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AVT Stock Study (4-3-23)

Posted by on April 12, 2023 at 07:09 | Last modified: April 3, 2023 14:20

I recently did a stock study on Avnet Inc. (AVT) with a closing price of $45.20.

Value Line writes:

     > Avnet, Inc. is a technology solutions company that markets,
     > sells, and distributes electronic components. The company
     > has two segments: Electronic Components (93% of ’22 sales),
     > which sells electr. components, semiconductors,
     > interconnect, passive and electromechanical components to
     > the world’s leading electronic component manufacturers;
     > Farnell (7%) sells kits, tools, test measurement, and
     > electronic components to customers that are developing and
     > testing their products. Acquired Premier Farnell, ’16.

Excluding ’18 and ’20, this large-sized company has posted annualized sales and EPS declines of 2.9% and 1% over the last 10 years. The company recorded goodwill impairment of ~$181M in ’18. COVID-19 shocked the world economy in ’20, which led to widespread losses. Even without these two years, lines are nowhere close to up, straight, and parallel.

For me, the analysis would end now as the company does not clear the barbed wire fence. However, I was introduced to Avnet by the recent Manifest Investing Roundtable in what was a rather attractive presentation. I will press on to see if “there’s gold in them thar hills” in the form of a potential non-core position.

PTPM decreased from 2.2% in ’13 to 0.9% in ’21 before rebounding to 3.4% in ’22. This trails peer and industry averages.

ROE fell below 10% in ’17 and remained there until ’22 when it spiked to 15.9%. The last-5-year average is 4.2% (including negative numbers for ’18 and ’20). This is disappointingly low and trails peer/industry averages.

As some potential bright spots, Debt-to-Capital has been lower than peer and industry averages with a last-5-year mean of 29%. Interest Coverage is 7.5, Quick Ratio is 1.26, and Value Line gives an A rating for Financial Strength.

I forecast long-term annualized sales growth of 2% based on the following:

I am discounting the one long-term estimate to get my forecast.

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

Of four long-term estimates, two are negative. I am forecasting toward the lower end of the range (mean 4.4%)

My Forecast High P/E is 8. Over the last 10 years, high P/E has ranged from 7.2 (’22) to 30.3 (’19) with a last-5-year average (excluding NMF in ’18 and ’20) of 20.4. I am forecasting near the bottom of the range (only ’22 is lower).

My Forecast Low P/E is 4. Over the last 10 years, low P/E has ranged from 5.1 (’22) to 20.6 (’19) with a last-5-year average (excluding NMF in ’18 and ’20) of 12.8. I am forecasting below the entire range.

My Low Stock Price Forecast is the default value of $35.60. This is 21.2% less than the previous closing price and right near the 52-week low of $35.50.

Since 2014 (and excluding NMF in ’18 and ’20), Payout Ratio has ranged from 14.4% (’22) to 49.1% (’19) with a last-5-year average of 35.8%. I am forecasting below the entire range at 14%.

These inputs land AVT in the BUY zone with an U/D ratio of 3.1. The Total Annualized Return (TAR) is 12.4%.

PAR (using Forecast Average–not High–P/E) is less than I seek at 6.8%. 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 42 studies done in the past 90 days (seven outlier studies and my own excluded), averages for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.1%, 5.8%, 13.4, 9.2, and 33.7%. I am lower across the board. Value Line projects a future average annual P/E of 11 compared to MS 11.3. I am much lower at 6.

With regard to other data, MS high and low EPS are $13.40 and $7.62 compared to my $9.36 and $8.91. My low EPS may be greater than MS due the latest quarter(s) of growth and my high EPS is less due to a lower forecast growth rate. MS has a Low Stock Price Forecast of $30.10, which is 15.4% less than than mine. This does not align with the default value of 9.2 * $7.62 = $70.62 [which would be invalid]. I would argue that willingness to entertain a particular low price entails acceptance of the corresponding P/E as the lower end of the P/E range. This suggests certain studies should lower their Forecast Low P/E.

A robust MOS underlies this study, and indeed there may be “gold in them thar hills!” Given the historically inconsistent track record of sales and earnings, I would either demand a higher projected return or establish a smaller position size. I will look to buy under $41/share.

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TD Stock Study (3-30-23)

Posted by on April 10, 2023 at 06:29 | Last modified: March 30, 2023 15:16

I recently did a stock study on Toronto-Dominion Bank (TD) with a closing price of $59.22 (NYSE).

Value Line writes:

     > Toronto-Dominion Bank, one of Canada’s biggest by assets, has
     > branches in Canada, the U.S., and other countries. It serves
     > over 27 million customers worldwide in four key units: Canadian
     > Personal and Commercial Banking including TD Canada Trust and
     > TD Auto Finance Canada; U.S. Retail including TD Bank and TD
     > Wealth (U.S.); Wealth Management and Insurance including TD
     > Wealth (Canada) and TD Direct Investing; and Wholesale Banking.

This large-sized company has grown sales and EPS at annualized rates of 6% and 14.8%, respectively, over the last decade. Lines are generally up, straight, and parallel except for a sales dip in ’21. PTPM has closely tracked peer and industry averages generally trending higher from 28% in ’13 to 44.6% in ’22 with a last-5-year average of 36.2%.

Over the last 10 years, ROE has been higher than peer and industry averages going from 7.2% in ’13 to 24.6% in ’22 with a last-5-year average of 20%. Debt-to-Capital over the decade has been greater than peer and industry averages with a last-5-year average of 75.1%. While uncomfortably high, perhaps, Value Line gives an A rating for Financial Strength while M* gives an Exemplary rating for Capital Allocation (along with a Wide economic moat rating).

Return on Average Assets has a last-5-year average of 0.84%. An outstanding number to look for is 1.5% or more over several years. If I remember correctly from a Ross Meredith presentation, though, ROAA isn’t as relevant for large banks (versus smaller regional/community banks) because business segments are diversified rather than dominated by loans.

I forecast long-term annualized sales growth of 5% based on the following:

Without any long-term estimates (Value Line separates loans from total assets but not report “sales” or “revenue”), I am forecasting to the low side.

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

I am forecasting below the range [mean of five long-term estimates: 8.3%].

My Forecast High P/E is 9. Over the last 10 years, high P/E has declined from 26.8 in ’13 to 9.1 in ’22 with a last-5-year average of 10. I am forecasting below the range.

My Forecast Low P/E is 5.5. Over the last 10 years, low P/E has ranged from 22.1 in ’13 to 5.2 in ’20 with a last-5-year average of 6.7. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast is the default value of $45.40. This is 23.3% less than the previous closing price, 18.1% less than the 52-week low, and 2.9% greater than the ’21 low.

Excluding 93.8% in ’13 (upside outlier), Payout Ratio has ranged from 37.6% in ’22 to 48.4% in ’20 over the last 10 years. The last-5-year average is 43.3%. I am forecasting just below the range at 37%.

These inputs land TD in the HOLD zone with an U/D ratio of 2.9. The Total Annualized Return (TAR) is 15%.

PAR (using Forecast Average—not High—P/E) is 11.3%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I will use TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 32 studies done in the past 90 days (16 studies with outliers and my own study excluded), averages for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.9%, 6.2%, 10.2, 7.2, and 43.9%. I am lower across the board. MS high and low EPS are $12.15 and $7.66 compared to my $11.05 and $8.26. My low EPS may be greater than MS due the latest quarterly earnings release, and my high EPS may be less due to a [marginally] lower forecast growth rate. MS has a Low Stock Price Forecast of $48.60, which is 7% higher than mine (not surprising since the stock has fallen recently). Once again, this does not align with the default value of 7.2 * $7.66 = $55.15. I think some studies manually override the Low Stock Price Forecast rather than lowering the Forecast Low P/E when the latter would allow for a clearer translation inside the numbers. Value Line forecasts an average annual P/E of 10.5 compared to MS 8.7 and my 7.3.

A robust MOS underlies this study, and I would be a buyer under $58/share.

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RBA Stock Study (3-30-23)

Posted by on April 6, 2023 at 07:22 | Last modified: March 30, 2023 14:47

I recently did a stock study on Ritchie Bros Auctioneers Inc. (RBA) with a closing price of $55.42.

M* writes:

     > Ritchie Bros. 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. Ritchie
     > Bros. 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.

This medium-sized company has grown sales and EPS at annualized rates of 18.1% and 10.7% over the last decade. Lines are generally up and parallel except for EPS declines in ’14, ’16, ’17, and ’21. PTPM has remained above peer and industry averages declining from 28.8% in ’13 to 12.7% in ’17 and rebounding to 23.4% in ’22. Last-5-year average is 16.5%.

Over the last 10 years, ROE has been relatively stable except for a spike in ’22 to 25.6%. ROE has remained mostly above peer and industry averages with a last-5-year average of 18%. Debt-to-Capital over the decade has generally been lower than the industry but higher than peer averages with a last-5-year average of 47.5%. Quick Ratio is 0.86, and Interest Coverage is 8. Value Line rates the company B++ for Financial Strength. M* gives a Standard rating for Capital Allocation, writing “the company’s low balance sheet risk is largely due to its manageable debt levels and access to credit lines.”

I forecast long-term annualized sales growth of 10% based on the following:

The lofty growth rates over the next two years are probably due to acquisition of U.S. auto retailer IAA Inc., which completed on March 20 (see here).

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

I am not seeing any bump in estimated EPS for ’23-’24 like I did with sales.

I find it odd that four of five long-term estimates are identical. CNN Business and Seeking Alpha get data from Factset and S&P Global, respectively. YF gets data from Refinitiv, and Zacks is its own data source. Given all different sources, I would not expect duplication unless multiple sources are getting estimates from the same analysts. Even at that, this isn’t a case like others I’ve seen where the number of analysts is next to none: CNN Business, YF, and Zacks are citing 8, 8, and 3.

I am forecasting EPS growth just below the long-term range (mean of 5 estimates: 8.4%).

My Forecast High P/E is 24. Over the last 10 years, high P/E has ranged from 24.3 in ’15 to 56 in ’21 with a last-5-year average of 40. I am forecasting below the range.

My Forecast Low P/E is 15. Over the last 10 years, low P/E has ranged from 16.8 in ’20 to 37.2 in ’21 with a last-5-year average of 24.2. I could forecast below the range with 16, but the resultant Low Stock Price Forecast would only be 17.4% below the previous close [rule of thumb is 20%]. I am forecasting even lower.

My Low Stock Price Forecast is the default value of $42.90. This is 22.6% less than the previous closing price and 11.9% less than the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 36.4% in ’22 to 98.6% in ’17 (possibly an upside outlier) with a last-5-year average of 55.8%. I am forecasting just below the range at 36%.

These inputs land RBA in the HOLD zone with an U/D ratio of 2.9. The Total Annualized Return (TAR) is 13%.

PAR (using Forecast Average—not High—P/E) is 9%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I will use TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 14 studies done (7 studies with outliers excluded) in the past 90 days, mean averages for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.2%, 9.9%, 35, 23, and 61.2%. I am lower on everything except sales growth. MS high and low EPS are $3.92 and $2.09 compared to my $3.83 and $2.86. My low EPS may be greater than MS because EPS jumped 110% in ’22 and some studies use the ’21 number (with ’22 not yet completed). My high EPS is less due to a lower forecast growth rate (I’m surprised the difference isn’t larger). MS has a Low Stock Price Forecast of $36.10. This is 15.9% lower than mine although the default MS low price would be higher: 23 * $2.09 = $48.07. Value Line projects an average annual P/E of 25 compared to MS 29 and my 19.5.

A robust MOS underlies this study, and I would be a buyer under $55/share.

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LFUS Stock Study (3-29-23)

Posted by on April 4, 2023 at 06:45 | Last modified: March 29, 2023 10:33

I recently did a stock study on Littelfuse Inc. (LFUS) with a closing price of $257.96.

M* writes:

     > Littelfuse is a primary provider of circuit protection products
     > (such as fuses and relays) into the transportation, industrial,
     > telecommunications, and consumer electronics end markets. The
     > firm is also increasing its power semiconductor business, where
     > it predominantly serves industrial end markets and is breaking
     > into electric vehicle charging infrastructure.

This medium-sized company has grown sales and EPS at annualized rates of 13.6% and 13.8%, respectively, over the last decade. Lines are generally up and parallel with sales declines in ’19 and ’20 along with EPS declines in ’15, ’19, and ’20. PTPM has been cyclical over the last decade above peer and industry averages with a last-5-year average of 13.6%.

Over the last 10 years, ROE has been cyclical and above peer and industry averages with a last-5-year average of 12.3%. Debt-to-capital over the decade has generally been lower (higher) than industry (peer) averages with a last-5-year average of 30.6%. Value Line rates the company B++ for Financial Strength. M* gives a Standard rating for Capital Allocation, writing that the company has “a sound balance sheet, based on low net debt.” Quick Ratio is 1.5, and Interest Coverage is 17.9.

I forecast long-term annualized sales growth of 4% based on the following:

I forecast long-term annualized EPS growth of 4% based on the following:

Value Line is a downside outlier of six long-term EPS projections. Its left-margin table says 14.5% annualized from ’20-’22 to ’26-’28, but I can’t get this from numbers in the statistical array. Per the latter, 4.7% annualized growth is projected from 2021 through 2027 (my interpretation of ’26-’28). I will use the 4.7% in place of 0.6% and forecast conservatively toward the lower end of the range (mean of long-term estimates using the 0.6% for Value Line is 9.1%).

To counter the argument that my forecast is unreasonably low, I would also point out that earnings have spiked 68.1% per year over the last two years. Whenever this happens, my gut tells me [for one reason or another] time will be needed in order to digest the hefty gains.

My Forecast High P/E is 21. High P/E went from 24.1 in ’13 to 48.5 in ’20 before heading down to 21.9 in ’22. The last-5-year average is 34.6. I am forecasting below the range.

My Forecast Low P/E is 13. Low P/E went from 15.3 in ’13 to 28.2 in ’17 before heading down to 12.9 in ’22. The last-5-year average is 20.7. I am forecasting near the bottom of the range (only ’22 is lower).

My Low Stock Price Forecast is the default value of $194.20. This is 24.7% below the previous closing price and 1% above the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 15.1% in ’22 to 36.3% in ’20 with a last-5-year average of 25.2%. I am forecasting just below the range at 15%.

These inputs land LFUS in the HOLD zone with an U/D ratio of 1.9. The Total Annualized Return (TAR) is 8.9%.

PAR (using future average—not high—P/E) is 4.6%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, however, then I will focus on the TAR rather than PAR.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 205 studies done in the past 90 days, averages for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.3%, 9.0%, 27.0, 19.4, and 26.1%. I am much lower across the board. MS high and low EPS are $22.12 and $13.40 compared to my $18.18 and $14.94. My low EPS may be greater than MS due the latest quarterly earnings release, and my high EPS is less due to a lower forecast growth rate. MS has a Low Stock Price Forecast of $186.22, which is 4.1% lower than mine (not surprising since the stock has rallied 15% over the last three months). Value Line forecasts average annual P/E of 24 compared to MS 23.2 and my 17.

A robust MOS underlies this study, and I would be a buyer under $240/share.

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MEDP Stock Study (3-28-23)

Posted by on March 31, 2023 at 07:02 | Last modified: March 28, 2023 15:15

I recently did a stock study on Medpace Holdings Inc. (MEDP) with a closing price of $183.26.

CFRA writes:

     > Medpace Holdings, Inc. provides clinical research-based drug and
     > medical device development services in North America, Europe, and
     > Asia. It offers a suite of services supporting the clinical development
     > process from Phase I to Phase IV in various therapeutic areas. The
     > company also provides clinical development services to the
     > pharmaceutical, biotechnology, and medical device industries; and
     > development plan design, coordinated central laboratory, project
     > management, regulatory affairs, clinical monitoring, data management
     > and analysis, pharmacovigilance new drug application submissions, and
     > post-marketing clinical support services. In addition, it offers bio-
     > analytical laboratory services, clinical human pharmacology, imaging
     > services, and electrocardiography reading support for clinical trials.

This medium-sized company has grown sales and earnings at annualized rates of 21.3% and 30.1% (excluding NMF, $0.11, $0.37, and $0.98/share in ’14-’17, respectively, which if included would boost this number higher) for the last 10 years. Lines are up, straight, and parallel since ’15. PTPM was 14.3% in ’13 before dipping negative and recovering over the following three years. Since ’17, PTPM has increased from 13.1% to 19.4% with a last-5-year average of 16.6%. For the last 10 years, PTPM is about equal with the industry while trailing its peers as neither of the latter two suffered the ’14-’17 dip.

ROE increased from 2.5% in ’16 (initial ROE value on record) to 19.3% in ’21 before catapulting to 64.7% in ’22 (upside outlier). The last-5-year average (excluding ’22) is 15.7%, and as a whole this leads peer and industry averages—both of which cratered in ’17 (possibly due to TCJA). Debt-to-Capital declined from 47.8% in ’15 to 5.9% in ’19 before reversing higher to 32.8% in ’22. Overall, this is much lower than peer and industry averages. The last-5-year average is 15%. M* reports a Quick Ratio of 0.35, which [deserves a bit more digging and] on its own would be somewhat concerning. Value Line assigns a Financial Strength rating of B++ despite the company having no long-term debt.

I forecast long-term annualized sales growth of 11% based on the following:

I am forecasting below the range.

I forecast long-term annualized EPS growth of 10% based on the following:

I am forecasting below the three-long-term-estimate range (mean 12.2%).

My Forecast High P/E is 32. Excluding the upside outlier in ’16 (105.2), over the last six years high P/E has ranged from 32.4 in ’22 to 48 in ’21 with a last-5-year average of 37. I am forecasting below the range.

My Forecast Low P/E is 16. Excluding the upside outlier in ’16 (71.7), over the last six years low P/E has ranged from 15.3 in ’20 to 27.2 in ’21 with a last-5-year average of 18.8. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast is the default value of $117.10. This is 36.1% less than the previous closing price and 7.7% less than the ’22 low.

These inputs land MEDP in the HOLD zone with an U/D ratio of 2.9. The Total Annualized Return (TAR) is 15.4%.

PAR (using Forecast Average, not High, P/E) is 9%. This is less than I want to see from a medium-sized company. If the margin of safety (MOS) is strong enough, then I can ignore PAR in favor of TAR.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 170 studies over the past 90 days (mine excluded), averages for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 15.9%, 15.6%, 31.8 and 18.9, respectively. I am significantly lower on growth rates and also lower on P/E range. MS high and low EPS are $14.75 and $6.69 compared to my $11.72 and $7.32. My low EPS may be greater than MS due the latest quarterly earnings release, and my high EPS is less due to a lower forecast growth rate. MS has a Low Stock Price Forecast of $125.38, which is 7.1% higher than mine.

As just suggested, my forecast average annual P/E (24) is just below MS (25.4) even though my Forecast High P/E is higher. Value Line projects much lower at 20. This is where I question the Value Line numbers. Going back in the statistical array, average annual P/E for ’19-’22 are 25.5, 27, 37.3, and 22.9. Looking back to the M* data I used, these same values are 25.3 (difference of -0.2), 27.3 (+0.3), 37.6 (+0.3), and 24.9 (+2.0). Unlike a few other companies on which I have run this analysis, Value Line here only understates by a mean of 0.6, which is not significant. My higher P/E range therefore offsets MOS created by my lower forecast growth rates.

I was uncharacteristically stretching with the P/E forecasts. Given my initial Forecast Low P/E, the Low Stock Price Forecast came up extremely far below the previous close. I therefore increased as high as I could while still maintaining justification to call it conservative.

Although MEDP is a BUY under $181, I may look for an even lower entry price to compensate for the lack of MOS. An additional reason to demand MOS in this study is uncertainty due to the lower number of analysts contributing to the above-cited projections and the lower number of long-term projections themselves.

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CBRE Stock Study (3-27-23)

Posted by on March 29, 2023 at 06:45 | Last modified: March 28, 2023 08:48

I recently did a stock study on CBRE Group, Inc. (CBRE) with a closing price of $68.86.

Value Line writes:

     > CBRE Group, Inc. is a worldwide commercial real estate firm,
     > offering services to occupiers, owners, lenders, and investors
     > in the office, retail, industrial, and multi-family segments
     > of the market. Provides facilities management, leasing,
     > property, sales, mortgage origination, investment management,
     > and valuation services.

This large-sized company has grown sales and earnings at annualized rates of 17.8% and 18%, respectively, for the last 10 years. Lines are mostly up, straight, and parallel except for sales in ’20 and EPS in both ’20 and ’22. PTPM has trended slightly lower over the last 10 years while slightly edging out peer and industry averages. Its last-5-year average is 6.1%.

Aside from a downside outlier in ’20 (11.4%), ROE has remained between 17-23% over the last 10 years while beating peer and industry averages; last-5-year average is 19.2%. Debt-to-Capital has generally trended lower over the last decade from 56.8% in ’13 to 30.8% in ’22 while tracking higher than peer and industry averages; last-5-year average is 35.6%. Per Value Line, Interest Coverage is 25 and Financial Strength gets a rating of A. M* assigns a Standard rating for Capital Allocation.

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

I am forecasting below the range.

I forecast long-term annualized EPS growth of 4% based on the following:

I am forecasting near the bottom of the four-long-term-estimate range (mean 9.3%).

My Forecast High P/E is 18. Excluding the upside outlier in ’20 (30.5), high P/E has gone from 28.3 in ’13 to 16.3 in ’18 and ’19 before rebounding to 25.9 in ’22 with a last-5-year average (excluding ’20) of 19.7. I am forecasting near the low end of the range (only ’18 and ’19 are lower).

My Forecast Low P/E is 12. Low P/E has gone from 21 in ’13 to 10 in ’19 before rebounding to 15.5 in ’22. The last-5-year average is 12.3. My forecast is lower than all but ’19 and ’21 (10.9).

My Low Stock Price Forecast is the default value of $51.20. This is 25.6% less than the previous closing price and 12.8% less than the ’21 low.

These inputs land CBRE in the HOLD zone with an U/D ratio of 1.4. The Total Annualized Return (TAR) is 6.4%.

PAR (using Forecast Average, not High, P/E) is 2.6%. This is too low for me to invest.

To assess margin of safety (MOS) in this study, I like to compare inputs with those of Member Sentiment (MS). Based on 73 studies over the past 90 days (mine excluded), averages for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 8.2%, 9.2%, 20.7 and 13.4, respectively. I am lower across the board—especially on growth rates. MS high and low EPS are $7.45 and $3.91, respectively, compared to my $5.22 and $4.27. My low EPS may be greater due to a the latest quarterly earnings release, but my high EPS is less than MS due to a lower forecast growth rate. MS has a Low Stock Price Forecast of $50.38, which is close to mine. Overall, I think the MOS in this study is robust.

When I last studied this stock on 1/22/23, I called for a 10% discount to $76 as a buy point. My inputs went from 5%, 5%, 16, and 10 in January to 3%, 4%, 18, and 12 now. Despite getting that 10% selloff, I am still looking for another 10% discount to reach my BUY zone under $61.90/share.

While this may seem puzzling, I want to spend today’s extra time discussing study pliability. As an example consider the Value Line long-term estimate in the left-margin table [I don’t use this because I feel it’s watered down with too much actual data]: 8.5% growth between ’19-’21 and ’26-’28. The statistical array says ’20 and ’26-’28 correspond to $3.27 EPS/share and $6.50, respectively: 10.3% annualized growth. If I use the mean of ’19, ’20, and ’21 ($4.26 EPS/share) for ’20, then I get 6.2% annualized growth. That 8.5% is in the middle of 6.2% and 10.3%, yet I can’t pinpoint exactly where it comes from.

In generating my growth forecasts, I like to estimate conservatively near the lower end or just below the range altogether. I just illustrated how two legitimate approaches to calculation result in estimates ~4% apart. Were that the lower threshold, my forecast could vary by that amount.

In calculating growth rates from analyst estimates, I like to anchor the range with an actual result to reduce uncertainty. I therefore start with the column to the left of Value Line’s bold font. For the current CBRE report, this is [inexplicably] ’21 [CBRE has an estimate earnings date (per Nasdaq.com) of 5/2/23, which suggests the final 2022 earnings announcement was around 2/2/23 or two weeks before the report date. That should be enough time to be included here!]. I think of the ’26-’28 column as ’27 [technically it could be ’26 or ’28, which adds more potential variance to the mix]. My preferred forecast is therefore $5.80 to $6.50 over six years for a 1.9% annualized growth rate.

Again, moving the starting point forward demonstrates the aforementioned pliability. Given a completed ’22, the calculation is $5.55 to $6.50 over five years for a 3.2% growth rate. Going from ’23 to ’26-’28 would be $5.05 (projected) to $6.50 over four years or a 6.5% growth rate. None of these are that left-margin-table 8.5% and once again, we see how changing the starting year can result in variation over 4%.

Despite the pliability, my conservative approach brings me comfort. Basing my forecast on the mean (in the middle rather than at the low end of the range) estimate would increase stability if I were willing to sacrifice MOS. I prefer the latter.

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MRK Stock Study (3-14-23)

Posted by on March 27, 2023 at 07:25 | Last modified: March 24, 2023 15:44

I recently did a stock study on Merck & Co., Inc. (MRK) with a closing price of $105.00.

Value Line writes:

     > Merck & Co., Inc. is a global health care company that delivers
     > innovative health solutions through its prescription medicines,
     > vaccines, biologic therapies, and animal health products.
     > Operations comprised of two segments: Pharmaceutical (88% of
     > total sales) and Animal Health (12%). Top-grossing franchises
     > in 2021 included Keytruda (oncology), Januvia (diabetes),
     > Gardasil (vaccine), ProQuad (vaccine), and Bridion (hospital
     > acute care). Acquired Acceleron Pharma (11/21).

This mega-sized (annual revenue > $50B) company has grown sales and earnings at rates of 3.2% and 13.1% per year, respectively, over the last 10 years. I hesitate to call MRK a “high-quality growth stock” because lines are not particularly up, straight, and parallel. YOY sales were down in ’14 and ’15. YOY EPS were down in ’15, ’16, ’17 (perhaps due to TCJA), and ’20.

Excluding an upside outlier in ’14 (40.9%), PTPM has increased over the last decade from 12.6% (’13) to 27.7% (’22) with a last-5-year average of 23.9%. This trails peer and industry averages.

Over the last decade, ROE has increased from 9.1% to 32.6% with a last-5-year average of 29.1%. This is lower than peer and industry averages. Debt-to-Capital has increased from 33.5% (’13) to 55.7% (’20) before declining to 40% (’22) with a last-5-year average of 48.2%: slightly less than peer and industry averages. Interest Coverage is 18 and Quick Ratio is 0.93. Value Line rates the company A for Financial Strength and M* describes the balance sheet as “sound” while assigning a Standard rating for Capital Allocation.

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

I am forecasting below the two longer-term estimates.

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

I am projecting just below the entire range (mean of six long-term estimates: 9.3%).

My Forecast High P/E is 18. Excluding the upside outlier in ’17 (73.2), high P/E has ranged from 14.6 (’14) to 44.3 (’16) with a last-5-year average of 25.3. I am forecasting toward the bottom of the range (only the ’14 value is lower).

My Forecast Low P/E is 13. Excluding the upside outlier in ’17 (58.8), low P/E has ranged from 11.6 (’14) to 32.4 (’16) with a last-5-year average of 17.8. I am forecasting toward the bottom of the range (only the ’14 value is lower).

My Low Stock Price Forecast is the default value of $74.20. This is 29.3% less than the previous closing price, 4% less than the 52-week low of $77.3, and 1.8% higher than the ’22 low.

Payout Ratio in the last 10 years has ranged from 42.5% in ’14 to 131.2% in ’16 (excluding upside outlier of 217.2% in ’17) with a last-5-year average of 67.5%. I am estimating conservatively at 40%.

These inputs land MRK in the HOLD zone with an U/D ratio of 1.2. The Total Annualized Return (TAR) is 8.6%.

TAR is decent for a large-sized company, but PAR (using Forecast Average, not High, P/E) is only 5.8%. A good margin of safety (MOS) will give me more confidence in the former as a reasonable target.

For this assessment, I compare my forecasts with those of Member Sentiment (MS). Out of 399 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 5.7%, 8.4%, 25.7, 22.1, and 96.3%, respectively. I am lower across the board [I think something is seriously awry with the 96.3% but that would be a whole other discussion] thereby suggesting a robust MOS in this study.

Value Line projects an average annual P/E of 14, which is much lower than MS (23.9) and even lower than mine (15.5). Upon closer look, though, some discrepancy exists between M* and Value Line’s P/E ratios. Looking at M*’s mean high/low P/E versus Value Line’s average annual P/E (statistical array), for ’18-’22 reveals the following: 27.4 vs. 14.8, 20.6 vs. 15.9, 27 vs. 13.6, and 17.0 vs. 12.9. In other words, the mean difference over these four years is 8.7 points in favor of M*. Since I used M* data to determine my forecasts, maybe I should compare my 15.5 with 14 + 8.7 = 22.7 for Value Line as an apples-to-apples comparison. Not only does this preserve my MOS, it would seem to exaggerate it!

In either case, MRK seems to be fully-valued right now. I would look to re-evaluate below $91/share.

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AL Stock Study (3-13-23)

Posted by on March 23, 2023 at 06:32 | Last modified: March 23, 2023 15:21

I recently did a stock study on Air Lease Corp. (AL) with a closing price of $39.25.

Value Line writes:

     > Air Lease Corp. engages in the purchase and leasing of
     > commercial jet transport aircraft to airlines worldwide.
     > It sells aircraft from its operating lease portfolio to
     > third parties, including other leasing companies,
     > financial services companies, and airlines.

Over the last 10 years, this medium-sized company has grown sales 11.1% per year. Earnings have grown 11.3% per year from ’13-’21. The company posted a loss of $1.24/share in ’22 due to aircraft in Russia. From the 2022 10-K:

     > In response to the sanctions, in March 2022 we terminated
     > all of our leasing activities in Russia, consisting of 24
     > aircraft in our owned fleet, eight aircraft in our managed
     > fleet and the leasing activity relating to 29 aircraft that
     > that had not yet delivered from our orderbook, all of which
     > have been subsequently placed. In the first quarter of
     > 2022, we also canceled five aircraft in our orderbook that
     > were slated for delivery in Russia.
     >
     > While we or the respective managed platform maintain title
     > to the aircraft, we determined that it is unlikely we or
     > they will regain possession of the aircraft that are
     > detained in Russia. As a result, we recorded a write-off of
     > our interests in our owned and managed aircraft that are
     > detained in Russia, totaling approximately $802.4 million
     > for the three months ended March 31, 2022. The 21 aircraft
     > that remained in Russia were removed from our fleet as of
     > March 31, 2022.

Sans write-off, I calculate ’22 earnings at $5.67/share rather than -$1.24. For purposes of 5-year projections below, I will lean conservatively and discount by just over 20% to get $4.50/share as my initial value.

Excluding ’22, sales are up and mostly straight while earnings peaked in ’19 (excluding ’17 when EPS was up ~100% YOY due to TCJA) and have been falling slightly ever since. PTPM went from 34.2% in ’13 to 40.9% in ’16 and has fallen every year since to 25.9% in ’21 for a last-5-year average (excluding ’22) of 33.2%, which is higher than peer and industry averages.

ROE went from 7.5% in ’13 to 11.4% in ’18 (’17 excluded due to TCJA) before falling to 6.2% in ’21 for a last-5-year average (excluding ’22) of 9.1%. This is slightly better than peer averages and mostly lower than the industry.

Debt-to-Capital has averaged 71.8% over the last five years, which is lower than peer and industry averages but still uncomfortably high. M* lists Interest Coverage as an ominous -1.61: first time I have seen a negative number on this metric. Current and Quick Ratio are ~0.9 and FCF has been negative since at least ’20.

Despite these red flags, M Ramirez writes in a SA article:

     > The main negative point for the market is that Air Lease is
     > a finance company and as such needs a lot of debt to operate
     > on a large scale with the assets it holds. Leverage is
     > currently high (about 2.5 debt/equity), although in no case
     > is the amount of debt greater than the total value of the
     > company’s assets… although a priori the debt seems exorbitant,
     > the company finances more than 95% of the debt at a fixed rate
     > (…close to 3%), which, together with the high predictability
     > of its cash flows, makes it practically impossible for the
     > company to go bankrupt. The company could stop aircraft
     > purchases for 5 years and with the cash flows repay half of
     > the debt without increasing rents to the lessees.

I forecast long-term annualized sales growth of 11% based on the following:

I am extrapolating out to five years with a forecast lower than all estimates except ’22-’24 CNN Business.

I forecast long-term annualized EPS growth of 96.4% based on the following:

I am forecasting 15% growth—below the entire range of five long-term estimates (mean 22.5%)—and using $4.50/share in ’22 (see above) as my base. This results in future EPS of $9.04/share.

In order to project from ’22 on the website, I need to recalculate based on the trendline at $0.30 and enter a 96.4% growth rate to end up at $8.72/share (98% growth rate overshoots to $9.08/share; we’ll just say “user error” as the reason this didn’t end up as 97%, but it’s even more conservative this way).

My Forecast High P/E is 8. From ’13-’21, high P/E ranged from 7.2 (’17) to 18.6 (’13) with a last-5-year average of 11.7. I am forecasting near the bottom of the range (only the ’17 value is lower).

My Forecast Low P/E is 6. Excluding the downside outlier in ’20 (1.9), from ’15-’21 low P/E ranged from 5.0 (’17) to 14.6 (’14) with a last-5-year average of 7.4. I am forecasting near the bottom (using the aforementioned $4.50/share rather than TTM).

My Low Stock Price Forecast is $27. This is 6 * $4.50: 31.2% below the previous close and 9.4% less than the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 4.8% (’17) to 18.6% (’21) with a last-5-year average of 13.1% (2022’s NMF excluded). I am forecasting conservatively at 5%.

These inputs land AL in the HOLD zone with an U/D ratio of 2.5. The Total Annualized Return (TAR) is 12.8%.

Total annualized return (TAR) of 12.8% is acceptable for a medium-sized company, but PAR (using Forecast Average, not High, P/E) is lower at 9.9%. Can I believe in the former?

To answer this, I compare my inputs with Member Sentiment (MS). Out of 226 studies over the past 90 days [my own and 20 other studies with high EPS > $40/share excluded (18 of these were 4 digits or more)], projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio average 11.7%, 31.9%, 11.6, 7.7, and 8.2%, respectively. I’m lower on P/E range and Payout Ratio. My sales growth forecast is the same. The 31.9% projected EPS growth along with the MS [average] high EPS of $4.65 suggest most people are not acknowledging ’22 as a one-time loss since it alone is less than ’22 EPS sans write-off. Low EPS is another head-scratcher as many studies have negative values. From my perspective, recording a loss on the Russian airplane fleet is the epitome of an extraordinary item; how can that possibly be used to represent zero growth five years hence short of the write-off being repeated each and every year?

Based on these observations, I perceive a robust margin of safety in this study and would be a buyer under $37/share.

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AEIS Stock Study (2-23-23)

Posted by on March 21, 2023 at 07:19 | Last modified: March 22, 2023 14:05

I recently did a stock study on Advanced Energies Industries Inc. (AEIS) with a closing price of $92.45.

Value Line writes:

     > Advanced Energy Industries, Inc. develops and produces power
     > conversion and control systems that are used by manufacturers
     > of semiconductors and in industrial thin-film manufacturing
     > processes. The largest customer is Applied Materials,
     > accounting for approximately 20% of total sales in 2021.

Over the last 10 years, this medium-sized company has grown sales and earnings at annualized rates of 16.4% and 17%, respectively. Lines are mostly up while displaying some cyclicality (’14 sales not exceeded until ’17 and ’18 EPS not exceeded until ’22 with ’19 and ’21 showing YOY declines). PTPM over the last 10 years traces an inverse-U shape while trending slightly higher from 2.6% in ’13 to 13.1% in ’22. The last-5-year average is 13.4%, which beats peer and industry averages.

The historical ROE profile is similar, going from 7.7% in ’13 to 20.2% in ’22. The last-5-year average is 17.2%, which is roughly on par with peer and industry averages (both of which show a 2016 excursion below -400%). Debt-to-Capital was zero before ’19 and has averaged 35.6% in the last four years since FASB Accounting Standards Update 2016-02 [requires leases to be recorded on the balance sheet]. This is lower than peer and industry averages. Quick Ratio is 1.93.

CFRA writes, “AEIS’s balance sheet is in a good spot, with $459M in cash, net cash of $69M, and low leverage (debt-to-EBITDA of 1.2x). AEIS has no debt maturities until September 2024.”

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

With only one longer-term estimate and unknown recovery mechanics after ’23, I am forecasting a bit light.

I forecast long-term annualized EPS growth of 10% based on the following:

The four longer-term estimates average 16%. With 12.8% being the low end of the range, I’d like to use 12% but I’m going even lower since ’22 was up 39% YOY (especially given a sales growth projection of only 6%).

My Forecast High P/E is 22. Over the last 10 years, high P/E has ranged from 14.8 (’15) to 49.2 (upside outlier in ’19) with a last-5-year average (excluding the outlier) of 26.2. Four out of the last 9 years have high P/E less than my forecast.

My Forecast Low P/E is 12. Over the last 10 years, low P/E has ranged from 8.3 (’16) to 27.7 (’19) with a last-5-year average of 16.7. Four out of the last 10 years have low P/E less than my forecast.

My Low Stock Price Forecast is $64.30 (default): 30.4% beneath the previous close and 4.7% less than the 52-week low.

The dividend history is only two years with Payout Ratios of 11.4% and 7.5%. I am forecasting 7%.

These inputs land AEIS in the BUY zone with an U/D ratio of 3.4. The Total Annualized Return (TAR) is 15.8%.

TAR would be a stellar return for a medium-sized company, but margin of safety (MOS) determines whether I can believe in that or need to settle for PAR (using Forecast Average, not High, P/E) 10.1% as my future expectation.

Looking at Member Sentiment (MS), out of only 22 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 9.6%, 16.2%, 22.8, 13.5, and 5.4%, respectively [MS is really buying into increasing profit margins (EPS growth > sales growth)!]. My forecasts are lower for all inputs except Payout Ratio. Many people don’t think the dividend will continue. Value Line projects an average annual P/E of 18, which is just below MS (18.2) and slightly above mine (17).

My Low Stock Price Forecast is in line with MS ($64.13). Overall, MOS seems robust in this study.

AEIS is a competitor of MKSI on which I have previously done a First Cut. If I can believe in the semiconductor recovery [yes!], then I can definitely believe in this stock.

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Agilent Stock Study (2-22-23)

Posted by on March 16, 2023 at 07:21 | Last modified: May 17, 2023 13:09

I recently did a stock study on Agilent Technologies Inc. (A) with a closing price of $143.42.

M* writes:

     > Originally spun out of Hewlett-Packard in 1999, Agilent has
     > evolved into a leading life sciences and diagnostics firm.
     > Today, Agilent’s measurement technologies serve a broad base
     > of customers with its three operating segments: life science
     > and applied tools, cross lab (consisting of consumables and
     > services related to its life science and applied tools), and
     > diagnostics and genomics. Over half of its sales are generated
     > from the biopharmaceutical, chemical, and advanced materials
     > end markets, but it also supports clinical lab, environmental,
     > forensics, food, academic, and government-related organizations.

Since 2015, this medium-sized company has grown sales and earnings at annualized rates of 7.8% and 19.3%, respectively. Lines are mostly up and straight except for EPS declines in ’18 and ’20. Over the last 10 years (excluding ’17), PTPM has trended higher from 11.9% in ’15 to 22% in ’22 with a last-5-year average of 19.3%. This leads peer and industry averages.

ROE has also trended higher from 10.6% in ’15 to 24.2% in ’22 with a last-five-year average of 18.2%. This is slightly ahead of peer and industry averages. Interest Coverage is 18 and Quick Ratio is 1.32. Value Line gives Agilent an A rating for Financial Strength and M* rates them Exemplary on Capital Allocation including “its sound balance sheet management.”

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

I forecast long-term annualized EPS growth of 9% based on the following:

I am forecasting at the low end of the [six] long-term estimate[s] range [mean 12.2%].

My Forecast High P/E is 32. Since ’15, High P/E has ranged from 24.4 (’19) to 77.3 (upside outlier in ’18) with a last-5-year average (excluding the outlier) of 39.1. I am projecting lower than all values except ’19.

My Forecast Low P/E is 23. Since ’15, Low P/E has ranged from 18.4 (’19) to 62.3 (upside outlier in ’18) with a last-5-year average (excluding the outlier) of 24.5. I could go with 20 and project lower than all values except ’19 but instead, I am projecting lower than all values except ’19 and ’17 (20.6).

My Low Stock Price Forecast is the default $95.90. This is 33.1% below the previous closing price and 7.2% below the ’21 low.

Since ’15, Payout Ratio has ranged from 19.5% (’19) to 61.4% (upside outlier in ’18) with a last-5-year average (excluding the outlier) of 22.6%. I am projecting to the low side [at 19%] even though Value Line says positive things about the company’s ability to raise the dividend.

These inputs land A in the HOLD zone with an U/D ratio of 1.3. The Total Annualized Return (TAR) is 8.1%.

With TAR a bit lower than I would like for a medium-sized company, PAR (using Forecast Average, not High P/E) is definitely too low at 5%. This is not a huge surprise with the stock up almost 79% over the last three years.

I like to add more context to my studies by comparing my inputs to Member Sentiment (MS). Out of only 30 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 6.3%, 9.4%, 34.2, 25.1, and 28.9%, respectively. I am lower on all inputs. My P/E range is more than two points lower, but Value Line projects an average annual P/E that is even lower at 25 (vs. 27.5). I don’t think margin of safety in this study is anything to write home about.

My Low Stock Price Forecast is a tad higher than MS $92.78. See my comments on this in the Forecast Low P/E section.

M* categorizes Agilent with a wide economic moat, which is an alluring reason to buy. If we can get a 15% stock selloff, then I’ll be in line to do just that.

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