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INMD Stock Study (3-23-23)

Posted by on May 4, 2023 at 07:18 | Last modified: April 13, 2023 14:04

I recently did a stock study on InMode Ltd. (INMD) with a closing price of $30.48.

M* writes:

     > InMode Ltd provides minimally and non-invasive surgical
     > aesthetic and medical treatment solutions in the United
     > States. Its products and solutions address three energy-
     > based treatment categories that include face & body
     > contouring, medical aesthetics, and women’s health.
     > InMode has developed products using its technology for
     > plastic surgery, dermatology, gynecology, and ophthalmology.

Since 2018, this small-size company has grown sales and EPS at annualized rates of 47.0% and 52.9% (including ’17—a low base—raises these rates to 52.6% and 68.7%, respectively). Lines are mostly up, straight, and parallel except for EPS dip in ’22. PTPM leads peer/industry averages, increasing from 18.3% in ’17 to 44.3% in ’22 with a last-5-year average of 38.3%.

ROE averages 33.7% over the last four years. This leads the industry and is roughly equal to peer averages. The company has minimal uncapitalized, annual rentals but no long-term debt. As a result, Debt-to-Capital averages 0.5% over the last five years. Quick Ratio is over 7.

I forecast 12% long-term annualized sales growth based on the following:

Consensus for the next two years is at least 15% per year. I am conservatively discounting that by 30% for the longer term.

I forecast 12% long-term annualized EPS growth based on the following:

I am forecasting just under the one available long-term estimate.

My Forecast High P/E is 25. High P/E over the last four years has ranged from 29.9 (’20) to 51.7 (’21) with an average of 39. I am forecasting below the range.

My Forecast Low P/E is 9. Low P/E over the last four years has ranged from 7.4 (’20) to 11.8 (’21). I am forecasting just below the mean (9.6) and median (9.5).

My Low Stock Price Forecast (LSPF) is the default value of $18.10. This is 40.6% less than the previous close and 12.1% less than the 52-week low.

These inputs land INMD in the BUY zone with an U/D ratio of 3.8. Total Annualized Return (TAR) is 21.4%.

PAR (using Forecast Average, not High, P/E) is decent at 12.4%. 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). Out of 324 studies (mine excluded) done in the last 90 days, projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E, average 16.9%, 13.2%, 27.9, and 9.4, respectively. My inputs are slightly lower.

Value Line projects an average annual P/E of 12.9.in ’24, which is significantly lower than MS (18.7) and mine (17). Value Line states average annual P/E from ’19 to ’22 as: 20.5, 19.3, 28, and 18.1. In looking at the high/low P/E by year from M*, I see 36.7/8.2 (mean 22.5), 29.9/7.4 (mean 18.7), 51.7/11.8 (mean 31.8), and 37.6/10.9 (mean 24.3). The difference between Value Line and M* is therefore -2.0, +0.6, -3.8, and -6.2. On average, Value Line seems to understate M* by 11.4 / 4 ~ 2.8. Even adding this to the projected 12.9 in ’24 gets 15.7, which is still less than mine. Even though I am using a 12% EPS growth rate compared to Value Line’s 20%, I don’t see much MOS behind this study [overlooking the detail that Value Line’s projections are through ’24 rather than five years hence].

MS average high and low EPS are $3.68/share and $1.96/share compared to my $3.33 and $2.01. MS Low Stock Price Forecast is 6.4% above mine at $19.26.

Due to MOS concerns, I would look to buy under $31/share (an arbitrary 10% lowering of the upper purchase limit).

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CME Stock Study (4-10-23)

Posted by on May 2, 2023 at 07:02 | Last modified: April 13, 2023 10:58

I recently did a stock study on CME Group Inc. (CME) with a closing price of $195.10.

Value Line writes:

     > CME Group Inc. is the world’s largest and most diversified
     > derivatives marketplace. It enables clients to trade
     > futures, options, cash, and over-the-counter (OTC) markets,
     > optimize portfolios, and analyze date. It offers a range of
     > global benchmark products across major asset classes, incl.
     > interest rates, equity indexes, foreign exchange (FX),
     > agricultural commodities, energy, and metals.
     > Clearing/transaction fees (83% of ’22 rev.), Market
     > data/information services (12%), Other (5%). Acq. CBOT
     > Holdings, 7/07; NYMEX, 8/08.

Over the last 10 years, this medium-size company has grown sales and EPS at annualized rates of 6.7% and 10.3%, respectively. Lines are mostly up, straight, and parallel except for EPS spike in ’17 (probably due to TCJA), sales dip in ’21, and EPS dip in ’22. PTPM has been much better than peer and industry averages, going from 54.5% in ’13 to 69.5% in ’22 with a last-5-year average of 63.4%.

Over the last decade, ROE has been lower than peer and industry averages increasing from 4.4% in ’13 to 9.4% in ’22 while posting a last-5-year average of 8.7%. Debt-to-Capital has been much lower than peer and industry averages. This has ranged from 9.1% in ’17 to 14.5% in ’18 with a last-5-year average of 12.2%.

M* rates the company Exemplary for Capital Allocation while Value Line assigns an A rating for Financial Strength. Interest Coverage is 22.

Given all this, I am perplexed to see M* report a Quick Ratio of 0.02. In responding to another inquiry I had recently, M* wrote: QR = (Receivables + Cash and cash equivalent) / Current Liabilities . Applying that to the Value Line data shown in the left margin, this is (483.2 + 138065.3) / 137687.5 = 1.0. I have no qualm with that.

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

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

I am forecasting below the entire long-term-estimate range (mean of six: 4.7%).

My Forecast High P/E is 27. Excluding 13.0 in ’17, high P/E over the last 10 years has ranged from 27.3 (’15) to 38.4 (’20) with a last-5-year average of 35.5. With growth projected to slow, I am forecasting below the range.

My Forecast Low P/E is 19. Excluding 9.5 in ’17, low P/E over the last 10 years has ranged from 17.5 (’13) to 27.3 (’19) with a last-5-year average of 24.3. I am forecasting near the bottom of the range [’13 and ’16 (18.1), are lower].

My Low Stock Price Forecast (LSPF) is the default value of $140.40. This is 28.0% less than the previous close and 15.7% less than the 52-week low.

Excluding 51.4% in ’17, Payout Ratio over the last 10 years has ranged from 79.7% in ’18 to 150.7% in ’13 with a last-5-year average of 96.4%. Most of these numbers seem unsustainably high [I actually wonder if this portion of the data stream is corrupt]. I am forecasting below the range at 50.0%.

These inputs land CME in the HOLD zone with an U/D ratio of 0.7. Total Annualized Return (TAR) is 5.3%.

PAR (using Forecast Average, not High, P/E) is 2.4%, which is too low 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 20 studies done in the past 90 days (my study along with 7 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 5.1%, 5.5%, 28.4, 19.9, and 45.9%. I am lower on everything but Payout Ratio. Value Line projects a future average annual P/E of 22.5, which is lower than MS (24.2) and just lower than me (23.0). Overall, this study seems to have a small MOS.

With regard to other data, MS high and low EPS are $9.44/share and $6.63/share compared to my $8.58 and $7.39. My low EPS may be higher due to recent quarterly growth while my high EPS is lower due to a lower forecast growth rate. MS LSPF is $134.80 (4.2% less than mine). This is slightly higher than the default $6.63 * 19.9 = $131.94, which seems reasonable (MS LSPF is typically much lower than default).

I would look to re-evaluate this stock under $163/share.

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NFLX Stock Study (4-27-23)

Posted by on April 29, 2023 at 06:52 | Last modified: April 27, 2023 10:36

I recently did a stock study on Netflix Inc. (NFLX) with a closing price of $321.15.

M* writes:

     > Netflix’s primary business is a streaming video on demand
     > service now available in almost every country worldwide
     > except China. The firm primarily generates revenue from
     > subscriptions to its eponymous service. Netflix delivers
     > original and third-party digital video content to PCs,
     > internet-connected TVs, and consumer electronic devices,
     > including tablets, video game consoles, Apple TV, Roku,
     > and Chromecast. Netflix is the largest SVOD platform in
     > the world with over 220 million subscribers globally

This large-size company has grown sales and earnings at annualized rates of 26.6% and 58.4%, respectively, over the last 10 years. Lines are mostly up and parallel except for EPS declines in ’15 and ’22. PTPM has trended higher from 3.9% in ’13 to 16.6% in ’22 with a last-5-year average of 13.4%. This trails peer and industry averages.

ROE, which slightly lags peers and the industry, has trended up from 9.2% to 21.6% over the last 10 years with a last-5-year average of 26.0%. Debt-to-Capital, which overall is higher than peers but lower than the industry, increased from 27.3% in ’13 to 66.4% in ’18 before declining to 40.9% in ’22. The last-5-year average is 56.5%, which is a bit higher than I would like to see. Interest Coverage and Quick Ratio were most recently 7.2 and 1.1, respectively. As of Q2 2022, the M* analyst says the company is in a “decent position” with $14.2B long-term debt and $7.8B cash. M* gives the company a Standard rating for Capital Allocation while Value Line gives an A for Financial Strength.

I forecast long-term annualized sales growth of 7% based on the following:

I am forecasting toward the low end of the range.

I forecast long-term annualized EPS growth of 13% based on the following:

I am forecasting just under the long-term-estimate range (mean of six: 21.7%).

My Forecast High P/E is 35. High P/E has decreased from 210 in ’13 to 61.3 in ’22 with a last-5-year average trending lower at 93.9. At some point, I expect P/E to fall back to earth. For now, I am forecasting at the upper end of my comfort zone.

My Forecast Low P/E is 23. Low P/E has decreased from 49.1 in ’13 to 16.4 in ’22 with a last-5-year average trending lower at 48.1. Again, at some point I expect P/E to fall back to earth and we may already be starting to see this. I am forecasting toward the bottom of the 10-year range (only ’22 is lower).

My Low Stock Price Forecast (LSPF) is the default value of $213.90. This is 33.4% less than the previous close but 31.5% greater than the 52-week low.

These inputs land NFLX in the HOLD zone with an U/D ratio of 2.6. The Total Annualized Return (TAR) is 13.3%.

PAR (using Forecast Average—not High—P/E) is 9.1%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 13.3% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 275 studies done in the past 90 days (71 outliers and my study excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 10.1%, 12.3%, 36.5, and 35.6 [interesting to see high and low P/E so close together]. I am lower on everything but EPS growth. Value Line projects a future average annual P/E of 33.0, which is lower than MS (36.1) and higher than me (29.0). I seem to have a decent MOS behind this study.

With regard to other data, MS high and low EPS are $17.69/share and $9.49/share compared to my $17.13 and $9.30. MS LSPF is $170.10 (20.5% higher than mine). This is less than half the default $9.49 * 35.6 = $340.69 and implies a Forecast Low P/E of 17.9. While this is quite the disconnect, it errs to the conservative side by decreasing the future stock price range thereby requiring a lower basis to invest. I find no fault with that.

I would look to invest under $310/share.

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WAL Stock Study (4-12-23)

Posted by on April 28, 2023 at 06:33 | Last modified: July 3, 2023 10:16

I recently did a stock study on Western Alliance Bancorp (WAL) with a closing price of $31.84.

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.

I initially studied this stock on 3/15/23. I decided to do the 4/12/23 update with a new Value Line report just published.

Over the last 10 years, this medium-sized bank has grown assets and EPS 24.1% and 24.5% per year, respectively. Lines are mostly up, straight, and parallel (including total assets and sales). PTPM has trended up from 41.2% in ’13 to 57.3% in ’22 with a last-5-year average of 56.3%. This leads peer and industry averages.

ROE has trended up from 16.8% in ’13 to 21.0% in ’22 with a last-5-year average of 18.4%. This also leads peer and industry averages. Debt-to-Capital went from 30.9% in ’13 to 15.7% in ’20 before increasing to 55.7% in ’22. This was lower than peer and industry averages until two years ago. The last-5-year average is 26.2%. Value Line gives a B++ Financial Strength rating.

ROAA has increased from 1.34% in ’13 to 1.69% in ’22 with a last-5-year average of 1.85%. This is outstanding and has been above 1.50% every year since ’15.

The historical picture is completely unchanged since the 3/15/23 stock study. Looking forward is where things get murky.

In the first study, I went with a conservative 10% long-term sales growth forecast based on the following:

On 4/12/23, we have:

That’s some kind of haircut. I am now forecasting 5%—near the bottom of the range especially without a good explanation for why the analysts’ estimates have changed so drastically. I suspect a higher level of analyst uncertainty, and the more uncertain the estimates the more conservative my forecast should probably be.

One estimate that did not change much is M*. This confuses me because they’re all ACE as opposed to single-analyst projections. I would not think anything should be substantially different between M*’s batch of surveyed analysts and batches from other sources. The numbers indicate otherwise.

With regard to long-term EPS growth, I went with a 10% forecast in the original 3/15/23 study based on the following:

10% was less than the narrow range of five long-term estimates (mean 11%).

Here’s what we have today:

It literally feels like someone swung a sledgehammer as hard as they could and decimated the bank vault. Silicon Valley Bank (Santa Clara, CA) failed on 3/10/23 and Signature Bank (New York, NY) failed on 3/12/23. That’s it since 2020 per fdic.gov. Perhaps this is how analysts adjust for more perceived risk in the industry even though I am aware of nothing drastic changing recently on a macroeconomic level (e.g. big changes in inflation, GDP growth, jobs, wages, housing, interest rates, etc.).

The mean of five long-term estimates (not including Value Line’s 4.1%) is now 1.1% with a range -13.3% to +10.2%. I have done stock studies where the high and low estimates both seem equally unreasonable and therefore discarded both. Here, 10.2% seems like one of the most reasonable estimates because it is little changed from a month ago. The Zacks estimate is entirely unchanged. On the flipside, YF (Refinitiv) went from +12.0% to -13.3%: a mindboggling reversal. They also added ~6 analysts/ratings [when this differs by 1-2 in consecutive years, I report the lower].

Rather than excluding the YF estimate altogether (resulting in a modified mean estimate of 4.7%), I will change it to -0.7% (matches long-term estimates from Factset and S&P Global) to get a modified mean estimate of 3.6%. My forecast is just below the mean at 3%, which is aggressive by my standards as I usually try to target lower in the range if not below it.

My Forecast High P/E is 11. In the original study, I wrote:

     > From ’13-’22, high P/E has gone from 18.7 to 12.9 with a
     > last-5-year average of 13.4. I am just below the entire
     > range (lowest was 11.9 in ’19).

I see no reason to change this. What is different is the current P/E of 3.3, but I expect a return closer to the historical range over the next five years.

My Forecast Low P/E is 1. Again, I see no reason to change the original analysis:

     > From ’13-’22, low P/E has gone from 8.2 to 5.7 with a last-
     > 5-year average of 6.7 (lowest was 4.1 in ’20). These are
     > very uncertain times for banks, however, with two banks
     > failing in the past week. I am forecasting lower than
     > usual in order to extend to the bottom of this range.

My Low Stock Price Forecast (LSPF) is the default value of $9.70. This is 69.5% below the previous close and 29.3% above the 52-week low of $7.50 seen the week before my original study.

Short of failing and having to shudder its doors, it seems like the 52-week low price will not be revisited anytime soon.

Western Alliance started paying a dividend in ’19 with an average Payout Ratio of 14.7% since. I am forecasting below the range (10.3% – 19.8%) at 9%.

These inputs land WAL in the BUY zone with an U/D ratio of 4.1. Total annualized return is 32.0%.

One month ago, U/D was 6.7 and total annualized return 41.4%. These numbers have fallen due to the lower forecasts.

In the original SSG, I continued:

     > I assess the study margin of safety (MOS) by comparing
     > my inputs with Member Sentiment (MS). Out of 453 studies
     > over the past 90 days (my own excluded), projected sales
     > growth, projected EPS growth, Forecast High P/E, Forecast
     > Low P/E, and Payout Ratio average 15.4%, 12.8%, 12.9,
     > 7.3, and 12.6%, respectively. I’m lower across the board.
     > I can certainly give a pass to MS for Forecast Low P/E,
     > which I certainly would not have decreased as much had
     > it not been for events in the past week.
     >
     > As it stands, I believe the MOS here to be robust. While
     > the 41.4% seems quite achievable, even PAR (based on
     > Forecast Average, not High, P/E) at 26.1% would be more
     > than acceptable.

Flashing forward to today, we have the following [thanks to Suzi (et. al?) for the updated MS functionality! It truly makes the process so much easier]:

Based on 377 studies done in the past 90 days (my study along with 133 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 15.0%, 12.4%, 11.7, 6.5, and 14.2% [it should be interesting to see if these come down over time]. I am much lower across the board. A robust MOS appears to back this study.

With regard to other data, MS high and low EPS are $17.25/share and $9.41/share compared to my $11.24 and $9.70. My low EPS may be lower due to recent quarterly growth while my high EPS is lower due to a lower forecast EPS growth rate. MS has a LSPF of $42.70: invalid at the present time. Just for my interest, the default LSPF of $9.41 * 6.5 = $61.17, which is 43% higher than that actually used.

Again, while 32.0% seems totally achievable from this beaten down stock price, even PAR of 17.7% would be outstanding.

This has been quite the interesting stock study, to be sure!

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OLED Stock Study (3-21-23)

Posted by on April 26, 2023 at 06:31 | Last modified: April 11, 2023 15:24

I recently did a stock study on Universal Display Corp. (OLED) with a closing price of $144.88.

M* writes:

     > Universal Display Corp researches, develops and manufactures
     > organic light-emitting diode, or OLED, technologies for use
     > in displays for mobile phones, tablets, televisions, wearables,
     > personal computers, automotive interiors, and the solid-state
     > lighting market. OLED technologies are an alternative to a
     > light-emitting diode, or LED, technologies, in the solid-state
     > lighting market, and liquid crystal displays in the flat-panel-
     > display market. A large majority of the firm’s revenue is
     > generated in South Korea, with the rest coming from Japan,
     > China, the United States, and other countries across the world.

This small-sized company has grown sales at an annualized rate of 17.2% over the last decade. EPS has grown 15.1% per year over the last decade excluding ’14 and ’15 (inclusion of these years of fractional EPS results in 22.1% annualized rate). Lines are mostly up and parallel with sales declines in ’18 and EPS declines in ’18 and ’20 (accompanying the two years mentioned previously). Over the last 10 years, PTPM has generally trended higher from 26.6% to 43.5% with a last-5-year average of 38.1%. This leads peer and industry averages.

ROE has generally rallied since ’15 with a last-5-year average of 15.3%. This leads peer averages and slightly leads the industry. Debt-to-Capital has averaged 0.9% over the last five years as the company has zero long-term debt: much lower than peer and industry averages. Quick Ratio is 4.94, and Value Line rates the company A for Financial Strength.

I forecast 6% long-term annualized sales growth based on the following:

Given the projected contraction in ’23, I am forecasting to the low side.

I forecast 8% long-term annualized EPS growth based on the following:

I am forecasting just below the range of six long-term estimates (mean: 15.7%).

My Forecast High P/E is 35. Excluding triple-digit outliers in ’15 and ’18, high P/E over the last 10 years has ranged from 25.0 (’13) to 88.4 (’17) with a last-5-year average of 68.9. I am forecasting toward the bottom of the range (only ’13 is lower).

My Forecast Low P/E is 20. Excluding two upside outliers (82.6 in ’15 and 63.5 in ’18), low P/E over the last 10 years has ranged from 15.6 (’13) to 39.6 (’16) with a last-5-year average of 30.2. I am forecasting toward the bottom of the range (only the ’13 value is lower).

My Low Stock Price Forecast (LSPF) is the default value of $88.00. This is 39.3% less than the previous close and 1.6% less than the 52-week low.

The stock has paid a dividend since ’17. Payout Ratio has increased from 5.5% that year to 27.3% in ’22 with a last-5-year average of 20.5%. I am forecasting low at 10%.

These inputs land OLED in the HOLD zone with an U/D ratio of 1.6. Total Annualized Return is 10.0%.

PAR (using Forecast Average, not High, P/E) is 5%, which is too low for a small company.

I look to Member Sentiment (MS) to assess margin of safety (MOS). Out of 323 studies (mine excluded) done in the last 90 days, projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio average 13.9%, 15.1%, 47.2, 30.0, and 14.6%, respectively. My inputs are all substantially lower. Value Line projects an average annual P/E of 30, which is lower than MS (38.6) and higher than mine (27.5). All this is suggestive of a healthy MOS.

MS high and low EPS are $8.71/share and $3.73/share compared to my $6.47 and $4.40, respectively. Assuming most studies leave low EPS as TTM default, my $4.40 may be higher due to recent quarterly growth while my $6.47 is proportional to projected growth rate.

Given the robust MOS, I would look to establish an initial position under $122/share.

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IBP Stock Study (3-20-23)

Posted by on April 24, 2023 at 07:05 | Last modified: April 10, 2023 12:13

I recently did a stock study on Installed Building Products, Inc. (IBP) with a closing price of $103.72.

CFRA writes:

     > Installed Building Products, Inc., together with its subsidiaries,
     > engages in the installation of insulation, waterproofing, fire-
     > stopping, fireproofing, garage doors, rain gutters, window blinds,
     > shower doors, closet shelving and mirrors, and other products in
     > the continental United States. The company offers a range of
     > insulation materials, such as fiberglass and cellulose, and spray
     > foam insulation materials. It is also involved in the installation
     > of insulation and sealant materials in various areas of a structure,
     > which includes basement and crawl space, building envelope, attic,
     > and acoustical applications. In addition, the company installs a
     > range of caulk and sealant products that control air infiltration
     > in residential and commercial buildings; and waterproofing options,
     > including sheet and hot applied waterproofing membranes, as well
     > as deck coating, bentonite, and air and vapor systems. It serves
     > homebuilders, multi-family and commercial construction firms,
     > individual homeowners, and repair and remodeling contractors.

This medium-sized company has grown sales and earnings at annualized rates of 21.5% and 35.0% since 2012 and 2016 (earlier years with fractional EPS excluded to avoid artificial inflation of the the growth rate), respectively. Lines are mostly up, straight, and parallel except for the accelerated EPS growth in ’22. Over the last 10 years, PTPM has increased from 2.5% (’13) to 11.4% (’22) with a last-5-year average of 7.7%. This trails peer and industry averages.

Since ’15, ROE has led peer and industry averages, ranging from 21% (’17) to 48.4% (’22) with a last-5-year average of 33%. Debt-to-Capital has averaged 68.8% over the last five years, which is much higher than peer and industry averages. Interest Coverage is 8 and Quick Ratio is 1.91. Value Line gives IBP a B+ for Financial Strength.

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

With contraction projected for ’23[-’24], I am forecasting below the one long-term estimate available.

I forecast 6% long-term annualized EPS growth based on the following:

I am forecasting at the bottom of the long-term-estimate range (mean of three: 13.9%).

However, because EPS spiked 93% to $7.74/share in ’22, I do not feel comfortable projecting from the accelerated value. Projecting out six years from the ’21 EPS of $4.01/share results in $5.68/share, which is effectively -6% per year from the ’22 value projected out five years. This seems more reasonable to me.

Given that High (Low) Stock Price Forecast is a best- (worst-) case scenario, what to do with my conservatively-determined 6% forecast? One usually assumes growth and the other no growth.

As a conservative compromise, I will use EPS of $5.68 and $7.74 to determine the Low and High Stock Price Forecast. Compared to ’22, the former is effectively using negative growth while the latter is using zero growth. I am open to feedback from others regarding this approach.

My Forecast High P/E is 33. Since ’15, high P/E has ranged from 33.5 (’19) to 44.7 (’18) excluding the upside outlier of 61.1 in ’17. The last-5-year average is 42.4. I am forecasting below the range.

My Forecast Low P/E is 10. Since ’15, low P/E has ranged from 8.9 (’20) to 30.7 (’17) with a last-5-year average of 19.1. The former may be a downside outlier as the next-lowest value is 14.4 (’16 and ’19). I am forecasting toward the bottom of the range (only the ’20 value is lower).

My Low Stock Price Forecast (LSPF) is $56.80, which is 10 * $5.68/share. This is 45.2% less than the previous close and 18.3% less than the 52-week low: a print not seen since ’20.

The stock has paid a dividend since ’21. In two years, Payout Ratio has been 29.9% and 16.3%. I am forecasting low at 10%.

These inputs land IBP in the BUY zone with an U/D ratio of 3.2. Total Annualized Return is 20.1%.

PAR (using Forecast Average, not High, P/E) is 10.4%, which is a bit lower than I prefer. I feel like I have built a substantial margin of safety (MOS) into this study, though.

In an attempt to verify that, I look to Member Sentiment (MS) averages of 146 studies (mine excluded) done in the last 90 days. Forecast High P/E and Forecast Low P/E are 28.7 and 15.5, respectively. Value Line projects an average annual P/E of 17.5, which is much lower than MS (22.1) and me (21.5). No consensus MOS there.

For projected sales and EPS growth, MS averages 11.6% and 12.5%, respectively. This is much higher than my forecasts, but I don’t regard this as meaningful because I project from different starting points. MS average high EPS and low EPS are $13.03 and $5.77, respectively. The former is much higher than my $7.74 along with Value Line’s projected EPS of $10.95. The latter is very close to my $5.68. I do see substantial MOS here.

Overall, perhaps I have some MOS backing this study albeit not as much as I thought.

MS also projects a higher Payout Ratio (17.7%) than me along with a much higher Low Stock Price Forecast ($79.83). Using the latter would easily put the stock in the BUY zone. As is, it’s just near the threshold.

Nonlinear historical EPS growth along with sparse long-term analyst estimates make for a very challenging stock study!

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VZ Stock Study (4-6-23)

Posted by on April 20, 2023 at 06:49 | Last modified: April 6, 2023 10:42

I recently did a stock study on Verizon Communications Inc. (VZ) with a closing price of $39.46.

CFRA writes:

     > VZ provides communication, information, and entertainment
     > products and services to consumers, businesses, and
     > government entities. VZ has two reportable segments that
     > it operates and manages as strategic business units;
     > Verizon Consumer Group (71% of consolidated revenue in
     > 2021) and Verizon Business Group (23%).

Despite the popularity and brand recognition, where’s the love for Verizon?

For starters, this mega-sized (> $50B revenue per year) company has grown sales and EPS at annualized rates of 0.9% and 5.0%, respectively, over the last 10 years. Sales is flat with dips in ’16, ’17, and ’20. EPS is up and down every other year since ’14. I really don’t think this company gets past the barbed wire fence (visual inspection).

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

PTPM is better than peer and industry averages ranging from 18%-22% since ’15 with a last-5-year average of 18.7%.

ROE—over 24% for the last decade with a last-5-year average of 28.4%—is also better than peer and industry averages.

Debt-to-Capital is uncomfortably high and worse than peer and industry averages. The last-5-year average is 67.9% and although the 0.54 Quick Ratio may raise a red flag, Interest Coverage is 8.8. Value Line gives an A++ rating for Financial Strength. M* gives a Standard rating for Capital Allocation and writes, “VZ’s balance sheet is… reasonably solid… with net debt at 2.8 times EBITDA… roughly comparable to its major wireless rivals and major fixed-line competitor CMCSA.”

I forecast flat long-term annualized sales growth based on the following:

I am forecasting just below the entire range.

I forecast flat long-term annualized EPS growth based on the following:

I am forecasting toward the bottom of the long-term-estimate range (mean of six: 1.5%).

My Forecast High P/E is 10. Over the last 10 years, high P/E has generally trended down with a range from 7.4 in ’17 to 22.2 in ’14 and a last-5-year average of 13.3. I am forecasting toward the bottom of the range (only ’17 is lower).

My Forecast Low P/E is 6. Over the last 10 years, low P/E has generally trended down with a range from 5.8 in ’17 to 18.6 in ’14 and a last-5-year average of 10.2. I am forecasting toward the bottom of the range (only ’17 is lower).

My Low Stock Price Forecast (LSPF) is the default value of $30.40. This is 23% less than the previous closing price and 7.3% less than the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 31.7% in ’17 to 89.3% in ’14 and a last-5-year average of 54.5%. I am forecasting below the entire range at 31%.

These inputs land VZ in the HOLD zone with an U/D ratio of 1.1. The Total Annualized Return (TAR) is 7.9%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-sized company at 4.1%. 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 217 studies done in the past 90 days (my study along with 81 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 1.6%, 2.0%, 13.0, 9.7, and 54.5%. I am lower across the board. Value Line projects a future average annual P/E of 17.5, which is much higher than MS (11.4) and me (8.0). I usually forecast P/E compression, but as a mature company that may not happen. The result is a higher MOS.

With regard to other data, MS high and low EPS are $5.59 and $4.85 compared to my $5.06. MS has a LSPF of $34.50, which is 13.5% above mine. Per usual, this is lower than MS default $4.85 * 9.7 = $47.04 [curiously, this would be INVALID].

The Current Yield of 6.4% is a boon for dividend investors and would be even higher with the stock under $35/share. This is where I would look to enter given the MOS behind the study.

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TSM Stock Study (4-5-23)

Posted by on April 18, 2023 at 06:36 | Last modified: April 5, 2023 10:43

I recently did a stock study on Taiwan Semiconductor Manufacturing Co. Ltd. ADR (TSM) with a closing price of $92.17.

M* writes:

     > Taiwan Semiconductor Manufacturing Co. is the world’s largest
     > dedicated chip foundry, with over 57% market share in 2021 per
     > Gartner. TSMC was founded in 1987 as a joint venture of Philips,
     > the government of Taiwan, and private investors. It went public
     > as an ADR in the U.S. in 1997. TSMC’s scale and high-quality
     > technology allow the firm to generate solid operating margins,
     > even in the highly competitive foundry business. Furthermore,
     > the shift to the fabless business model has created tailwinds
     > for TSMC. The foundry leader has an illustrious customer base,
     > including Apple, AMD, and Nvidia, that looks to apply
     > cutting-edge process technologies to its semiconductor designs.

Over the last decade, this mega-sized (> $50B revenue per year) company has grown sales and EPS at annualized rates of 13.5% and 16.5%, respectively. Lines are up, straight, and parallel except for an EPS dip in ’19. PTPM is greater than peer and industry averages. It increased from 36.2% in ’13 to 50.5% in ’22 with a last-5-year average of 42.2%.

ROE was greater than peer and industry averages from ’13-’17 before falling behind in ’18 and beyond. A spike in ’22 to 38.3% boosts the last-5-year average to 27.7%. The lowest ROE in the last 10 years was 21.6% in ’19. Debt-to-Capital has been lower than peer and industry averages. This trended down from 21.4% in ’13 to 9.4% before reversing higher to 23.2% in ’22. The last-5-year average is 17.3%. Interest Coverage is over 90 and Quick Ratio is 2.2. M* gives an Exemplary rating for Capital Allocation and Value Line gives an A++ rating for Financial Strength.

M* also assigns a Wide [stable] economic moat to TSM.

I forecast long-term annualized sales growth of 6% based on the following:

I am forecasting below both long-term estimates.

I forecast long-term annualized EPS growth of 8% based on the following:

Actual EPS spiked over 60% YOY in ’22.

I am forecasting toward the bottom of the long-term-estimate range (mean of six: 14.6%).

My Forecast High P/E is 14. Over the last 10 years, high P/E has ranged from 14.1 (’15) to 34.8 (’21) with a last-5-year average of 27.3. I am forecasting below the entire range.

My Forecast Low P/E is 9. Excluding the upside outlier in ’21 (26.3), over the last 10 years low P/E has ranged from 9.0 (’22) to 15.5 (19) with a last-5-year average of 13.1. I am forecasting at the bottom of the range.

My Low Stock Price Forecast (LSPF) is the default value of $59.90. This is 36% less than the previous closing price and just a hair under the 52-week low ($59.40).

Over the last 10 years, Payout Ratio has ranged from 27.9% (’22) to 58.8% (’18) with outliers from ’15 (0%) and ’19 (90.6%) excluded. The last-5-year average (excluding ’19) is 45.9%. I am forecasting below the entire range at 27%.

These inputs land TSM in the HOLD zone with an U/D ratio of 1.3. The Total Annualized Return (TAR) is 9.9%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-sized company at 6.2%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on total annualized return (9.9%) instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 424 studies done in the past 90 days (my outlier study along with 127 others excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 10.6%, 9.8%, 23.0, 14.1, and 54.8%. I am lower across the board especially with regard to P/E. Value Line projects a future average annual P/E of 18.0: lower than MS 18.6 and much higher than my 11.5.

With regard to other data, MS high and low EPS are $9.52 and $5.86 compared to my $9.67 and $6.56. My numbers may be higher due to growth in the recent quarter, but I’m surprised my high EPS is not lower due to a lower forecast growth rate. MS has a LSPF of $64.50, which is 9.3% higher than mine. This doesn’t align with the MS default $5.86 * 14.1 = $82.63, but is still quite reasonable being 30% less than the previous close.

The robust MOS backing this study may actually be too much. My forecast P/E range is over 6 points lower than Value Line or MS. Raising Forecast High and/or Low P/E up to 12 points total could put TSM in the BUY zone. In looking at the 10-year P/E ranges, however, nothing jumps out at me to say “this forecast is unreasonably low.”

For now, I remain steadfast and will look to buy under $78/share.

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MNST Stock Study (4-11-23)

Posted by on April 15, 2023 at 06:46 | Last modified: May 5, 2023 10:17

I recently did a stock study on Monster Beverage Corp. (MNST) with a closing price of $52.35.

M* writes:

     > Monster Beverage is a leader in the energy drink subsegment
     > of the beverage industry. The Monster trademark anchors the
     > portfolio, and notable offerings include Monster Energy and
     > Monster Ultra. The firm has also started to incubate new
     > trademarks for emerging enclaves of the energy space, like
     > Reign in performance energy. It is primarily a brand owner,
     > outsourcing most of its manufacturing to third-party
     > copackers. It primarily uses the Coca-Cola bottling system
     > for distribution after a strategic agreement through which
     > Coke became Monster’s largest shareholder (nearly 20%).
     > Most of Monster’s revenue is generated in the United States.

Over the last 10 years, this medium-size company has grown sales and EPS at annualized rates of 12.0% and 16.5%, respectively. Lines are mostly up, straight, and parallel except for EPS declines in ’21 and ’22, which is worthy of further investigation. Although higher than peer and industry averages, PTPM traces an “inverse-U” pattern over the last 10 years going from 25.1% in ’13 up to 35.7% in ’17 and back down to 24.9% in ’22 with a last-5-year average of 32.1%.

ROE has generally been less than industry averages while about even with peers over the last decade, decreasing from 33.9% in ’13 to 17.1% in ’22 with a last-5-year average of 24.0%.

The company has zero long-term debt, which makes its Debt-to-Capital (0%) much lower than peer and industry averages. M* gives the company a Standard rating for Capital Allocation while Value Line awards an A+ grade for Financial Strength. Quick Ratio is an impressive 3.68.

I forecast long-term annualized sales growth of 7% based on the following:

I am forecasting in between the two longer-term estimates.

I forecast long-term annualized EPS growth of 12% based on the following:

I am forecasting below the entire range of long-term estimates (mean of six: 17.9%).

My Forecast High P/E is 33. Over the last 10 years, high P/E has been up, down, and up with a range of 32.7 (’19) to 56.6 (’15) and a last-5-year average of 38.7. I am forecasting near the bottom of the range (only ’19 is lower).

My Forecast Low P/E is 23. Over the last 10 years, low P/E has been up, down, and up with a range of 19.0 (’20) to 37.6 (’15) and a last-5-year average of 26.7. I am forecasting near the bottom of the range [only ’20 and ’14 (22.7) are lower].

My Low Stock Price Forecast (LSPF) is the default value of $25.50. This is 51.3% less than the previous closing price and 36.4% less than the 52-week low. The 2020 low is around $26.00, which almost makes my forecast look unreasonably extreme but from a valuation perspective (historical P/E ranges) it is not.

These inputs land MNST in the HOLD zone with an U/D ratio of 0.5. The Total Annualized Return (TAR) is 4.6%.

PAR (using Forecast Average—not High—P/E) is far less than T-bills at 1.2%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on total annualized return (4.6%) but even that right now is much lower than I seek.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 379 studies done in the past 90 days (my study along with 63 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E, are 10.0%, 11.0%, 35.0, and 25.8. I am higher on EPS growth and lower on the other three inputs. Value Line projects a future average annual P/E of 30.0, which is lower than MS (30.4) and higher than mine (28). Overall, some MOS appears to back this study.

With regard to other data, MS high and low EPS are $3.11/share and $2.09/share compared to my $1.97 and $1.11. The $2.09, which is almost double TTM value, seems to be the result of a 2:1 stock split executed on 3/28/23. From MS raw data (outliers not removed), 260 studies are dated before 3/28/23 with a mean high EPS of $3.92/share while 182 studies are dated after 3/27/23 with a mean high EPS of $1.97/share. Also suspect is the MS Low Stock Price Forecast (LSPF) of $52.70, which is about double my LSPF and near the previous close. The same two groups of studies just defined with dates before and after the stock split have mean LSPFs of $58.67 and $44.99, respectively: a statistically significant difference [Student’s t(297) ~ 9.3, p < 0.001] albeit far less than 2x apart.

I would look to re-evaluate MNST under $35/share.

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MMM Stock Study (4-4-23)

Posted by on April 14, 2023 at 07:13 | Last modified: April 4, 2023 12:22

I recently did a stock study on 3M Co. (MMM) with a closing price of $104.57.

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.

Over the last decade, this large-sized company has grown sales and EPS at annualized rates of 1.3% and 4.2%, respectively. Lines are somewhat up, but hardly straight or parallel (sales declines in ’15, ’16, ’19, and ’22; EPS declines in ’17 and ’19). Stock price is at a 10-year low. Per visual inspection, this is not a high-quality growth stock.

PTPM is greater than peer and industry averages. It increased from 21.3% in ’13 to 23.8% in ’17 before reversing to 18.7% in ’22. The last-5-year average is 19.8%.

ROE is greater than peer and industry averages. It increased from 25.1% in ’13 to 40% in ’22 with a last-5-year average of 43.4%. Unfortunately, Debt-to-Capital is also greater than peer and industry averages. This has trended higher over the last 10 years and has a last-5-year average of 59.4%. Interest Coverage is 14 and Quick Ratio is 0.9. M* gives a Standard rating for Capital Allocation and Value Line gives an A rating for Financial Strength.

MMM faces risk due to PFAS (environmental) and Combat Arms (military earplugs) litigation. M* assumes total liability of $18B. Value Line estimates liability at $1.00/share but wonders whether this is enough.

Although M* assigns a wide/stable economic moat to the company, 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.”

I forecast long-term annualized sales growth of 1% based on the following:

I am forecasting below both long-term estimates.

I forecast long-term annualized EPS growth of 0% based on the following:

The mean of six long-term estimates is 2.5% growth per year. I am forecasting toward the bottom of the range.

My Forecast High P/E is 18. Over the last 10 years, high P/E has ranged from 17.9 (’22) to 30.8 (’17) with a last-5-year average of 23.1. I am forecasting near the bottom of the range (only ’22 is lower).

My Forecast Low P/E is 9. Over the last 10 years, low P/E has ranged from 10.5 (’17) to 21.9 (’22) with a last-5-year average of 15.6. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) is $83.30. Given a 0% EPS growth rate, I am using ’20 EPS of $9.25/share (rather than $10.18 from ’22). This is 20.3% less than the previous closing price and 16.9% less than the 52-week low.

Over the last 10 years, Payout Ratio has increased from 37.8% in ’13 to 58.5% in ’22 with a last-5-year average of 63.1%. I am forecasting below the entire range at 37%.

These inputs land MMM in the BUY zone with an U/D ratio of 3.7. The Total Annualized Return (TAR) is 13.9%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-sized company at 8.4%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on total annualized return (13.9%) instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 158 studies done in the past 90 days (67 outlier studies and my own excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 2.6%, 4.0%, 20.0, 15.3, and 60%. I am significantly lower across the board. Value Line projects a future average annual P/E of 16.0: lower than MS 18.1 and higher than my 13.5.

With regard to other data, MS high and low EPS are $12.37 and $9.71 compared to my $10.18 and $9.25. MS has a LSPF of $107.10, which is higher than the last closing price. MMM is down ~15% over the last 2-3 months, which hopefully explains this. Per usual, this does not align with the default LSPF of 15.3 * $9.71 = $148.56.

The litigation risk offsets what I perceive to be a robust MOS in this study. While MMM is a BUY under $108/share, maybe I knock another 5-10% off and look to buy under $102 or $97 in case the legal tab ends up higher than anticipated.

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