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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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AEM Stock Study (9-25-23)

Posted by on November 11, 2023 at 06:30 | Last modified: September 25, 2023 13:07

I recently did a stock study on Agnico Eagle Mines Ltd. (AEM) with a closing price of $49.05. The original study is here.

M* writes:

     > Agnico Eagle is a gold miner with mines in Canada, Mexico, Finland,
     > and Australia. Agnico operated just one mine, LaRonde, as recently
     > as 2008 before bringing its other mines online in rapid succession
     > in the following years. It merged with Kirkland Lake Gold in 2022,
     > acquiring the Detour Lake and Macassa mines in Canada along with
     > the high-grade, low-cost Fosterville mine in Australia. It produced
     > more than 3.1 million gold ounces in 2022 and had about 15 years
     > of gold reserves at end 2022. Agnico Eagle is focused on increasing
     > gold production in lower-risk jurisdictions and bought the
     > remaining 50% of its Canadian Malartic mine along with the
     > Wasamac project and other assets from Yamana Gold in 2023.

Over the past decade, this medium-size company has grown sales at an annualized rate of 12.2%. EPS has grown at an annualized rate of 16.9% since 2016 (’14 and ’15 excluded due to low fractional EPS that would artificially inflate growth rate; ’13 and ’18 excluded due to negative EPS resulting from nonrecurrent events). PTPM lags industry averages despite trending up in recent years with a last-5-year mean of 17.1%.

Also over the past decade, ROE is roughly equal to industry averages despite trending down in recent years with a last-5-year mean of 5.2%. Debt-to-Capital is lower than industry averages and recently trending down with a last-5-year mean of 21.5%.

Interest Coverage is over 38 and Quick Ratio is 0.61. M* gives a “Standard” rating for Capital Allocation and Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

I am forecasting toward the lower end of the range at 6.0% per year.

With regard to EPS growth:

I am forecasting flat growth—toward the bottom of the long-term-estimate range (mean of four: 3.7%). For high EPS, I will use 2023 Q1 EPS of $5.14 (annualized). For low EPS, I am choosing to bypass ’22 EPS of $1.53/share because it seems curiously low [Value Line and CFRA’s normalized EPS reflect less than a 10% YOY decrease for ’22 versus M*’s GAAP reporting of a 31% YOY decrease]. Instead, I will use ’21 EPS of $2.22/share (arbitrary).

My Forecast High P/E is 24.0. Over the past decade, high P/E ranges from 32.6 in ’19 to 317 in ’15. The last-5-year mean high P/E is 38.4 and the last-5-year-mean average P/E is 29.1. I am forecasting below the range.

My Forecast Low P/E is 14.0. Over the past decade, low P/E ranges from 14.8 in ’20 to 191 in ’15 with a last-5-year mean of 19.8. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $31.10 is default based on $2.22/share. This is 36.6% less than the previous closing price and 15.3% less than the 52-week low.

These inputs land AEM in the BUY zone with a U/D ratio of 4.1. Total Annualized Return (TAR) is 21.4%.

Over the past decade, Payout Ratio has ranged from 27.6% in ’19 to 291% in ’15 with a last-5-year mean of 60.1% (’22 is 105%). I am forecasting below the entire range at 27.0%.

PAR (using Forecast Average—not High—P/E) is 16.2%, which is among the highest ever seen in one of my stock studies.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 68 studies over the past 90 days (29 outliers and 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 11.5%, 10.0%, 29.7, 16.9, and 43.7%, respectively. I am lower across the board. Value Line projects an average annual P/E of 20.0, which is lower than MS (23.5) and higher than mine (19.0).

MS high / low EPS are $6.13 / $2.24 versus my $5.14 / $2.22 (per share). Value Line’s high EPS is $5.20. Mine is lowest of the three due to a lower growth rate.

MS LSPF of $36.90 implies a Forecast Low P/E of 16.5, which is less than the above-stated 16.9. MS LSPF is 2.5% less than the default $2.24/share * 16.9 = $37.86, which results in more conservative zoning. MS LSPF is still 18.7% greater than mine.

My TAR (over 15.0% preferred) is much less than the 30.2% from MS. MOS seems robust in the current study.

I track a few different valuation metrics. With long-term growth rates of 1.0% and 0% from Zacks and me, PEG doesn’t make much sense (22.0 and indeterminate, respectively). Relative Value [(current P/E) / 5-year-mean average P/E] per M* seems excessively cheap at 0.33 (perhaps so low because 2023 EPS is up 200% YOY for Q1 and Q2 causing current P/E to nosedive). Kim Butcher’s “quick and dirty DCF” prices the stock at 11.0 * [$8.70 – ($2.40 + $3.10)] = $35.20, which suggests the stock to be 28.2% overvalued. These are conflicting (and confusing as to why that is).

AEM is a BUY at the current price. If I want to be even more cautious, then maybe I knock 5-10% off the max buy price to account for uncertainty related to my selection of high and low EPS.

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UHS Stock Study (8-29-23)

Posted by on November 10, 2023 at 06:36 | Last modified: August 29, 2023 10:17

I recently did a stock study on Universal Health Services Inc. (UHS) with a closing price of $133.01.

M* writes:

     > Universal Health Services Inc owns and operates acute care hospitals,
     > behavior health centers, surgical hospitals, ambulatory surgery
     > centers, and radiation oncology centers. The firm operates in two key
     > segments: Acute Care Hospital Services and Behavioral Health Services.
     > The Acute Care Hospital Services segment includes the firm’s acute
     > care hospitals, surgical hospitals, and surgery and oncology centers.

Over the past decade, this large-size company has grown sales and earnings at annualized rates of 6.5% and 8.8%, respectively. Lines are mostly up, straight, and parallel except for an EPS decline in ’22. PTPM leads peer and industry averages despite trending down from 11.9% in ’13 to 6.5% in ’22 with a last-5-year mean of 9.3%.

Also over the past decade, ROE leads peer and industry averages despite trending down from 16.2% in ’13 to 11.0% in ’22 with a last-5-year mean of 14.0%. Debt-to-Capital is much lower than peer and industry averages, ranging from 39.9% in ’20 to 50.5% in ’13 with a last-5-year mean of 43.3%.

Interest Coverage is 6.1 and Quick Ratio is 1.1. Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

I am forecasting below the range at 4.0% per year.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of five: 9.9%) at 7.0% per year. I will use ’22 EPS of $9.14/share as the initial value rather than 2023 Q2 EPS of $9.63 (annualized).

My Forecast High P/E is 13.0. Over the past decade, high P/E ranges from 13.5 in ’20 to 22.0 in ’15 with a last-5-year mean of 15.8. The last-5-year-mean average P/E is 12.9. I am forecasting just above the latter and below the entire high P/E range.

My Forecast Low P/E is 9.0. Over the past decade, low P/E ranges from 5.9 in ’20 (possibly a downside outlier) to 15.0 in ’15 with a last-5-year mean of 10.1. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast (LSPF) of $82.30 is default based on $9.14/share initial value. This is 38.1% less than the previous close and 20 cents off the 52-week low.

Over the past decade, Payout Ratio ranges from 1.8% in ’20 (downside outlier?) to 8.8% in ’22 with a last-5-year mean of 5.7%. I am forecasting near the bottom of the range at 3.0% (only ’20 is lower).

These inputs land UHS in the HOLD zone with a U/D ratio of 0.7. Total Annualized Return (TAR) is 5.1%.

PAR (using Forecast Average—not High—P/E) is 1.7%, 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 TAR but that, too, is less than the risk-free rate.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 37 studies (my study and 16 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 6.0%, 8.0%, 16.1, 11.0, and 5.5%. I am lower across the board. Value Line’s projected average annual P/E of 15.0 is higher than MS (13.6) and mine (11.0).

MS high / low EPS are $14.06 / $9.63 vs. my $12.82 / $9.14 (per share). High EPS are both lower than Value Line at $15.40.

MS LSPF of $67.10 implies a Forecast Low P/E of 9.8, which is less than the above-stated 11.0. MS LSPF is 10.8% less than the default $9.63/share * 11.0 = $105.93, which results in more conservative zoning. MS LSPF remains 14.8% above mine.

My TAR (over 15.0% preferred) is much less than the 11.9% from MS.

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

I track a few different valuation metrics. PEG is 1.3 (fairly valued) and 1.8 (slightly overvalued) per Zacks and my projected P/E, respectively. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is slightly overvalued at 1.1. Kim Butcher’s “quick and dirty DCF” prices the stock at 9.0 * [$15.40 – ($2.00 + $11.00)] = $21.60, which seems like NMF. The high CapEx may be causing a problem.

I would look to re-evaluate the stock under $103. With a forecast high price of $166.70, I would estimate TAR to meet my criterion at or below $83.35/share.

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AMT Stock Study (8-24-23)

Posted by on November 8, 2023 at 06:25 | Last modified: August 24, 2023 14:36

I recently did a stock study on American Tower Corp. (AMT) with a closing price of $177.84.

M* writes:

     > American Tower [a REIT] owns and operates more than 220,000
     > cell towers throughout the U.S., Asia, Latin America, Europe, and
     > Africa. It also owns and/or operates 25 data centers in eight
     > U.S. markets after acquiring CoreSite. On its towers, the company
     > has a very concentrated customer base, with most revenue in each
     > market being generated by just the top few mobile carriers. The
     > company operates more than 40,000 towers in the U.S., which
     > accounted for roughly half of the company’s total revenue in 2022.
     > Outside the U.S., American Tower operates over 75,000 towers in
     > India, almost 50,000 towers in Latin America (dominated by Brazil),
     > 30,000 towers in Europe, and nearly 25,000 towers in Africa.

AMT is organized as a REIT, which are not recommended as club investments for reasons explained here. I did not realize this recently in selecting CCI to study. Having done CCI, I am interested to study AMT to compare and contrast the two.

Over the past decade, this large-size company has grown sales and earnings at annualized rates of 12.7% and 15.5%, respectively. Lines are mostly up, straight, and parallel except for EPS declines in ’15, ’20, and ’22. PTPM leads peer and industry averages while ranging from 15.5% in ’18 to 30.2% in ’21 with a last-5-year mean of 21.9%.

Also over the past decade, ROE leads peer and industry averages while trending up from 15.4% in ’13 to 28.3% in ’22 with a last-5-year mean of 36.0%. Debt-to-Capital is higher than peer and industry averages while increasing from 80.4% in ’13 to 89.4% in ’22 with a last-5-year mean of 87.3%.

Quick Ratio is 0.5 and Interest Coverage is 1.7. Value Line gives an “A” rating for Financial Strength while M* gives a “Standard” rating for Capital Allocation.

I profess ignorance with regard to REITs. I’m not sure if the requirement to pay out 90% or more of their taxable profits to shareholders in the form of dividends affects ratios like Debt-to-Equity, Quick, or Interest Coverage. All three of these seem undesirable to me, but Value Line’s “A” rating along with M* comments suggest them to be no big deal.

With regard to sales growth:

I am forecasting toward the lower end of the range at 6.0% per year.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of six: 11.9%). Given the 32.5% YOY EPS decline in ’22, I will use that $3.82/share as the initial value rather than ’23 Q2 EPS of $2.07 (annualized).

My Forecast High P/E is 45.0. Over the past decade, high P/E ranges from 53.2 in ’14 to 76.6 in ’22 with a last-5-year mean of 64.0. The last-5-year-mean average P/E is 53.1. I am forecasting below the range [and above my personal comfort zone but REITs may have high P/E’s for reasons unbeknownst to me; I noticed something similar with CCI].

My Forecast Low P/E is 35.0. Over the past decade, low P/E ranges from 34.9 in ’21 to 61.6 in ’15 with a last-5-year mean of 42.2. I am forecasting near the bottom of the range (only ’21 is lower).

My Low Stock Price Forecast (LSPF) of $133.70 is default based on $3.82/share initial value. This is 24.8% less than the previous close and 22.5% less than the 52-week low.

Over the past decade, Payout Ratio ranges from 70.0% in ’14 to 153% in ’22 with a last-5-year mean of 114%. My 70.0% forecast is bottom of the range.

These inputs land AMT in the HOLD zone with a U/D ratio of 1.3. Total Annualized Return (TAR) is 7.2%.

PAR (using Forecast Average—not High—P/E) is 4.9%, 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 instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 67 studies (my study and 25 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 7.0%, 10.0%, 56.4, 41.0, and 102%. I am lower across the board. Value Line has NMF for projected average annual P/E [this may or may not have something to do with being a REIT].

MS high / low EPS are $5.59 / $2.84 vs. my $5.11 / $3.82 (per share). My high EPS is lower due to a lower growth rate. Both mine and MS are conservative compared to M* and Value Lines’ projected [high] EPS of $8.38 and $6.00/share, respectively.

MS LSPF of $126.00 implies a Forecast Low P/E of 44.4 as opposed to the above-stated 41.0. MS LSPF is 8.2% greater than the default $2.84/share * 41.0 = $116.44, which results in more aggressive zoning. MS LSPF is 5.8% less than mine, however.

My TAR (over 15.0% preferred) is much less than the 12.1% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG is 1.3 per Zacks (fairly valued). Relative Value per M* is significantly overvalued at 1.6 [(current P/E) / 5-year-mean average P/E]. Kim Butcher’s “quick and dirty DCF”—25.0 * [$12.10 – ($8.36 + $3.90)]—prices the stock at -$4.00, which is NMF and clearly a result of the dividend payout [characteristic of REITs] being so high.

AMT is a BUY under $157. To satisfy my minimum required TAR, I probably need to see the stock at $115 or less given a forecast high price of $230. With the stock already near the 52-week low, this strikes me as unusual.

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CCI Stock Study (8-23-23)

Posted by on November 6, 2023 at 06:40 | Last modified: August 23, 2023 14:48

I recently did a stock study on Crown Castle International (CCI) with a closing price of $98.71.

M* writes:

     > Crown Castle International owns and leases roughly 40,000 cell
     > towers in the United States. It also owns more than 85,000 route
     > miles of fiber. It leases space on its towers to wireless service
     > providers, which install equipment on the towers to support their
     > wireless networks. The company’s fiber is primarily leased by
     > wireless service providers to set up small-cell network
     > infrastructure and by enterprises for their internal connection
     > needs. Crown Castle’s towers and fiber are predominantly located
     > in the largest U.S. cities. The company has a very concentrated
     > customer base, with more than 70% of its revenue coming from
     > the big three U.S. mobile carriers. Crown Castle operates as a
     > real estate investment trust.

Yes, CCI is organized as a REIT. I did not realize this initially because it’s not the sort of REIT with which I am familiar [towers and fiber, although Real Estate (land) is necessary for the towers and/or fiber to be placed]. REITs are not recommended as club investments for reasons explained here.

This medium-size company has grown sales and earnings at annualized rates of 9.2% and 17.1% over the last 9 years (’13 excluded due to fractional EPS that would artificially inflate the rate to 24.0%). Lines are mostly up, straight, and parallel except for a sales dip in ’15 and EPS decline in ’16. PTPM slightly trails the industry and leads peer averages while trending up from 10.5% in ’14 to 25.2% in ’22 with a last-5-year mean of 17.8%.

Also since ’14, ROE lags peer and industry averages while increasing from 5.1% to 21.8% in ’22 with a last-5-year mean of 11.4%. Debt-to-Capital is less than peer and industry averages despite increasing from 64.0% in ’14 to 79.0% in ’22 with a last-5-year mean of 68.9%.

Quick Ratio is 0.3 and Interest Coverage is 3.3. Value Line gives an A rating for Financial Strength while M* gives a “Poor” rating for Capital Allocation for reasons other than the following:

     > The significant spending has left Crown’s balance sheet stretched,
     > although the steady tower business alleviates concerns that the
     > firm is overleveraged. Net debt/EBITDA has consistently been
     > between 5.0 and 6.0 for several years, which although high
     > relative to the market is not unusual for a tower REIT. We expect
     > the leverage ratio to stay above 5 but don’t foresee any
     > difficulty with covenants, interest payments, or debt maturities.

I will profess personal ignorance with regard to REITs. This is the first time I have studied one and I’m not sure if the requirement to pay out 90% or more of their taxable profits to shareholders in the form of dividends affects ratios like Debt-to-Equity, Current/Quick, or Interest Coverage. All three ratios seem borderline undesirable to me, but Value Line’s A rating along with M* comments suggest them to be no big deal.

With regard to sales growth:

I am forecasting toward the lower end of the range at 1.0% contraction per year.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean and median of five: 1.1%) at 1.0% contraction per year.

Given negative growth, I need to ensure high EPS exceeds low EPS. For the former, I will use ’22 EPS of $3.86/share as initial value rather than 2023 Q2 EPS of $3.94 (annualized). For low EPS, I will use $2.67/share from 2021 (arbitrary).

My Forecast High P/E is 45.0. Since 2014, high P/E ranges from 54.1 in ’22 to 114 in ’17 with a last-5-year mean of 76.1. The last-5-year-mean average P/E is 64.7. I am forecasting below the range [and above my personal comfort zone but—see my comment above about REIT ignorance].

My Forecast Low P/E is 25.0. Since 2014, low P/E ranges from 31.5 in ’22 to 83.1 in ’17 with a last-5-year mean of 53.4. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $66.80 is default based on $2.67/share initial value. This is 32.3% less than the previous close and 31.8% less than the 52-week low.

Since 2014, Payout Ratio ranges from 155% in ’22 to 386% in ’17 with a last-5-year mean of 229%. I am forecasting below the range at 150%.

These inputs land CCI in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 14.1%.

PAR (using Forecast Average—not High—P/E) is 9.6%, 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 69 studies (my study and 29 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 4.8%, 7.8%, 47.8, 28.0, and 229%. I am lower across the board. Value Line has NMF for projected average annual P/E (see my fifth paragraph above professing ignorance of how ratios may differentially affect REIT treatment).

MS high / low EPS are $5.65 / $3.42 vs. my $3.67 / $2.67 (per share). My EPS range is much lower. Value Line’s projected [high] EPS is also higher than mine at $4.50/share.

MS LSPF of $94.90 implies a Forecast Low P/E of 27.7: consistent with the above-stated 28.0. MS LSPF is also 42.1% greater than mine, which results in much more aggressive zoning.

My TAR (over 15.0% preferred) is less than the 25.8% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. Per my data, PEG is not meaningful because of the -1.0% growth rate. Per Zacks, PEG is NMF. Relative Value per M* [(current P/E) / 5-year-mean average P/E] is significantly undervalued at 0.4. Kim Butcher’s “quick and dirty DCF” prices the stock at 25.0 * [$9.30 – ($7.55 + $3.35)] = -$40.00. A negative stock price is NMF and here, it’s clearly because the dividend payout [characteristic of REITs] is so high.

CCI is a BUY under $91. With a forecast high price of $165.20, I would estimate TAR to qualify at or below $82.60/share.

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UI Stock Study (8-22-23)

Posted by 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:

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

With regard to EPS growth:

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.

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SBUX Stock Study (8-21-23)

Posted by on November 2, 2023 at 06:51 | Last modified: August 21, 2023 11:38

I recently did a stock study on Starbucks Corp. (SBUX) with a closing price of $97.23. My original study is here.

Value Line writes:

     > Starbucks Corp. is the leading retailer, roaster, and brand of
     > specialty coffee in the world. Sells whole bean coffees through
     > its specialty sales group, mail-order business, supermarkets, and
     > online. Had 10,216 company-owned stores in the Americas and
     > 8,037 elsewhere. Also had 17,458 licensed stores worldwide (as
     > of 10/2/22). Food & beverage: 96% of ’22 total; CPG and other,
     > 4%. Has joint ventures with Pepsi-Cola and Dreyer’s to develop
     > bottled coffee drinks and ice creams, respectively.

This large-size company has grown sales and earnings at annualized rates of 8.0% and 10.9% over the last 10 and 9 years, respectively. The latter excludes ’13 (fractional $0.01/share artificially inflates historical growth rate) and ’20 (including this downside outlier results in 6.1% historical growth rate). Lines are mostly up, straight, and parallel except for a sales decline in ’20 and EPS declines in ’19 and ’22. PTPM leads the industry but trails peer averages while trending down from 19.2% in ’14 to 13.1% in ’22 with a last-5-year mean of 17.9%.

The last-5-year mean ROE is -16.7%. ROE in 2021 is -61.4%. This is not atypical as the industry mean has been negative four out of the last 10 years.

Debt-to-Capital increases from 22.5% in ’13 to 41.9% in ’17: below peer and industry averages. This jumps to 89.0% in ’18 and is in triple-digit percentages and above peer and industry averages since ’19.

Interest Coverage is 10.2 and Quick Ratio is 0.52. M* gives an “Exemplary” rating for Capital Allocation and Value Line gives an A++ rating for Financial Strength.

In looking at the 2021 balance sheet, long-term debt, operating lease liability, and deferred revenue are the largest contributions. As discussed here, the latter is a deal made in late 2018 that allows Nestle to market, sell and distribute SBUX consumer packaged goods. SBUX was paid an upfront royalty of $6.7B to be recorded in equal amounts as “other revenue” x40 years. This means the deferred revenue liability will decrease by ~$175M per year until ~2061. The liability is really of no concern as long as SBUX stays in business; without this liability, shareholders’ equity would be positive.

With regard to sales growth:

I am forecasting toward the lower end of the range at 9.0% per year.

With regard to EPS growth:

I am forecasting below the long-term-estimate range (mean of six: 16.9%) at 14.0% per year. I will use ’22 EPS of $2.83/share as the initial value rather than 2023 Q3 EPS of $3.28 (annualized).

My Forecast High P/E is 28.0. Over the past decade, high P/E ranges from 30.4 in ’14 to 41.6 in ’22 (upside outliers of 7785 in ’13 and 119 in ’20 excluded) with a last-5-year mean of 32.6 (downside outlier of 19.1 in ’18 excluded). The last-5-year-mean average P/E is 26.5. I am forecasting above the latter but below the range.

My Forecast Low P/E is 20.0. Over the past decade, low P/E ranges from 14.6 in ’18 (possibly a downside outlier) to 27.7 in ’16 (excluding upside outliers 4427 in ’13 and 63.3 in ’20) with a last-5-year mean of 20.4. The last-10-year median is 24.6. I am forecasting toward the lower end of the range [’18, ’19 (18.7), and ’15 (19.4) are lower].

My Low Stock Price Forecast (LSPF) of $56.60 is default based on $2.83/share initial value. This is 41.8% less than the previous close and 30.7% less than the 52-week low.

Over the past decade, the lowest Payout Ratio is 35.2% in ’15 and the last-5-year mean is 52.1% (excluding the upside outlier of 208% in ’20). I am estimating below the range at 35.0%.

These inputs land SBUX in the HOLD zone with a U/D ratio of 1.4. Total Annualized Return (TAR) is 10.7%.

PAR (using Forecast Average—not High—P/E) is 7.6%, which is less than I seek for a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the total annualized return (TAR) of 10.7% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 330 studies (my study and 103 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 9.9%, 12.9%, 32.0, 21.0, and 62.4%. I am lower on everything but EPS growth rate. Value Line’s projected average annual P/E of 30.0 is higher than MS (26.5) and mine (24.0).

MS high / low EPS are $5.69 / $3.01 vs. my $5.45 / $2.83 (per share). My high EPS is lower despite a higher EPS growth rate.

MS LSPF of $67.10 implies a Forecast Low P/E of 22.3, which is higher than the above-stated 21.0. MS LSPF is 6.2% greater than the default $3.01/share * 21.0 = $63.21, which results in more aggressive zoning. MS LSPF is 18.6% greater than mine.

My TAR (over 15.0% preferred) is less than the 14.6% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG is 1.7 and 1.9 per Zacks and my projected P/E, respectively: both slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is overvalued at 1.1. Kim Butcher’s “quick and dirty DCF” prices the stock at 22.0 * [$7.65 – ($3.00 + $0.00)] = $102.30, which suggests the stock to be 5.0% undervalued.

I would look to re-evaluate the stock under $80. With a forecast high price of $152.60, I would estimate TAR to qualify at or below $76.30/share.

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RBA Stock Study (8-15-23)

Posted by on October 31, 2023 at 06:46 | Last modified: August 15, 2023 11:33

I recently did a stock study on RB Global, Inc. (name changed but ticker remains RBA) with a closing price of $58.14. Previous studies are here and here.

M* writes:

     > RB Global Inc. operates the world’s largest marketplace for heavy
     > equipment. The company started as a live auctioneer of industrial
     > equipment, since then it has greatly expanded its operations to
     > include the sale of construction, agricultural, oilfield, and
     > transportation equipment. RB Global Inc. operates over 40 live
     > auction sites in more than 12 countries, along with online
     > marketplaces, including IronPlanet, Marketplace-E, and GovPlanet.
     > Its agricultural auctions are frequently much smaller venues and
     > can include liquidations of single farms. The company holds over
     > 300 auctions yearly and sells $6 billion worth of equipment.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 18.1% and 10.7%. Lines are generally up and parallel except for EPS declines in ’14, ’16, ’17, and ’21. PTPM remains above peer and industry averages, declining from 28.8% in ’13 to 12.7% in ’17 and rebounding to 23.4% in ’22 with a last-5-year mean of 16.5%.

Also over the past decade, ROE is solidly above peer and industry averages and stable (except for a spike to 25.6% in ’22) with a last-5-year mean of 18.0%. Debt-to-Capital is generally lower than the industry but higher than peer averages with a last-5-year mean of 47.5%.

Quick Ratio is 0.99 but Interest Coverage is only 2.9 [versus 8.4 in ’22—possibly due to Mar ’23 IAA acquisition that also causes a disconnect with many of the numbers below]. Value Line rates the company B++ for Financial Strength and M* gives a Standard rating for Capital Allocation: “the company’s low balance sheet risk is largely due to its manageable debt levels and access to credit lines.”

With regard to sales growth:

As mentioned above, acquisition of U.S. auto retailer IAA Inc., which completed on March 20 (see https://www.reuters.com/markets/deals/ritchie-bros-completes-acquisition-iaa-2023-03-20/), explains the lofty growth rates. I am forecasting conservatively below the range at 10.0% per year.

With regard to EPS growth:

Unlike sales, no bump in estimated EPS for ’23-’24 is projected (except for Nasdaq.com, which is strange).

I have data duplication concerns because four of five long-term estimates are identical [to the hundredths place on the actual websites]. CNN Business and Seeking Alpha get data from FactSet and S&P Global, respectively. YF gets data from Refinitiv, and Zacks is its own entity. Given different sources, I would not expect duplication unless [some of] the same analysts are being used by multiple sources. Neither is this a case where the number of analysts is an extreme few: CNN Business, YF, and Zacks are citing 7, 6, and 5.

I am forecasting EPS growth below the long-term-estimate range (mean of five: 7.9%) at 6.0% per year. With ’22 EPS up over 100% YOY to $2.86/share and 2023 Q2 EPS at $0.92/share (annualized), I will lean toward the former but use Value Line’s $2.41 instead. This results in a 5-year forecast of 2.41/share * (1.06 ^ 5) = $3.22/share, which is effectively a 2.4% growth rate on M*’s $2.86/share.

My Forecast High P/E is 25.0. Over the past decade, high P/E has ranged from 24.3 in ’15 to 56.0 in ’21 with a last-5-year mean of 40.0. The last-5-year-mean average P/E is 32.1. I am forecasting near the bottom of the range (only ’15 is lower).

My Forecast Low P/E is 15.0. Over the past decade, low P/E has ranged from 16.8 in ’20 to 37.2 in ’21 with a last-5-year mean of 24.2. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast (LSPF) of $41.00 is default based on $2.41/share initial value. This is 29.5% less than the previous closing price and 15.8% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 36.4% in ’22 to 98.6% in ’17 (possibly an upside outlier) with a last-5-year mean of 55.8%. I am forecasting just below the range at 36.0%.

These inputs land RBA in the HOLD zone with a U/D ratio of 1.3. Total Annualized Return (TAR) is 8.2%.

PAR (using Forecast Average—not High—P/E) is 4.8%, 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 the 8.2% total annualized return (TAR) instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 15 studies (my study and 9 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 15.0%, 9.0%, 31.0, 22.4, and 55.8%. I am lower across the board. Value Line’s projected average annual P/E of 24.0 is lower than MS (26.7) and higher than mine (20.0).

MS high / low EPS are $3.65 / $0.98 vs. my $3.22 / $2.41 (per share). I think EPS numbers under $1.00/share are due to the acquisition and to be excluded, which would render that unreasonable to use.

The MS sample size is too small upon which to base valid comparisons, but I will continue for the sake of completeness.

MS LSPF of $41.60 implies a Forecast Low P/E of 42.4 vs. the above-stated 22.4. MS LSPF is 89.5% greater than the default $0.98/share * 22.4 = $21.95, which results in much more aggressive zoning [this clearly reflects a disconnect, which I say is the unreasonable $0.98/share]. MS LSPF remains 1.5% greater than mine.

My TAR (over 15.0% preferred) is much less than the 17.2% from MS. MOS in the current study seems to be robust.

I track a few different valuation metrics. PEG is 3.2 and over 10.0 per Zacks and my projected P/E, respectively: both extremely overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is overvalued at 1.97. Kim Butcher’s “quick and dirty DCF” prices the stock at 20.0 * [$5.25 – ($1.50 + $1.75)] = $40.00 thereby suggesting the stock to be overvalued by 45.0%. This is the first time I have seen unanimous agreement among the four different calculations.

While the BUY zone tops out at $50/share, I would seek a much lower cost basis to approach a 15.0% TAR. This is also to heed Value Line’s advice from a previous report: “the integration risks and added debt load associated with the acquisition mean more conservative investors will likely want to proceed cautiously.”

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ADUS Stock Study (8-28-23)

Posted by on October 29, 2023 at 06:12 | Last modified: August 28, 2023 13:10

I recently did a stock study on Addus Homecare Corp. (ADUS) with a closing price of $89.37. The original study is here.

M* writes:

     > Addus HomeCare Corp is engaged in the provision of in-home personal
     > care services. It operates through the following segments: Personal
     > care segment, which is a key revenue driver, provides nonmedical
     > assistance with activities of daily living, primarily to persons who
     > are at risk of hospitalization or institutionalization, such as the
     > elderly, chronically ill and disabled. The Hospice segment provides
     > physical, emotional and spiritual care for people who are terminally
     > ill and their families. Its Home health segment provides services
     > that are primarily medical in nature to those individuals who may
     > require assistance during an illness or after surgery.

Over the past decade, this small-size company has grown sales and EPS at annualized rates of 15.9% and 13.8%, respectively. Lines are mostly up, straight, and parallel except for an EPS dip in ’15. PTPM leads peers but trails the industry while ranging from 4.0% in ’16 to 7.0% in ’21 with a last-5-year mean of 5.6%.

Also over the past decade, ROE leads peer and industry averages despite trending down from 9.8% to 7.5% with a last-5-year mean of 7.0%. Debt-to-Capital is much lower than peer and industry averages with a last-5-year mean of 21.1%.

Quick Ratio is 1.4 and Interest Coverage is 8.0 per M*. Value Line rates the company B+ for Financial Strength.

With regard to sales growth:

I am forecasting toward the lower end of the range at 6.0% per year.

With regard to EPS growth:

MarketWatch’s 2024 estimate is the same as the ’25 estimate from Nasdaq.com: $4.73/share. This is puzzling given an estimated EPS growth rate around 10%. This may be totally random as the latter estimate is just one analyst. It probably catches my eye because I’ve never noticed any relationship between MarketWatch and Nasdaq.com estimates (unlike CNN Business and MarketWatch, which are both supplied by FactSet).

I am forecasting below the long-term-estimate range (mean of five: 13.6%) at 11.0% per year. I am using ’22 EPS of $2.84/share as the initial value rather than ’23 Q2 EPS of $3.31 (annualized).

My Forecast High P/E is 34.0. Over the past decade, high P/E ranges from 27.3 in ’14 to 56.7 in ’20 with a last-5-year mean of 50.4. The last-5-year-mean average P/E is 37.9. I am forecasting below the latter and toward the bottom of the range [only ’14 and ’13 (32.1) are lower].

My Forecast Low P/E is 22.0. Over the past decade, low P/E trends up from 7.0 in ’13 to 24.1 in ’22 with a last-5-year mean (median) of 25.4 (22.4). I am forecasting below the latter.

My Low Stock Price Forecast (LSPF) of $62.50 is default based on $2.84/share EPS. This is 30.1% less than the previous close and 8.9% less than the 2022 low.

These inputs land ADUS in the HOLD zone with a U/D ratio of 2.7. Total Annualized Return (TAR) is 12.7%.

PAR (using Forecast Average—not High—P/E) is 8.4%, which is less than I seek for a small-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 219 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, and Forecast Low P/E are 9.0%, 12.2%, 37.9, and 24.3. I am lower across the board. Value Line’s projected average annual P/E of 22.2 is less than MS (31.1) and mine (28.0). This comparison may be invalid with Value Line projecting to ’24/’25 rather than five years hence.

MS high / low EPS are $5.60 / $3.10 vs. my $4.79 / $2.84 (per share). My high EPS is lower due to a lower EPS growth rate.

MS LSPF of $70.00 implies a Forecast Low P/E of 22.6: less than the above-stated 24.3. MS LSPF is 7.1% less than the default $3.10/share * 24.3 = $75.33, which results in more conservative zoning. MS LSPF remains 12.0% greater than mine.

My TAR (over 15.0% preferred) is less than the 18.2% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG per Zacks and my projected P/E are 1.7 and 2.2, respectively: both slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is undervalued at 0.7.

ADUS is a BUY under $87. With a forecast high price of $162.70, my TAR criterion should be satisfied under $81/share.

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