. my $10.97 / $9.46 (per share). My high EPS is lower due to a lower growth rate.

MS LSPF of $109.90 implies a Forecast Low P/E of 11.2, which is lower than the above-stated 11.6. MS LSPF is 3.6% less than the default $9.83/share * 11.6 = $114.03, which results in more conservative zoning. MS LSPF is only 0.6% less than mine.

My TAR (over 15.0% preferred) is much less than the 13.0% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG is 3.6 and 5.0 per Zacks and my projected P/E, respectively: both significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is fair at 0.95. Kim Butcher’s “quick and dirty DCF” prices the stock at 22.0 * [$20.65 – ($6.50 + $7.85)] = $75.60, which suggests the stock to be 48.3% overvalued.

I would look to re-evaluate PKG under $121/share. With a forecast high price of $153.50, I would estimate TAR to qualify at or below $76.75/share. Hopefully as the quarters go by, we can get some resolution to the Value Line vs. YF long-term estimates.

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GNRC Stock Study (9-11-23)

Posted by on November 28, 2023 at 07:09 | Last modified: September 11, 2023 12:53

I recently did a stock study on Generac Holdings Inc. (GNRC at $117.66/share). Previous studies are here and here.

Value Line writes:

     > Generac Holdings Inc. designs and manufactures a wide range
     > of generators and other engine-powered products for the
     > residential, light commercial, industrial, and construction
     > markets. Its products are fueled by natural gas, liquid
     > propane, diesel, and Bi-Fuel. Acquired Ottomotores, 12/12;
     > Tower Light, 8/13; Country Home Prod., 8/15; and Pramac
     > Group, 3/16. Generac’s products are sold through indep.
     > dealers, retailers, wholesalers, and equipment rental cos.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 13.8% and 17.5%, respectively. Lines are mostly up, straight, and parallel except for sales/EPS declines in ’14 and ’15 and an EPS decline in ’22. PTPM leads peer and industry averages despite going from 18.8% in ’13, down, up, and back down to 11.1% in ’22 with a last-5-year mean of 15.5%.

Also over the past decade, ROE leads peer and industry averages despite trending down from 66.9% in ’13 to 14.4% in ’22 with a last-5-year mean of 26.1%. Debt-to-Capital is above peers and roughly even with the industry while trending down from 79.1% in ’13 to 43.6% in ’22 with a last-5-year mean of 45.4%.

Interest Coverage is 3.9 and Quick Ratio is 0.8. M* rates the company “Standard” for Capital Allocation and describes its balance sheet as “sound.” Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

With sources projecting near-term contraction, I am halving the long-term estimate to 6.0% per year.

With regard to EPS growth:

The mean of six long-term estimates is 9.2%, and I am as perplexed by the lowest as I am the highest. Excluding both, the 4-estimate mean is 8.0% with the least at 7.0%. I am forecasting 6.0%—just below the latter—and using ’22 EPS of $5.42/share as an initial value rather than Q1 ’23 $3.92 (annualized) since the former is already 35.0% lower YOY.

My Forecast High P/E is 25.0. Over the past decade, high P/E has ranged from 17.1 in ’18 to 65.3 in ’22 with a last-5-year mean of 43.0. The last-5-year-mean average P/E is 29.6. I am forecasting below the latter.

My Forecast Low P/E is 15.0. Over the past decade, low P/E has ranged from 12.0 in ’19 to 26.8 in ’21 with a last-5-year mean of 16.1. I am forecasting below the 10-year median of 15.5.

My Low Stock Price Forecast (LSPF) of $81.30 is default based on ’22 EPS. This is 29.4% less than the previous closing price and 5.8% less than the 52-week low.

These inputs land GNRC 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 4.7%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the total annualized return (TAR) of 9.5% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 248 studies (my study and 102 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 10.1%, 14.0%, 30.0, and 14.9. I am lower on everything but the latter (15.0). Value Line’s projected average annual P/E of 26.0 is higher than MS (22.5) and mine (20.0).

MS high / low EPS are $7.68 / $3.62 vs. my $7.25 / $5.42 (per share). My overall EPS range is higher. Value Line projects $16.00/share for high EPS, which soars above everything else.

MS LSPF of $61.30 implies a Forecast Low P/E of 16.9, which is higher than the above-stated 14.9. MS LSPF is 13.7% greater than the default $3.62/share * 14.9 = $53.94, which results in more aggressive zoning. MS LSPF is 24.6% less than mine, though, which does not bode well for MOS.

My TAR (over 15.0% preferred) is less than the 12.6% from MS. This argues for some MOS, but I would call it slim.

I track a few different valuation metrics. PEG is 2.1 and 4.6 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is fair at 1.0. Kim Butcher’s “quick and dirty DCF” prices the stock at 24.0 * [$19.40 – ($6.00 + $2.25)] = $267.60, which suggests the stock to be 57.0% undervalued (perhaps not surprising since the Value Line long-term EPS estimate is so much higher than all the others).

GNRC is a BUY under $106/share. My forecast high price is $181.30. Especially with limited MOS, I would look to re-evaluate closer to the meeting of my TAR criterion around $181.30 / 2 = $90.65/share.

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MMM Stock Study (10-2-23)

Posted by on November 25, 2023 at 07:04 | Last modified: October 2, 2023 14:09

I recently did a stock study on 3M Co. (MMM) with a closing price of $93.62. Previous studies are here, here, and here.

Value Line writes:

     > 3M Company is a diversified manufacturer and technology
     > company with operations in more than 70 countries. It is
     > among the leading manufacturers in many of the markets it
     > serves. The conglomerate currently operates four business
     > segments: Safety and Industrial (33.9% of ’22 sales);
     > Transportation and Electronics (26.0%); Health Care
     > (24.6%); Consumer (15.5%). Research & Development:
     > $1.9 billion or 5.4% of ’22 sales.

This large-size company has grown sales and EPS at annualized rates of 1.3% and 4.2%, respectively, over the last 10 years. Lines are somewhat up, straight and parallel with sales declines in ’15, ’16, ’19, and ’22 along with EPS declines in ’17 and ’19. Stock price is near a 10-year low. Per visual inspection, this is not a high-quality growth stock.

Over the past decade, PTPM is greater than peer and industry averages despite trending lower from 21.3% (’13) to 18.7% (’22) with a last-5-year mean of 19.8%. ROE is greater than peer and industry averages while increasing from 25.1% (’13) to 39.7% (’22) with a last-5-year mean of 43.3%. Debt-to-Capital is also greater than peer and industry averages while trending higher from 25.7% (’13) to 53.4% (’22) with a last-5-year mean of 59.4%.

Interest Coverage is currently NMF as a result of negative TTM EPS. Quick Ratio is 0.85. M* gives a Standard rating for Capital Allocation and Value Line gives an A rating for Financial Strength.

With regard to ongoing litigation risk, M* writes:

     > Nothing in the settlement or the proposed payment schedule
     > materially alters our prior view, as we were only off our most
     > recent estimate by about $400 million (and time value of money
     > more than made up the difference). After truing up its latest
     > liabilities, we come away more confident in 3M’s liquidity
     > position to fund the dividend, though we expect it will have
     > to take about $2.5 billion in additional debt over the next
     > couple of years. Apart from the $10 billion-plus liability
     > booked related to PFAS and municipal drinking water and the
     > more recent Combat Arms [military] earplug settlement, we
     > think 3M will be on the hook for approximately $9 billion
     > more in PFAS-related legal liabilities.

M* assigns a wide/stable economic moat to the company, but CFRA seems to disagree:

     > …most 3M products are commodity-like, such as roofing
     > granules or adhesives. Commodity-like products with intense
     > competition have little pricing power, making it difficult
     > to improve margins over the long term. 3M does enjoy brand
     > power on certain products, but not enough to drive
     > overall pricing growth that can keep up with inflation.

With regard to sales growth:

I am forecasting below the long-term estimates at 1.0% per year.

With regard to EPS growth:

The mean of five long-term estimates is 4.9% per year. I am forecasting below the range at 1.0% per year. I could forecast 2.0% and still be below the range, but due to uncertainty over how the 2023 Q2 [litigation] loss will affect the annual number, I remain ultra-conservative. I will use trendline EPS of $10.05/share as the initial value (slightly less than ’22 EPS of $10.18).

My Forecast High P/E is 18.0. Over the past decade, high P/E ranges from 17.9 in ’22 to 30.8 in ’17 with a last-5-year mean of 23.1. The last-5-year-mean average P/E is 19.4. I am forecasting near the bottom of the range (only ’22 is lower).

My Forecast Low P/E is 7.0. Over the past decade, low P/E ranges from 10.5 in ’22 to 21.9 in ’17 with a last-5-year mean of 15.6. I am forecasting well below the entire range.

My Low Stock Price Forecast (LSPF) of $70.40 is default based on $10.05/share initial value. This is 24.8% less than the previous closing price and 23.8% less than the 52-week (and 10-year) low.

Over the past decade, Payout Ratio has increased from 37.8% (’13) to 58.5% (’22) with a last-5-year average of 63.1%. I am forecasting below the entire range at 37.0%.

These inputs land MMM in the BUY zone with a U/D ratio of 4.1. Total Annualized Return (TAR) is 17.3%.

PAR (using Forecast Average—not High—P/E) is decent for a large-sized company at 10.1%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR, which is much better.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 93 studies over the past 90 days (52 outliers including my study excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 2.4%, 3.8%, 20.9, 14.6, and 60.0%, respectively. I am lower across the board. Value Line projects an average annual P/E of 14.0, which is lower than MS (17.8) and higher than mine (12.5).

MS high / low EPS are $11.78 / $7.04 versus my $10.56 / $10.05 (per share). With regard to low EPS, MS would be a 9-year low for the company. This almost seems unreasonable but as mentioned above, we don’t know how the Q2 loss will affect the full year. I also see a slew of studies using -$2.84/share for low EPS. That number is nowhere in the 2023 Q2 10-Q, and it doesn’t make sense to me to use a negative number anyway [I would exclude as a nonrecurring event to get +$2.17/share ($8.68 annualized) per Value Line]. I did not lowball the low EPS but I did lower forecast growth rate by 1.0%. With regard to high EPS, Value Line projects $12.50/share. I am lowest of the three.

MS LSPF of $96.50 implies a Forecast Low P/E of 13.7: less than the above-stated 14.6. MS LSPF is invalid on today’s date, however. My LSPF is 27.1% lower, which is much more conservative. Interesting to see MS low EPS so much less than mine given a LSPF so much greater.

My TAR (over 15.0% preferred) is less than the 21.5% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 1.5 per Zacks, which is fairly valued. Relative Value [(current P/E) / 5-year-mean average P/E] cannot be calculated due to negative quarterly EPS. Kim Butcher’s “quick and dirty DCF” prices the stock at 12.0 * [$16.10 – ($6.75 + $3.00)] = $76.20, which suggests the stock to be 18.6% overvalued.

Based on what I consider to be a very conservative stock study, MMM is a BUY under $100/share.

This is my fifth First Cut done on MMM as I remain fascinated despite massive shortcomings: this is not a [high] quality company, growth is anemic, and litigation risk is very high.

Despite all this and a rating of HOLD, CFRA has a 12-month price target of $120: 13x projected 2024 EPS, which is down from the last-5-year-mean forward P/E of 16.7. This represents annual price appreciation of 28.2% and does not include the dividend yield of roughly 6%.

Maybe that’s reason to find some appeal to this stock?

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VZ Stock Study (9-6-23)

Posted by on November 24, 2023 at 06:22 | Last modified: September 6, 2023 14:14

I recently did a stock study on Verizon Communications Inc. (VZ) with a closing price of $34.30. The original study is here.

M* writes:

     > Verizon Communications is primarily a wireless business (it
     > provides about 70% of service revenue and nearly all
     > operating income). It serves about 92 million postpaid and
     > 22 million prepaid phone customers (following the acquisition
     > of Tracfone) via its nationwide network, making it the
     > largest U.S. wireless carrier. Fixed-line telecom operations
     > include local networks in the Northeast, which reach about
     > 25 million homes and businesses and serve about 8 million
     > broadband customers. Verizon also provides telecom services
     > nationwide to enterprise customers, often using a mixture
     > of its own and other carriers’ networks.

Over the past decade, this mega-size (> $50B revenue per year) company has grown sales and EPS at annualized rates of 0.9% and 5.0%, respectively. YOY sales declines in ’16 and ’20. EPS is up and down every other year since ’14. For me, this does not actually clear the barbed wire fence (visual inspection not “up, straight, and parallel”).

Nevertheless [in the spirit of MMM], I will proceed to see how the study pans out.

Over the past decade, PTPM leads peer and industry averages while ranging from 12.0% in ’14 to 24.3% in ’15 with a last-5-year mean of 18.7%. ROE also leads peer and industry averages with a last-5-year mean of 28.4% (four values from 60%-136% precede that). Debt-to-Capital is higher than peer and industry averages despite trending lower from 70.7% in ’13 to 65.9% in ’22 with a last-5-year mean of 67.9%.

Quick Ratio is 0.54, and Interest Coverage is 7.2. Value Line gives an A+ rating for Financial Strength. M* gives a “Standard” rating for Capital Allocation.

With regard to sales growth:

I am forecasting flat sales growth: just below the long-term estimate.

With regard to EPS growth:

I am forecasting flat EPS growth—toward the bottom of the long-term-estimate range (mean of six: 1.3%). As high EPS, I will use 2023 Q2 EPS of $5.00/share (annualized) rather than ’22 EPS of $5.06. As low EPS, I will use ’20 EPS [arbitrary] of $4.30.

My Forecast High P/E is 11.0. Over the past decade, high P/E has trended down, ranging from 7.4 in ’17 to 22.2 in ’14 with a last-5-year mean of 13.3. The last-5-year-mean average P/E is 11.7. I am forecasting below the latter and toward the bottom of the range (only ’17 is lower).

My Forecast Low P/E is 6.0. Over the past decade, low P/E has trended down, ranging from 5.8 in ’17 to 18.6 in ’14 with a last-5-year mean of 10.2. I am forecasting toward the bottom of the range (only ’17 is lower).

My Low Stock Price Forecast (LSPF) of $25.80 is default based on low EPS (see above). This is 24.8% less than the previous closing price and 17.6% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 31.7% in ’17 to 89.3% in ’14 with a last-5-year mean of 54.5%. I am forecasting below the entire range at 31.0%.

These inputs land VZ in the HOLD zone with a U/D ratio of 2.4. Total Annualized Return (TAR) is 12.7%.

PAR (using Forecast Average—not High—P/E) is 8.0%, which is decent for a mega-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 210 studies (my study and 44 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 1.6%, 2.0%, 12.7, 9.1, and 54.3%. I am lower across the board. Value Line’s projected average annual P/E of 13.0 is higher than MS (10.9) and mine (8.5).

MS high / low EPS are $5.58 / $4.95 vs. my $5.00 / $4.30 (per share). My EPS range is clearly lower. Value Line projects future (high) EPS of $5.65/share, which is higher than both.

MS LSPF of $32.80 implies a Forecast Low P/E of 6.6: lower than the above-stated 9.1. MS LSPF is 27.2% less than the default $4.95/share * 9.1 = $45.05 [invalid on today’s date], which results in more conservative zoning. MS LSPF remains 27.1% greater than mine [suggesting current study could be a BUY with a greater (yet still sufficiently low) LSPF].

My TAR (over 15.0% preferred) is much less than the 19.6% from MS.

MOS seems robust in the current study.

I track a couple different valuation metrics. PEG is 2.1 per Zacks [cannot be calculated based on projected P/E since my growth rate (denominator) is 0%]: slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is very cheap at 0.6.

VZ is a BUY under $33/share. With a forecast high price of $55.00, I estimate TAR would meet my criterion at or below $27.50/share [if I wanted to hold out that long].

Not sure exactly why I am so fascinated by such companies with lackluster and inconsistent growth. Maybe it’s when they come close to meeting stringent BUY criteria anyway. Some would call this “value investing.”

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CMCSA Stock Study (9-5-23)

Posted by on November 22, 2023 at 06:48 | Last modified: September 5, 2023 14:41

I recently did a stock study on Comcast Corp. (CMCSA) with a closing price of $45.73. The original study is here.

Value Line writes:

     > Comcast Corp. is a global media and telecommunications company.
     > Its Cable Communications segment (54% of adjusted ’21 revenues)
     > provides high-speed Internet, pay-TV, and voice services across
     > major U.S. markets under the Xfinity brand. NBCUniversal
     > includes: broadcast, cable, and streaming networks (NBC, Bravo,
     > USA, Peacock); TV/film studios (Universal Pictures,
     > DreamWorks); and theme parks (Universal Studios). Acquired
     > European pay-TV provider SKY plc (14%) 12/18.

Over the past decade, this mega-size (greater than $50B annual revenue) company has grown sales and earnings 7.6% and 10.5% per year (excluding ’22 EPS for reasons discussed in the original study). Sales are up and straight. EPS is generally up and straight with an upward spike in ’17 (possibly related to TCJA) and YOY declines in ’18, ’20, and ’22. PTPM leads peer and industry averages, ranging from 13.6% in ’20 to 18.1% in ’14 and ’17 with a last-5-year mean (excluding ’22) of 15.4%.

Also over the past decade, ROE trails peer and industry averages by going from 12.2% in ’13 to 17.0% in ’16 then falling to 14.4% in ’21 with a last-5-year mean of 14.8% (’22 excluded along with upside outlier of 39.8% in ’17). Debt-to-Capital is less than peer and industry averages, ranging from 47.8% in ’14 to 60.9% in ’18 with a last-5-year mean of 54.7%.

Although Interest Coverage and Quick Ratio are only 5.1 (mean of M* and Value Line) and 0.6 (M*), respectively, Value Line gives an A+ rating for Financial Strength. M* gives a “Standard” rating for Capital Allocation and writes:

     > We give Comcast a Standard Capital Allocation Rating. We believe
     > the firm’s balance sheet is sound and shareholder returns are
     > generally appropriate. The firm instituted a dividend in 2008 as
     > the business started to generate strong cash flows and has
     > increased its payout ninefold, or 16% annually on average.

M* also tags the company with a “Wide” economic moat.

With regard to sales growth:

I am forecasting just under the long-term estimate at 1.0% per year.

With regard to EPS growth:

I am forecasting just below the long-term estimate range (mean of six: 9.8%). I will use ’21 EPS of $3.04/share as the initial value thereby discounting any growth occurring in ’22 (sans write-down for Sky). This is the same as projecting from the ’22 trendline ($3.35/share) with a 4.9% growth rate.

My Forecast High P/E is 16.0. Over the past decade, high P/E ranges from 16.7 in ’19 to 23.0 in ’20 (’17 and ’22 excluded as downside and upside outliers of 8.9 and 43.1, respectively) with a last-5-year mean of 19.4. The last-5-year-mean average P/E is 16.3. I am forecasting below the range (sans outliers).

My Forecast Low P/E is 10.0. Over the past decade, low P/E ranges from 11.8 in ’19 to 15.4 in ’15 (’17 and ’22 excluded as downside and upside outliers of 7.2 and 23.5) with a last-5-year mean of 13.2 . I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $30.40 is default given initial value of $3.04/share. This is 33.5% less than the previous closing price and 7.0% greater than the 52-week low.

Over the past decade, Payout Ratio ranges from 28.1% in ’14 to 40.4% in ’20 (excluding outliers of 13.3% in ’17 and 89.3% in ’22) with a last-5-year mean of 33.2%. I am forecasting conservatively at 28.0% (only the downside outlier is less).

These inputs land CMCSA in the HOLD zone with a U/D ratio of 1.5. Total Annualized Return (TAR) is 10.0%.

PAR (using Forecast Average—not High—P/E) is 6.0%, which is less than I seek for a mega-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 166 studies (my study and 61 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 4.7%, 11.0%, 19.0, 13.2, and 29.2%. I am lower across the board. Value Line’s projected average annual P/E of 16.0 is lower than MS (16.1) and higher than mine (13.0).

MS high / low EPS are $2.99 / $1.58 vs. my $3.64 / $2.78 (per share). My forecast EPS range is higher because many MS studies use 2023 Q1 and Q2 EPS of $1.32/share and $1.58, respectively. I am excluding these low values. Value Line projects high EPS of $5.35, which makes mine look conservative.

MS LSPF of $26.40 implies a Forecast Low P/E of 16.7, which is higher than the above-stated 13.2. MS LSPF is 26.6% greater than default $1.58/share * 13.2 = $20.86, which supports MS low EPS as excessive. MS LSPF is also 13.2% less than mine.

For the first time ever, my TAR (over 15.0% preferred) is greater than [the 7.8% from] MS.

If I’m right about ’22 EPS being a nonrecurrent aberration, then rebound to the trendline should take place soon. Until/if that happens, I can’t claim any MOS as MS may be correct.

I track a few different valuation metrics. PEG is 1.3 per Zacks: fairly valued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is expensive at 1.8 [using what I think is that ’22 lowball EPS number]. Kim Butcher’s “quick and dirty DCF” prices the stock at 9.5 * [$9.60 – ($1.60 + $3.50)] = $42.75, which suggests the stock to be about 6.5% overvalued.

I would look to re-evaluate the stock under $39. With a forecast high price of $68.10, I would estimate TAR to meet my personal criterion at or below $34/share.

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VEEV Stock Study (8-31-23)

Posted by on November 20, 2023 at 07:09 | Last modified: August 31, 2023 13:44

I recently did a stock study on Veeva Systems, Inc. (VEEV) with a closing price of $192.59.

M* writes:

     > Veeva is the global leading supplier of cloud-based software
     > solutions for the life sciences industry. The company’s best-of-
     > breed offerings address operating and regulatory requirements
     > for customers ranging from small, emerging biotechnology
     > companies to departments of global pharmaceutical manufacturers.
     > The company leverages its domain expertise to improve the
     > efficiency and compliance of the underserved life sciences
     > industry, displacing large, highly customized and dated
     > enterprise resource planning systems that have limited
     > flexibility. Its two main products are Veeva CRM, a customer
     > relationship management platform for companies with a salesforce,
     > and Veeva Vault, a content management platform that tackles
     > various functions within any life sciences company.

Over the past decade, this medium-size company has grown sales at an annualized rate of 29.1%. EPS has grown 25.2% per year since ’17 (previous years excluded due to fractional EPS values that would otherwise inflate rate to 40.8%). Lines are up, straight, and parallel. PTPM is above peer and industry averages, increasing from 18.3% in ’13 to 23.6% in ’22 with a last-5-year mean of 26.9%.

Also over the past decade, ROE leads peer and industry averages by increasing from 6.9% in ’13 to 13.9% in ’22 with a last-5-year mean of 16.5%. To complete the trifecta, the company has no long-term debt; Debt-to-Capital is lower than peer and industry averages with a last-5-year mean of 1.9%.

Quick Ratio is 4.0. M* rates the company “Exemplary” for Capital Allocation and categorizes them as “Wide” for Economic Moat. Value Line gives an A+ rating for Financial Strength. From what I’ve seen, it really doesn’t get much better than this!

With regard to sales growth:

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

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of six: 17.3%) at 13.0% per year. I will use ’22 EPS of $3.00/share as the initial value rather than 2023 Q1 EPS of $3.20 (annualized).

My Forecast High P/E is 50.0. Over the past decade, high P/E trends down from 327 in ’13 to 79.9 in ’22 with a last-5-year mean of 102. The last-5-year-mean average P/E is 78.6. I am forecasting well below the range as I expect these values to moderate as the company matures.

My Forecast Low P/E is 45.0. Over the past decade, low P/E ranges from 35.5 in ’18 to 191 in ’13 with a last-5-year mean of 54.9. I am forecasting near the bottom of the range [only ’18 and ’16 (42.5) are lower].

My Low Stock Price Forecast (LSPF) of $135.00 is default based on $3.00/share initial value. This is 29.9% less than the previous close and 10.6% less than the 52-week low.

These inputs land VEEV in the HOLD zone with a U/D ratio of 1.6. Total Annualized Return (TAR) is 7.9%.

PAR (using Forecast Average—not High—P/E) of 6.8% 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 197 studies (68 outliers along with my study excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 15.0%, 15.8%, 72.0, and 47.4, respectively. I am lower across the board. Value Line’s projected average annual P/E of 42.0 is lower than MS (59.7) [unlike HEI, which I studied earlier this week, MS believes the P/E hype for this stock] and mine (47.5).

MS high / low EPS are $6.66 / $2.91 vs. my $5.53 / $3.00 (per share). My high EPS is lower due to a lower EPS growth rate. Value Line projects a future [high] EPS of $8.25, which is greater than both. M* is similar at $8.38/share [although this number may come from the website itself rather than MS; I have emailed Suzi to find out more].

MS LSPF of $143.60 implies a Forecast Low P/E of 49.3: greater than the above-stated 47.4. MS LSPF is 4.1% greater than the default $2.91/share * 47.4 = $137.93, which results in more aggressive zoning. MS LSPF is also 6.4% greater than mine.

My TAR (over 15.0% preferred) is much less than MS 19.4%.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG is 2.1 and 4.0 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is cheap at 0.8. Kim Butcher’s “quick and dirty DCF” prices the stock at 35.0 * [$8.50 – ($0.00 + $0.20)] = $290.50: undervalued by 33.7%.

VEEV is a BUY under $170/share. For TAR to meet my personal 15% target, I need a stock price around $138.

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SON Stock Study (9-14-23)

Posted by on November 17, 2023 at 06:57 | Last modified: September 15, 2023 14:53

I recently did a stock study on Sonoco Products Co. (SON) with a closing price of $54.34.

M* writes:

     > Over its 100-year-plus history, Sonoco Products has steadily assembled
     > a diverse portfolio of industrial and consumer packaging product
     > offerings such as flexible and rigid plastics, reels and spools,
     > pallets, and composite cans. The company serves a variety of
     > consumer and industrial end markets throughout North America. Sonoco
     > has raised its dividend each year for more than 30 years.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 3.1% and 5.8%, respectively. I have excluded ’21 EPS because, from the company’s 2021 10-K:

     > The full-year 2021 GAAP loss per diluted share was $(0.86)… The
     > full-year 2021 GAAP loss was driven by $410.4 million after-tax
     > pension settlement charges mostly related to the Company’s
     > settlement of its U.S. Inactive Plan in the second quarter.

Lines are up, jagged, and somewhat parallel. Sales [EPS] declines in ’15, ’16, and ’19 [’17, ’19, and ’20]. PTPM trails peer averages and the industry despite increasing from 6.3% in ’13 to 7.9% in ’22 with a last-5-year mean of 6.7% (’21 excluded).

Also over the past decade, ROE trails peer and industry averages despite increasing from 13.7% (’13) to 27.9% (’22) with a last-5-year mean of 16.9% (’21 excluded). Debt-to-Capital is less than peer and industry averages despite trending up from 36.5% (’13) to 62.7% (’22) with a last-5-year mean of 51.9%.

Interest Coverage is 5.7 and Quick Ratio is 0.9. M* rates the company “Standard” for Capital Allocation and describes its balance sheet as “sound.” Value Line gives an A rating for Financial Strength.

And remember: Sonoco is a Dividend Champion!

With regard to sales growth:

I am forecasting near the lower of two long-term estimates at 2.0% per year.

With regard to EPS growth:

My 2.0% per year forecast is below the 5-long-term-estimate mean (3.4%) due to two negative projections. I will use ’22 EPS of $4.72/share as the initial value rather than 2023 Q2 $4.88 (annualized).

My Forecast High P/E is 18.0. Over the past decade, high P/E ranges from 14.2 in ’22 to 32.1 in ’17 with a last-5-year mean of 21.7. The last-5-year-mean average P/E is 18.6. I am forecasting below the latter and every year but ’22.

My Forecast Low P/E is 9.0. Over the past decade, low P/E ranges from 10.9 in ’22 to 27.1 in ’17 with a last-5-year mean of 15.5. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) of $42.50 is default based on ’22 EPS. This is 21.8% less than the previous closing price and 17.5% less than the 2021-22 low.

Over the past decade, Payout Ratio ranges from 40.7% in ’22 to 88.5% in ’17 with a last-5-year mean of 59.0%. I am forecasting conservatively below the range at 40.0%.

These inputs land SON in the BUY zone with a U/D ratio of 3.3. Total Annualized Return (TAR) is 13.8%.

PAR (using Forecast Average—not High—P/E) is 8.3%, which is less than I seek in a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR 13.8% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 8 studies (my study and one other outlier 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 4.7%, 8.1%, 18.9, 15.3, and 56.7%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 16.0 is lower than MS (17.1) and higher than mine (13.5).

MS high / low EPS are $7.15 / $4.79 vs. my $5.21 / $4.72 (per share). My high EPS is lower due to a lower growth estimate. Value Line projects $7.40/share for high EPS, which is above the others.

MS LSPF of $48.90 implies a Forecast Low P/E of 10.2: less than the above-stated 15.3 and 33.3% less than the default $4.79/share * 15.3 = $73.29, which results in more conservative zoning. MS LSPF still remains 15.1% greater than mine.

My TAR (over 15.0% preferred) is less than MS 20.4%. While the MS sample size is too small for a valid comparison, I consider MOS to be at least moderate in this study because all inputs are conservative [i.e. at the bottom (or below) respective ranges, below the mean, etc.].

I track a few different valuation metrics. PEG is 2.1 and 5.5 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is cheap at 0.6. Kim Butcher’s “quick and dirty DCF” prices the stock at 10.0 * [$10.65 – ($2.24 + $3.15)] = $52.60, which suggests the stock to be 3.2% overvalued.

One thought worthy of further consideration is that longer-term averages will mean less if the ’22 acquisition of Ball Metalpack shocks parameters into completely new ranges.

SON is a BUY under $55/share. I would personally wait for price to drop a bit lower to meet my TAR criterion of 15.0%.

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CNC Stock Study (8-30-23)

Posted by on November 16, 2023 at 06:53 | Last modified: August 31, 2023 11:04

I recently did a stock study on Centene Corp. (CNC) with a closing price of $64.44.

M* writes:

     > Centene is a managed-care organization focused on government-
     > sponsored healthcare plans, including Medicaid, Medicare, and
     > the individual exchanges. Centene served 23 million medical
     > members as of September 2022, mostly in Medicaid (70% of
     > membership), the individual exchanges (9%), Medicare Advantage
     > (7%), and the balance in Tricare (West region), correctional
     > facility, and commercial plans. The company also serves 4
     > million users through… Medicare Part D pharmaceutical program.

Over the past decade, this mega-size (over $50B annual revenue) company has grown sales and earnings at annualized rates of 33.3% and 13.0%, respectively. Lines are mostly up and widening with EPS declines in ’18, ’20, ’21, and ’22. PTPM trails peer and industry averages while decreasing from 2.5% in ’13 to 1.4% in ’22 with a last-5-year mean of 2.0%.

Also over the past decade, ROE trails peer and industry averages while decreasing from 13.5% in ’12 to 4.5% in ’22 with a last-5-year mean of 7.2%. Debt-to-Capital is roughly equal to peer and industry averages while increasing from 35.1% in ’12 to 47.0% in ’22 with a last-5-year mean of 44.0%.

Interest Coverage is 6.5 and Quick Ratio is 1.1. Value Line gives a B++ rating for Financial Strength. M* gives a “Standard” rating for Capital Allocation and writes:

     > Overall, while the balance sheet appears weak to us, it is
     > improving and could reach sound territory in the near future if the
     > firm refrains from significant, leverage-increasing acquisitions.

Admittedly, I am not overly impressed to this point with CNC. While I believe it passes visual inspection (despite sales growing faster than EPS, which is not often seen), it’s not a leader and fundamental trends are negative.

With regard to sales growth:

My forecast is flat [below the range] over the next five years. This is also consistent with the widening visual inspection.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of six: 10.5%) at 8.0% per year. I will use ’22 EPS of $2.07/share as the initial value rather than 2023 Q2 EPS of $4.85 (annualized).

The latter is a pivotal judgment worthy of further discussion. $2.07/share continues the nascent downtrend from ’20 to ’21. The first two quarters of ’23, however, show sudden reversal and growth. Value Line reports consistent annual earnings growth over the past decade by excluding substantial “nonrecurrent” losses in ’16, ’18, ’19, ’20, ’21, and ’22. I question whether six out of seven years is “nonrecurrent” [CFRA seems to agree as “Normalized EPS”—often seen for other companies—is absent from this statistical matrix]. I should probably look at the 10-K’s to assess the “nonrecurrence” [if due to regular acquisitions, then M* suggestion to cut back on leverage-increasing purchases would require breaking an established pattern].

My Forecast High P/E is 27.0. Over the past decade, high P/E increases from 23.6 in ’14 to 47.6 in ’22 with a last-5-year mean of 32.8. The last-5-year-mean average P/E is 27.4. I am forecasting just below the latter.

My Forecast Low P/E is 21.0. Over the past decade, low P/E ranges from 11.9 in ’17 to 35.4 in ’22 with a last-5-year mean of 21.9. I am forecasting below the latter [aggressive since declining EPS over the last two years corresponds to inflated P/E].

My Low Stock Price Forecast (LSPF) of $43.50 is default based on $2.07/share initial value. This is 32.5% less than the previous close and 29.0% less than the 52-week low.

These inputs land CNC in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 5.3%.

PAR (using Forecast Average—not High—P/E) is 2.8%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR although even that is less than the risk-free rate.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 121 studies (25 outliers and my study excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 6.0%, 13.4%, 23.8, and 15.5. My P/E range is higher but my growth rates are not. Value Line’s projected average annual P/E of 14.0 is lower than MS (19.7) and mine (24.0).

MS high / low EPS are $6.25 / $3.04 vs. my $3.04 / $2.07 (per share). My high EPS is lower partially due to a lower EPS growth rate. My high EPS is also lower than M* and Value Line at $3.88 and $9.30/share, respectively [a wide disparity also worthy of discussion].

MS LSPF of $52.70 implies a Forecast Low P/E of 17.3: greater than the above-stated 15.5. MS LSPF is 11.8% greater than the default $3.04/share * 15.5 = $47.12, which results in more aggressive zoning. MS LSPF remains 21.1% greater than mine.

My TAR (over 15.0% preferred) is far less than the 15.2% from MS. The latter is a direct result of MS high EPS and has nothing to do with LSPF.

MOS backing the current study seems almost excessive for two reasons [neither of which are P/E range]. First, my LSPF is much less than the 52-week low. For a stock trading near a 52-week low, maybe I need to reconsider the legitimacy of [overriding default and] discounting the previous closing price by 20-30%. An argument can be made to dissociate LSPF from a Forecast Low P/E, and I can always readjust later if needed. Second, I am using ’22 EPS rather than ’23 Q2 EPS as the initial value. That represents a significant haircut.

I track a few different valuation metrics. PEG is 0.9 and 1.5 per Zacks and my projected P/E, respectively: fairly valued, on average. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is significantly low at 0.5. Kim Butcher’s “quick and dirty DCF” prices the stock at 11.0 * [$12.70 – ($0.00 + $2.80)] = $108.90: undervalued by 40.8%.

CNC is a BUY under $53/share. For TAR to meet my 15% criterion, I need closer to $41. My conservative approach sometimes represents a very high bar for stock picking.

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HEI Stock Study (8-29-23)

Posted by on November 14, 2023 at 07:05 | Last modified: August 29, 2023 14:54

I recently did a stock study on HEICO Corp. (HEI) with a closing price of $167.85. Previous studies are here and here.

Value Line writes:

     > HEICO Corp. engages in the design, manufacture, and sale of aerospace,
     > defense, and electronics-related products and services. It operates in
     > two segments: The Flight Support Group (57% of 2022 sales) designs and
     > manufactures jet engine and aircraft component replacement parts. The
     > Electronic Technologies Group (43%) manufactures various electronic,
     > microwave, and electro-optical products. Sales by industry: commercial
     > aviation, 43%; defense/space, 39%; medical, electronics, and other, 18%.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 8.8% and 15.0%, respectively. Lines are mostly up, straight, and parallel with a slight pullback in ’20 [and ’21 for EPS]. PTPM leads industry and peer averages while increasing from 17.9% in ’13 to 22.2% in ’22 with a last-5-year mean of 20.9%.

Also over the past decade, ROE leads peers and lags the industry while declining from 17.6% in ’13 to 14.2% in ’22 with a last-5-year mean of 16.6%. Debt-to-Capital is less than peer and industry averages while falling from 38.4% in ’13 to 10.5% in ’22 with a last-5-year mean of 20.2%.

Interest Coverage is 25.5 and Quick Ratio is 1.3. Value Line gives a B++ rating for Financial Strength, and M* gives a “Standard” rating for Capital Allocation.

With regard to sales growth:

I am forecasting below the long-term estimate at 11.0% per year.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of five: 14.0%) at 12.0% per year. My initial value is ’22 EPS of $2.55/share rather than 2023 Q2 EPS of $2.73 (annualized).

My Forecast High P/E is 48.0. Over the last decade, high P/E ranges from 32.3 in ’15 to 67.4 in ’21 with a last-5-year mean of 60.5. The trend is higher, but I don’t expect this to continue forever. The last-5-year-mean average P/E is 48.3. My forecast is just below the latter.

My Forecast Low P/E is 36.0. Over the past decade, low P/E trends higher with a range from 19.5 in ’13 to 49.8 in ’22 and a last-5-year mean of 36.1. My forecast is just below the latter.

My Low Stock Price Forecast (LSPF) of $91.80 is default based on $2.55/share initial value: 45.3% less than the previous closing price, 33.9% less than the 52-week low, and 13.7% less than the 2021 low. This may seem extreme. However, the Forecast Low P/E seems completely reasonable to me as is. Using my approach, it would have to be raised.

Over the past decade, Payout Ratio ranges from 5.7% to 7.7% with a last-5-year mean of 6.7%. I am forecasting conservatively at 5.0%.

These inputs land HEI in the HOLD zone with a U/D ratio of 0.6. Total Annualized Return (TAR) is 5.2%.

PAR (using Forecast Average—not High—P/E) is 2.5%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the total annualized return (TAR) of 5.2% instead, which is still lower than the risk-free rate.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 108 studies (my study and 21 other 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 10.0%, 12.0%, 46.2, 25.5, and 6.6%. I am only lower on Payout Ratio [very unusual for me!]. Value Line’s projected average annual P/E of 49.5 is higher than MS (35.9) and mine (42.0).

MS high / low EPS are $4.62 / $2.40 vs. my $4.49 / $2.55 (per share). These EPS ranges are practically identical.

MS LSPF of $67.10 implies a Forecast Low P/E of 30.2: higher than the above-stated 25.5. MS LSPF is 18.3% greater than the default $2.40/share * 25.5 = $61.20, which results in more aggressive zoning. MS LSPF does remain 21.1% less than mine.

My TAR (over 15.0% preferred) is greater than the 4.6% from MS. This is a first.

I would not claim any MOS backing the current study.

I track a few different valuation metrics. PEG is 4.4 and 4.6 per Zacks and my projected P/E: both significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is overvalued at 1.3. Kim Butcher’s “quick and dirty DCF” prices the stock at 40.0 * [$6.50 – ($0.36 + $0.50)] = $225.60, which would be 35.6% undervalued.

I will look to re-evaluate the stock under $122. With a forecast high price of $215.70, I estimate TAR will meet my criterion at or below $107.85/share.

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