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RMD Stock Study (5-7-24)

Posted by on May 22, 2024 at 07:07 | Last modified: May 7, 2024 10:46

I recently did a stock study on ResMed Inc. (RMD) with a closing price of $216.94. The previous study is here.

M* writes:

     > ResMed is one of the largest respiratory care device companies
     > globally, primarily developing and supplying flow generators,
     > masks and accessories for the treatment of sleep apnea.
     > Increasing diagnosis of sleep apnea combined with ageing
     > populations and increasing prevalence of obesity is resulting
     > in a structurally growing market. The company earns roughly
     > two thirds of its revenue in the Americas and the balance
     > across other regions dominated by Europe, Japan and Australia.
     > Recent developments and acquisitions have focused on digital
     > health as ResMed is aiming to differentiate itself through
     > the provision of clinical data for use by the patient,
     > medical care advisor and payer in the out-of-hospital setting.

Over the past 10 years, this medium-size company has grown sales and earnings at annualized rates of 11.7% and 10.9%, respectively. Lines are mostly up, straight, and parallel except for EPS dips in ’17, ’18, and ’21. FY ends June 30.

Over the past decade, PTPM leads peer and industry averages while ranging from 19.9% in ’19 to 27.7% in ’14 with a last-5-year mean of 25.0%. ROE leads peer and industry averages while ranging from 15.1% in ’18 to 27.4% in ’20 with a last-5-year mean of 22.2%. Debt-to-Capital is lower than the industry and roughly even with peers while increasing from 14.6% in ’14 to 27.7% in ’23 with a last-5-year mean of 28.6%.

Value Line rates the company “A” for Financial Strength. M* rates the company “Exemplary” for Capital Allocation and assigns a “Narrow” economic moat. Quick Ratio is 1.3.

With regard to sales growth:

My 7.0% per year forecast is at the bottom of the range.

With regard to EPS growth:

My 9.0% per year forecast is below the long-term estimate range [mean of five: 11.9%]. I will use ’23 EPS of $6.09/share as the initial value rather than 2024 Q3 $6.51 (annualized).

My Forecast High P/E is 30.0. Over the past decade, high P/E trends up from 24.0 (’14) to 40.7 (’23) with a last-5-year mean of 52.7 and a last-5-year-mean average P/E of 44.1. I am near the bottom of the range [only ’14 and ’16 (25.8) are lower].

My Forecast Low P/E is 23.0. Over the past decade, low P/E trends up from 17.4 in ’14 to 33.2 in ’23 with a last-5-year mean of 35.6. My forecast would be the lowest value since 2016 (19.7).

My Low Stock Price Forecast (LSPF) of $140.10 is default based on $6.09/share initial value. This is 35.4% less than the previous closing price and 21.4% less than the 52-week low.

Over the past decade, Payout Ratio decreases from 41.8% in ’14 to 28.9% in ’23 with a last-5-year mean of 39.6%. I am forecasting below the range at 28.0%.

These inputs land RMD in the HOLD zone with a U/D ratio of 0.8. Total Annualized Return (TAR) is 6.3%.

PAR (using Forecast Average—not High—P/E) is less than the current yield on T-bills at 3.8%. 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 222 studies done in the past 90 days (my study along with 81 other 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 7.4%, 10.0%, 36.8, 28.0, and 39.2%. I am lower across the board. Value Line’s future average annual P/E of 28.0 is lower than MS (32.4) but higher than mine (26.5).

MS high / low EPS are $9.81 / $6.05 versus my $9.37 / $6.09 (per share). My high EPS is less due to a lower growth rate. Both are less than Value Line high EPS of $10.00.

MS LSPF of $145.20 implies a Forecast Low P/E of 24.0 vs. the above-stated 28.0. MS LSPF is 14.3% less than the default $6.05/share * 28.0 = $169.40 resulting in more conservative zoning. MS LSPF remains 3.6% greater than mine.

TAR (over 15.0% preferred) is much less than MS 14.2%. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 2.7 and 3.4 per Zacks and my projected P/E, respectfully: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is still cheap at 0.76.

While still within the stock price range of the last three years, RMD currently trades near its 2024 high.

RMD is a BUY under $175/share. With a forecast high price ~$280, my personal TAR criterion won’t be satisfied until ~$140.

Full disclaimer: I currently own shares of RMD.

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OZK Stock Study (5-6-24)

Posted by on May 20, 2024 at 07:17 | Last modified: May 6, 2024 10:43

I recently did a stock study on Bank OZK (OZK) with a closing price of $46.75. My previous study is here.

Value Line writes:

     > Bank OZK (formerly Bank of the Ozarks) is a bank holding company.
     > The company owns an Arkansas state chartered subsidiary bank, Bank
     > of the Ozarks, that conducts operations through 240 offices. Bank
     > OZK provides a range of retail and commercial banking services.
     > Deposit services includes: checking, savings, money market, time
     > deposit, and individual retirement accounts. Loan services include:
     > various types of real estate, consumer, commercial, industrial and
     > agricultural loans, and various leasing services. The company also
     > provides mortgage lending; treasury management services for
     > businesses, individuals and non-profit and governmental entities
     > including: wholesale lock-box services; remote deposit capture
     > services; trust and wealth management services for businesses,
     > individuals and non-profit and governmental entities; real estate
     > appraisals; ATMs; telephone banking; online and mobile banking
     > services; debit cards, gift cards, and safe deposit boxes.

Over the past 10 years, this medium-size company has grown sales and EPS at annualized rates of 14.8% and 12.3%, respectively. Lines are mostly up and parallel except for a sales dip in ’19 and EPS dips in ’18 and ’20.

Over the past decade, PTPM leads peer and industry averages while ranging from 38.2% in ’20 to 68.6% in ’21 with a last-5-year mean of 55.5%. ROE leads peer and industry averages ranging from 10.4% in ’19 (excluding 7.0% outlier in ’20) to 14.6% in ’23 with a last-5-year mean of 11.4%. Debt-to-Capital is much less than peer and industry averages ranging from 9.5% in ’17 to 22.0% in ’14 with a last-5-year mean of 18.7%.

Return on Average Assets (ROAA) has a last-5-year mean of 1.87%. Aside from 1.15% in ’20 (COVID-19), the lowest ROAA in the last 10 years is 1.85% in ’19. That is impressive!

Value Line gives a B+ grade for Financial Strength.

With regard to sales growth:

I am forecasting toward the lower end of the range at 3.0% per year.

With regard to EPS growth:

Despite being less than either long-term estimate (6.0% and 12.0% for a mean of 9.0%), I don’t consider my forecast overly conservative. It seems high relative to estimates for the next 2-3 years and plenty of room for error exists with only two longer-term estimates that currently exceed it.

I will use ’23 EPS of $5.87/share as the initial value.

My Forecast High P/E is 8.0. Over the past decade, high P/E trends down from 25.1 (’14) to 8.9 (’11) with a last-5-year mean of 11.1. The last-5-year-mean average P/E is 8.8. I am forecasting below the range.

My Forecast Low P/E is 6.0. Over the past decade, low P/E trends down from 18.1 (’14) to 5.2 (’23) with a last-5-year mean of 6.6. I am forecasting near the bottom of the range (only ’23 is lower).

My Low Stock Price Forecast (LSPF) of $35.20 is the default value based on $5.87/share. This is 24.7% less than the previous close and 14.7% greater than the 52-week low.

Over the past decade, Payout Ratio ranges from 21.2% in ’17 to 47.7% (upside outlier) in ’20 with a last-5-year mean (excluding the outlier) of 26.5%. I am forecasting below the range at 21.0%.

These inputs land OZK in the HOLD zone with a U/D ratio of 1.1. Total Annualized Return (TAR) is 7.7%.

PAR (using Forecast Average—not High—P/E) of 5.3% is comparable to the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR 7.7% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 16 studies done in the past 90 days (8 outliers including 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 8.0%, 7.6%, 10.6, 6.5, and 28.5%, respectively. I am lower across the board. No 5-year P/E range is available for comparison.

MS high / low EPS are $8.48 / $5.45 versus my $7.49 / $5.87 (per share). My high EPS is lower due to a lower growth rate. No 5-year consensus estimate is available for comparison.

MS LSPF of $31.00 implies a Forecast Low P/E of 5.7 versus the above-stated 6.5. MS LSPF is 12.5% less than the default $5.45 share * 6.5 = $35.43 resulting in more conservative zoning. MS LSPF is also 11.9% less than mine.

TAR (over 15.0% preferred) is much less than MS 17.2%. Despite the small MS sample, I have forecasted conservatively at every turn. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 1.5 (fairly valued) per my projected P/E. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly undervalued at 0.91.

While ROAA is stellar for this bank, the stock has had quite a run and is now extended from a buy point.

OZK is a BUY under $41/share. With a forecast high price ~$60, my personal TAR criterion will be satisfied ~$30.

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VRSN Stock Study (5-3-24)

Posted by on May 16, 2024 at 07:11 | Last modified: May 3, 2024 10:54

I recently did a stock study on Verisign, Inc. (VRSN) with a closing price of $168.34.

M* writes:

     > Verisign is the sole authorized registry for several generic top-level
     > domains, including the widely utilized .com and .net top-level domains.
     > The company operates critical internet infrastructure to support the
     > domain name system, including operating two of the world’s 13 root
     > servers that are used to route internet traffic. In 2018, the firm
     > sold off its Security Services business, signaling a renewed focus
     > on the core registry business.

Over the last 10 years, this medium-size company has grown sales and earnings at annualized rates of 4.1% and 13.9%, respectively. Lines are mostly up, somewhat straight, and parallel/narrowing except for YOY EPS declines in ’21 and ’22.

Over the past decade, PTPM leads peer/industry averages while increasing from 47.8% (’14) to 65.4% (’23) with a last-5-year mean of 61.4%. ROE trails peer/industry averages and is negative throughout with a last-5-year mean of -49.1%. Debt-to-Capital is higher than peer/industry averages [and perhaps unacceptably high for some] with a last-5-year mean of 599%.

Despite what appears to be an upside-down balance sheet with Quick Ratio 0.77, Interest Coverage is 14.2. Value Line gives an “A” grade for Financial Strength and M* an “Exemplary” rating for Capital Allocation. Even CFRA, who has a SELL rating on the stock, writes: “VRSN maintains a healthy balance sheet of total cash and short-term investments of $924M, and nearly $1.8B in debt. Its closest debt maturity is April 2025 for $500M.”

M* assigns the company a “Wide” Economic Moat as a partial monopoly.

With regard to sales growth:

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

With regard to EPS growth:

My 6.0% per year forecast is below the three-long-term-estimate range (mean 9.6%). My biggest concern is the lack of analyst coverage/estimates. Otherwise, I might feel comfortable going 1.0% higher. I will use ’23 EPS of $7.90/share as the initial value rather than 2024 Q1 EPS of $8.14 (annualized).

My Forecast High P/E is 25.0. Over the past decade, high P/E ranges from 25.0 in ’14 to 43.1 in ’19 with a last-5-year mean of 36.2 and a last-5-year-mean average P/E of 30.5. I am at the bottom of the range.

My Forecast Low P/E is 16.0. Over the past decade, low P/E trends up from 18.4 (’14) to 23.9 (’23) with a last-5-year mean of 24.8. I am below the range.

My Low Stock Price Forecast (LSPF) is the default of $126.40 based on $7.90/share initial value. This is 24.9% less than the previous close and 18.6% less than the 2022 low.

These inputs land VRSN in the HOLD zone with a U/D ratio of 2.5. Total Annualized Return (TAR) is 10.1%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a medium-size company at 5.8%. 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). Unfortunately, this stock has been largely overlooked by the community. Based on only seven studies done in the past 90 days (excluding two outliers including my own), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 6.0%, 8.6%, 30.0, and 23.3, respectively. I am lower across the board. Value Line projects a future average annual P/E of 24.0 that is lower than MS (26.7) and higher than mine (20.5).

MS high / low EPS are $11.99 / $7.71 versus my $10.89 / $7.90 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS of $12.80 is greater than both.

MS LSPF of $163.90 implies a Forecast Low P/E of 21.3 versus the above-stated 23.3. MS LSPF is 8.8% less than the default $7.71/share * 23.3 = $163.90, which results in more conservative zoning. MS LSPF is 29.7% greater than mine, however.

TAR (over 15.0% preferred) is much less than MS 14.4%. Despite the tiny MS sample, I attempt to forecast conservatively at every turn. Especially given the company’s consistent revenue model, I believe MOS to be robust in the current study.

With regard to valuation, PEG is 3.3 per my projected P/E: significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is cheap at 0.68.

I won’t pound the table too hard because of the debt (much used to acquire treasury stock). What few analysts weigh in are also split with CFRA’s SELL, M* giving four stars, and Value Line claiming solid long-term potential. At the very least, I think the business model/monopoly is fascinating and theoretically able to justify M*’s “Wide” Economic Moat.

VRSN is a BUY under $162/share. With a forecast high price ~$272, my personal TAR criterion will be satisfied around $136.

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CPAY Stock Study (5-2-24)

Posted by on May 14, 2024 at 06:42 | Last modified: May 2, 2024 10:13

I recently did a stock study on Corpay, Inc. [CPAY (formerly FLT), $296.25]. Previous studies are here and here.

Value Line writes:

     > Corpay, Inc. (formerly FLEETCOR) is a leading independent provider of
     > fuel cards, and payment products and services throughout North America,
     > Latin America, and Europe. Its corporate charge cards cater to
     > commercial fleets, major oil companies, petroleum marketers, and
     > government entities. The company owns and operates proprietary
     > closed-loop networks electronically connected to merchants, through
     > which it captures and reports customized information.

Over the last 10 years, this medium-size company has grown sales and earnings at annualized rates of 11.3% and 14.5%, respectively. Lines are mostly up, straight, and parallel except for a sales decline in ’20 and EPS declines in ’15 and ’20.

Over the past decade, PTPM leads peer and industry averages while ranging from 31.5% in ’15 to 45.0% in ’18 with a last-5-year mean of 37.8%. ROE leads peer averages and tracks evenly with the industry while generally trending up from 24.9% (’14) to 31.2% (’23) with a last-5-year mean of 28.4%. Debt-to-Capital is higher than peer and industry averages while trending higher from 56.6% (’14) to 67.2% (’23) with a last-5-year mean of 64.5%.

Interest Coverage is 4.8 or 13.8 according to M* or Value Line, respectively. M* reports Quick Ratio as 0.52. Value Line gives a B++ grade for Financial Strength. CFRA writes: “We like CPAY’s balance sheet at 2.7x net debt-to-EBITDA, down from 3.3x in Q4 2022, with healthy liquidity of ~$2.2B.”

With regard to sales growth:

I am forecasting below the range at 8.0% per year.

With regard to EPS growth:

My 10.0% per year forecast is below the four-long-term-estimate range. Although most estimates have edged slightly lower since my previous stock study nine months ago, I have increased by 200 basis points and am still under the analyst mean of 14.3%. I will use ’23 EPS of $13.20/share as the initial value.

My Forecast High P/E is 21.0. Over the past decade, high P/E ranges from 21.4 (’22) to 43.0 (’15) with a last-5-year mean of 29.0 and a last-5-year-mean average P/E of 23.0. I am below the range.

My Forecast Low P/E is 13.0. Over the past decade, low P/E ranges from 13.0 (’22) to 34.9 (’15) with a last-5-year mean of 17.1. I am at the bottom of the range.

My Low Stock Price Forecast (LSPF) is $204.00. Default based on $13.20/share initial value seems unreasonably low at $171.60 (42.1% less than the previous close). I am using the 52-week low price instead (31.1% less).

These inputs land CPAY in the HOLD zone with a U/D ratio of 1.6. Total Annualized Return (TAR) is 8.5%.

PAR (using Forecast Average—not High—P/E) is less than the current yield on T-bills 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 136 studies done in the past 90 days (my study and 36 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 9.4%, 11.9%, 24.7, and 16.8, respectively. I am lower across the board. Value Line projects a future average annual P/E of 16.0 that is lower than MS (20.8) and mine (17.0).

MS high / low EPS are $23.14 / $12.87 vs. my $21.26 / $13.20 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS of $34.00 is much higher than both.

MS LSPF of $202.40 implies a Forecast Low P/E of 15.7 vs. the above-stated 16.8. MS LSPF is 6.4% less than the default $12.87/share * 16.8 = $216.22, which results in more conservative zoning. MS LSPF is also 0.8% less than mine.

TAR (over 15.0% preferred) is much less than MS 14.3%. MOS backing the current study seems robust.

With regard to valuation, PEG is 1.1 and 2.0 per Zacks and my projected P/E, respectively: the latter is overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is fair at 0.97.

Up ~46% over the past year, the stock has been on a roll. These are tough stocks to buy because they are often well extended from a buy point. More than anything else, I think that is taking place here.

CPAY is a BUY under $264/share. With a forecast high price ~$446, my TAR criterion will be met ~$223.

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Are Stock Studies Helpful to [Prospective] BI Members?

Posted by on May 11, 2024 at 09:10 | Last modified: July 4, 2024 08:36

In a relatively short period of time (since www.optionfanatic.com is well over 12 years old), over 15% of my blog content is now BetterInvesting (BI) stock studies. While I have an idea whether this is helping anybody, I am more curious about whether this can help anybody.

Posting studies in the blog certainly helps me by keeping me structured and holding me accountable. When I stopped posting studies, I stopped doing studies for about five months (see here).

Learning how to size up and analyze a stock was the main reason I joined BI. Mission accomplished: 220 (and counting) posted right here are testament to that fact.

Option Fanatic is primarily for personal use only as part and parcel of my trading business. I leave it public, however, and welcome anyone to read it. Occasionally, I get comments or emails. I am more than happy if the blog can help anybody else.

Without blog publicity/advertising, I doubt many people are reading. From time to time I have looked at the analytics and not seen large numbers. I have lots of quality content but a helping hand may be needed for it to make an impact: some instruction on adapting what works for me with what can work for them and how they can make that happen.

I doubt stock studies posted here are helping others for two reasons. First, not advertising my blog prevents others from discovering it. Second, these studies are incomplete. BI members will understand most of what I write, but graphical/tabular data presentation (completing the study as a First Cut) would greatly benefit non-members and is not included.

This brings me to the next question: can these studies help anybody? The studies are publicity to demonstrate the BI stock study methodology. The BI website, www.betterinvesting.org, includes [complete] First Cuts, though, and anyone can get a 90-day free trial for that. All studies posted here are also submitted to the BI website as First Cuts.

One thing that cannot be done on the BI website is sorting by author. All my studies may be seen on my blog. A particular stock must be known/selected to find my respective First Cut(s) on the BI website. The BI website archives everyone’s First Cut submissions, though. I strongly encourage reading a variety of members because different nuances and tweaks to the analytical process will resonate with different investors.

Studies posted on my blog can be useful for non-members to get a sense of the BI process without giving personal details. I am sometimes wary of free trials if I have to submit an address, phone number, email, or credit card. If avoidance of the latter enables my blog to facilitate an introduction to BetterInvesting, then so much the better!

Just some random thoughts on what started out as a cloudy and rainy day in South Florida…

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CTSH Stock Study (5-1-24)

Posted by on May 10, 2024 at 06:58 | Last modified: May 1, 2024 11:40

I recently did a stock study on Cognizant Technology Solns Corp. (CTSH, $65.68). Previous studies are here, here, and here.

M* writes:

     > Cognizant is a global IT services provider, offering consulting and
     > outsourcing services to some of the world’s largest enterprises spanning
     > the financial services, media and communications, healthcare, natural
     > resources, and consumer products industries. Cognizant employs nearly
     > 300,000 people globally, roughly 70% of whom are in India, although
     > the company’s headquarters are in Teaneck, New Jersey.

Over the past 10 years, this large-size company has grown sales and EPS at annualized rates of 6.8% and 6.9%. Visual inspection is mediocre with sales dips in ’20 and ’23 along with EPS rockiness from declines in ’16, ’17, ’19, ’20, and ’23.

Over the past decade, PTPM leads peer and industry averages despite trending down from 18.7% (’14) to 14.4% (’23) with a last-5-year mean of 14.6%. ROE trails peer and industry averages, ranging from 12.2% in ’20 to 19.4% in ’14 with a last-5-year mean of 16.5%. Debt-to-Capital is much less than peer and industry averages while declining from 17.5% (’14) to 9.0% (’23) with a last-5-year mean of 11.9%.

Quick Ratio is 1.9 and Interest Coverage is 69.0. M* gives a “Standard” rating for Capital Allocation while Value Line gives an “A+” grade for Financial Strength.

With regard to sales growth:

I am forecasting below both long-term estimates at 5.0% per year.

With regard to EPS growth:

My 6.0% forecast is below the long-term-estimate range (mean of five: 9.0%). Initial value will be ’23 EPS of $4.21/share.

My Forecast High P/E is 19.0. Over the past decade, high P/E trends down from 23.4 (’14) to 18.3 (’23) with a last-5-year mean of 23.3 and a last-5-year-mean average P/E of 19.1. I am forecasting near the bottom of the range (only ’23 is less).

My Forecast Low P/E is 12.0. Over the past decade, low P/E trends down from 17.7 (’14) to 13.4 (’23) with a last-5-year mean of 14.8. I am forecasting near the bottom of the range [only ’22 is less (11.6)].

My Low Stock Price Forecast (LSPF) of $50.50 is default based on initial value of $4.21/share. This is 23.1% less than the previous close and 13.7% less than the 52-week low.

Since a dividend is first issued in 2017, Payout Ratio ranges from 17.8% in ’17 to 34.2% in ’20 with a last-5-year mean of 26.9%. I am forecasting below the range at 17.0%.

These inputs land CTSH in the HOLD zone with a U/D ratio of 2.7. Total Annualized Return (TAR) is 11.2%.

PAR (using Forecast Average—not High—P/E) is 7.0%, which is less than I seek in a large-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 94 studies done in the past 90 days (my study and 41 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 4.1%, 6.8%, 20.6, 14.8, and 24.8%. I am lower on all but sales growth. Value Line projects a future average annual P/E of 17.0, which is lower than MS (17.7) and higher than mine (15.5).

MS high / low EPS are $5.89 / $4.20 versus my $5.63 / $4.21 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is much higher than both at $7.00.

MS LSPF of $54.70 implies a Forecast Low P/E of 13.0 vs. the above-stated 14.8. MS LSPF is 12.0% less than the default $4.20/share * 14.8 = $62.16, which results in more conservative zoning. MS LSPF remains 8.3% greater than mine.

TAR (over 15.0% preferred) is very close to MS 11.8%. MOS seems small in the current study, which is unusual for me.

With regard to valuation, PEG is 1.5 and 2.5 per Zacks and my projected P/E, respectively: latter is overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly cheap at 0.82.

One thing that jumps out is increasing analyst estimates from my previous First Cut nine months ago. Both Value Line and M* expect growth to increase in ’25 and beyond. This could bode well for my MOS although with the current increases I have also increased my P/E range. I’ll need to keep judgments fixed to bolster MOS.

CTSH is a BUY under $64/share. With a forecast high price of $107, my TAR criterion won’t be met until $53.50.

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ETSY Stock Study (4-30-24)

Posted by on May 8, 2024 at 06:33 | Last modified: May 1, 2024 14:28

I recently did a stock study on Etsy Inc. (ETSY, $68.88). Previous studies are here and here.

M* writes:

     > Etsy operates a top-10 e-commerce marketplace operator in the
     > U.S. and the U.K., with sizable operations in Germany, France,
     > Australia, and Canada. The firm dominates an interesting niche,
     > connecting buyers and sellers through its online market to
     > exchange vintage and craft goods. With $13.2 billion in 2023
     > consolidated gross merchandise volume, Etsy has cemented itself
     > as one of the largest players in a quickly growing space,
     > generating revenue from listing fees, commissions on sold items,
     > advertising services, payment processing, and shipping labels.
     > As of the end of 2023, the firm connected more than 96 million
     > buyers and 9 million sellers on its marketplace properties:
     > Etsy, Reverb (musical equipment), and Depop (clothing resale).

This medium-size company has grown sales at an annualized rate of 38.0% over the past decade.

EPS is complex. I am excluding negative/fractional EPS in 2013-2016 [otherwise resulting in an inflated growth rate] to start with $0.68/share in ’17. The company takes a goodwill impairment charge of $1.0 billion in ’22 due to Depop and Elo7 acquisitions that slashes EPS to -$5.48 thereby precluding future growth rate projections. If this is overwritten with CFRA’s “normalized” EPS of $4.61 value, then the result is a 38.5% EPS growth rate since 2017.

For ’17-’22, [sales and EPS] lines are mostly up and narrowing despite an EPS dip in ’18. ’23 will be discussed below.

PTPM is above peer and industry averages while increasing from 7.3% in ’17 to 10.7% in ’23 with a last-5-year mean (excluding ’22) of 15.5%. ROE is above peer and industry averages while decreasing from 23.8% in ’17 to -43.1% in ’23 with a last-5-year mean (excluding ’22) of 27.9%.

Debt-to-Capital has risen above peer and industry averages by climbing from 15.0% in ’17 to 129.5% in ’23. Despite being remarkably high, Value Line gives a “B” rating for Financial Strength and writes in a previous report:

     > Although debt represented over 100% of capital at the end of 2022,
     > cash and short-term investments totaled $1.2 billion and the
     > company has only modest debt due over the next five years.
     > Additional funds can be sourced from the company’s $200 million
     > undrawn revolver and $29.1 million in long-term investments that
     > can be liquidated on short notice.

M* rates the company “Wide” for Economic Moat, gives a “Standard” rating for Capital Allocation and, in a previous report, is also not concerned about debt:

     > With our forecast for just 0.8 times average net leverage over the next
     > five years (net debt/adjusted EBITDA), a paucity of near-term debt
     > maturities, and a highly cash generative mode… balance sheet risk
     > appears minimal for the marketplace operator. We believe that Etsy
     > should encounter no difficulties in funding its investments in headcount
     > and platform development with internally generated funds, while
     > retaining substantial flexibility to invest in brand marketing and
     > strategic acquisitions. With no principal maturities until 2026, we
     > view Etsy’s balance sheet health as strong, despite the firm carrying
     > $2.3 billion in gross debt as of the end of the first quarter of 2023.

Quick Ratio is 2.0 and Interest Coverage is 21.8.

With regard to sales:

I am forecasting near the bottom of the range at 3.0% per year.

With regard to EPS:

My 5.0% forecast is below the long-term-estimate range (mean of five: 12.9%).

Initial value—pivotal for any stock study—depends on EPS that is very hard to decipher for this company. From the M* website, I get diluted earnings for ’20-’23, respectively: $2.69, $3.40, -$5.48, and $2.24/share. M* website also gives normalized EPS of $3.31, $4.03, $4.21, and $4.28/share for ’20-’23: three years of consecutive growth with the ’22 goodwill impairment charge excluded. CFRA reports normalized EPS of $3.19, $4.32, $4.61, and $4.99/share: three years of consecutive growth. Value Line reports $2.69, $3.40, $2.46, and $2.24/share. Despite a footnote indicating the $1B goodwill impairment charge excluded for ’22 ($2.46/share), it still reports YOY EPS declines for ’22 and ’23. BI website gives something altogether different with $2.69, $3.40, $4.61, and $2.24: YOY decline only for ’23. Since BI gets data from M*, why is this different from the other two sets of data from the M* website?

Excluding a negative as a nonrecurring expense to smooth out data and enable future projection makes logical sense to me.

In this case, excluding the negative results in consistently growing profits (i.e. M* and CFRA normalized EPS), EPS contraction (Value Line), or delayed EPS contraction (BI website). The waters are muddy.

The BI website pairs a low ’23 EPS with a 17.8% growth rate. This seems too low given my 5.0% growth rate.

In contrast, I feel the ’23 normalized EPS numbers are too high.

As a compromise, I will use M* 2020 normalized EPS of $3.31/share as ’23 initial value. $3.31 * (1.05 ^ 5) = $4.22/share high EPS. Since the BI website uses $2.24 initial value, I need to enter a 13.5% growth rate to get $4.22.

My Forecast High P/E is 30.0. Since 2017, high P/E ranges from 32.1 in ’17 to 96.5 in ’19 with a last-5-year mean of 75.2. The last-5-year-mean average P/E is 52.5. I am forecasting below the range.

My Forecast Low P/E is 14.0. Since 2017, low P/E ranges from 11.1 in ’20 to 52.3 in ’19 with a last-5-year mean of 29.8. I am forecasting toward the bottom of the range [’20 and ’17 (13.8) are lower].

My Low Stock Price Forecast (LSPF) of $46.30 is default based on $3.31/share initial value. This is 32.8% less than the previous close and ~20% less than the 52-week low.

These inputs land ETSY in the HOLD zone with a U/D ratio of 2.6. Total Annualized Return (TAR) is 12.9%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-size company at 6.1%. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on the 12.9% Total Annualized Return (TAR) instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on a tiny sample of 13 studies (my study and 7 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 6.8%, 5.0%, 48.7, and 29.3, respectively. I am equal to or lower for all. Value Line projects an average annual P/E of 35.0, which is less than MS (39.0) and much higher than mine (22.0).

MS high / low EPS are $2.86/ $2.24 versus my $4.22/ $3.31 (per share). My higher EPS range is due to a higher initial value. I think the analyst earnings data confuses most people just like it has me. Value Line’s high EPS is in the middle at $3.50/share.

MS Low Stock Price Forecast (LSPF) of $57.10 implies a Forecast Low P/E of 25.5: less than the above-stated 29.3. MS LSPF is 13.0% less than the default $2.24/share * 29.3 = $65.63 resulting in more conservative zoning. MS LSPF is 23.3% greater than mine, however.

TAR (over 15.0% preferred) is less than MS 15.0%. I don’t want to conclude too much because of the small MS sample, but I believe MOS is at least moderate in the current study if not healthy.

With regard to valuation, PEG is 4.8 and 5.9 per Zacks and my projected P/E, respectively: both extremely high and probably not immune to the EPS confusion. Relative Value [(current P/E) / 5-year-mean average P/E] is cheap at 0.6.

ETSY makes for an extremely challenging stock study. It’s close to or in the BUY zone if recent, normalized EPS is used. PAR is less than T-bills if $2.24/share is used with a conservative growth rate. The stock is probably best left at the foot of the barbed wire fence or at least limited to a speculative position size because the case for “up, straight, and parallel” may be weak depending on what EPS data is used.

I have ETSY a BUY under $66/share. A further [10% perhaps] discount may be warranted because of all the uncertainty.

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V Stock Study (4-29-24)

Posted by on May 6, 2024 at 07:22 | Last modified: April 29, 2024 10:16

I recently did a stock study on Visa Inc. (V) with a closing price of $227.96. The previous study is here.

CFRA writes:

     > Visa Inc. (V) operates the world’s largest retail electronic
     > payments network, connecting consumers, businesses, banks,
     > and governments in more than 200 countries and territories,
     > enabling them to use digital currency instead of cash and
     > checks. Visa’s core products include credit, debit, and prepaid
     > cards, and related business services. Its processing
     > infrastructure, VisaNet, processes approximately 750 million
     > transactions per day. Visa’s customers include nearly 15,000
     > financial institutions that issue Visa-branded products and
     > nearly 130 million merchant locations. There are over 4.4
     > billion Visa cards currently in circulation.

This large-size company has grown sales and EPS at annualized rates of 10.7% and 16.4%, respectively, over the last 10 years. Lines are mostly up, straight, and parallel except for EPS dip in ’16 and sales + EPS dip in ’20.

Over the past decade, PTPM outpaces peer and industry averages while ranging from 53.1% in ’16 (possible outlier) to 66.6% in ’21 with a last-5-year mean of 64.2%. ROE is just ahead of peer and industry averages while increasing from 19.4% (’14) to 43.9% (’23) with a last-5-year mean of 39.6%. Debt-to-Capital is less than peer and industry averages despite increasing from zero (’14-’15) to 34.6% (’23) with a last-5-year mean of 36.3%.

Interest Coverage is 36.2 and Quick Ratio is 1.0. M* categorizes the company “Wide” for economic moat and gives a “Standard” rating for Capital Allocation. Value Line gives an A++ rating for Financial Strength.

With regard to sales:

I am forecasting below both long-term estimates at 9.0% per year.

With regard to EPS:

My 11.0% forecast is just below the long-term-estimate range (mean of five: 13.7%). I am using ’23 EPS of $8.28/share as the initial value rather than 2023 Q2 EPS of $8.95 (annualized). FY ends Sep 30.

My Forecast High P/E is 29.0. Over the past decade, high P/E ranges from 27.3 in ’14 to 44.9 in ’21 with a last-5-year mean of 37.7 and a last-5-year-mean average P/E of 31.7. I am forecasting toward the low end of the range [only ’13 is less].

My Forecast Low P/E is 24.0. Over the past decade, low P/E ranges from 18.9 in ’15 to 31.8 in ’21 with a last-5-year mean of 25.6. The last-10-year median is 24.4. I am forecasting in the lower part of the range.

My Low Stock Price Forecast (LSPF) of $198.70 is default based on $8.28/share initial value. This is 27.6% less than the previous closing price and 8.1% less than the 52-week low.

Over the past decade, Payout Ratio ranges from 18.6% in ’14-’15 to 24.5% in ’20 with a last-5-year mean of 21.8%. I am forecasting below the range at 18.0%.

These inputs land V in the HOLD zone with a U/D ratio of 1.7. Total Annualized Return (TAR) is 8.7%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-size company at 6.8%. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 577 studies over the past 90 days (my study and 251 other outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 10.0%, 12.4%, 33.0, 24.8, and 21.7%, respectively. I am lower across the board. Value Line projects an average annual P/E of 28.0, which is lower than MS (28.9) and higher than mine (26.5).

MS high / low EPS are $16.45/ $8.49 versus my $13.95 / $8.28 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is in the middle at $14.85.

MS LSPF of $205.30 implies a Forecast Low P/E of 24.2: less than the above-stated 24.8. MS LSPF is 2.5% less than the default $8.49/share * 24.8 = $210.55 resulting in more conservative zoning. MS LSPF is also 3.2% less than mine.

TAR (over 15.0% preferred) is much lower than MS 13.6%. MOS is robust in the current study.

With regard to valuation, PEG is 1.9 and 2.5 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is fairly valued at 1.0.

From reading analyst reports and seeing presentations from the BI community, Visa may be a COST-like juggernaut. Back-up-the-truck opportunities to purchase stock may be slim to none. Should the consistency remain, it wouldn’t hurt to buy, hold, and watch the investment grow. Personally, I will wait until U/D gets closer to 3.0 with the realization it may never get there.

V is a BUY under $250/share. With a forecast high price ~$327, my TAR criterion will be met when the stock drops to ~$164.

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PYPL Stock Study (4-29-24)

Posted by on May 2, 2024 at 07:10 | Last modified: April 29, 2024 09:32

I recently did a stock study on PayPal Holdings Inc. (PYPL) with a closing price of $65.96. The previous study is here.

M* writes:

     > PayPal Holdings, Inc. operates a technology platform that
     > enables digital and mobile payments by consumers and merchants
     > throughout the world. It offers a wide range of payment
     > solutions under the brands: PayPal, PayPal Credit, Venmo, Xoom,
     > Paydiant, and Braintree. Has more than 425 million active
     > users. In 2023, approximately 25.0 billion transactions were
     > completed on its platform. From 2002 to July 2015, PayPal was
     > a wholly-owned subsidiary of eBay.

Over the past nine years, this large-size company has grown sales and EPS at annualized rates of 16.4% and 17.4% [24.6% including $0.31/share in ’14], respectively. Lines are mostly up, straight, and parallel except for EPS dips in ’21 and ’22.

Over the past decade, PTPM trails peer and industry averages while ranging mostly (excluding 23.6% in ’20 and 12.2% in ’22) from 15.0% in ’16 to 18.2% in ’23 with a last-5-year mean of 17.4%. ROE trails peer and industry averages despite increasing from 9.3% in ’15 to 20.9% in ’23 with a last-5-year mean of 17.7%. Debt-to-Capital is less than peer and industry averages despite increasing from 15.2% in ’14 to 31.5% in ’23 with a last-5-year mean of 29.7%.

Quick Ratio is 1.2 and Interest Coverage is 16.6. M* gives a “Standard” rating for Capital Allocation while Value Line gives a B++ (down from A about eight months ago) grade for Financial Strength.

With regard to sales:

I am forecasting below both long-term estimates at 4.0% per year.

With regard to EPS:

My 9.0% annualized forecast is below the long-term-estimate range (mean of five: 13.0%). I will use ’23 EPS of $3.84/share as the initial value. Compared to ’21, $3.84/share is normalized (4.4% growth rate) despite being 83.7% greater YOY.

My Forecast High P/E is 23.0. Since 2015, high P/E increases from 42.5 in ’15 to 93.8 in ’22 before falling to 23.1 in ’23 for a last-5-year mean of 66.5 and a last-5-year-mean average P/E of 49.1. I am forecasting below the entire range.

My Forecast Low P/E is 13.0. Since 2015, low P/E ranges from 13.1 in ’23 to 50.9 in ’21 with a last-5-year mean of 31.7. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $49.90 is default based on initial value of $3.84/share. This is 24.3% less than the previous close and near the 52-week low of $50.30.

These inputs land PYPL in the BUY zone with a U/D ratio of 4.4. Total Annualized Return (TAR) is 15.6%.

PAR (using Forecast Average—not High—P/E) is 10.0%, which is less than I seek in a large-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I start by comparing my inputs with those of Member Sentiment (MS). Based on 222 studies (my study and 90 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 7.5%, 10.0%, 25.0, and 15.0, respectively. I am lower across the board. Value Line’s projected average annual P/E of 25.0 is higher than MS (20.0) and higher than mine (18.0).

MS high / low EPS are $6.18 / $3.75 versus my $5.91 / $3.84 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is in the middle at $6.05.

MS LSPF of $49.90 implies a Forecast Low P/E of 13.3: lower than the above-stated 15.0. MS LSPF is 11.3% less than the default $3.75/share * 15.0 = $56.25 resulting in more conservative zoning. MS LSPF is equal to mine.

TAR meets my 15% criterion despite being lower than MS 21.4%. MOS is robust in the current study.

With regard to valuation, PEG is 1.0 and 1.8 per Zacks and my projected P/E, respectively: the latter slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is extremely cheap at 0.35.

The 0.35 reflects severe P/E compression between ’21-’22 and 2023. Compression is mainly due to stock price decrease with ’23 EPS and ’21 EPS roughly equal. Coincidently, analyst estimates are much lower today than my first study nine months ago. Going forward, I believe whether P/E remains compressed or expands consequent to rebounding growth [estimates] will strongly influence where the stock price heads next.

Either way, PYPL is a BUY under $71/share.

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APD Stock Study (4-29-24)

Posted by on April 30, 2024 at 06:46 | Last modified: April 27, 2024 14:35

I recently did a stock study on Air Products and Chemicals Inc. (APD, $236.08). The previous study is here.

M* writes:

     > Since its founding in 1940, Air Products has become one of the
     > leading industrial gas suppliers globally, with operations in
     > 50 countries and 19,000 employees. The company is the largest
     > supplier of hydrogen and helium in the world. It has a unique
     > portfolio serving customers in a number of industries, including
     > chemicals, energy, healthcare, metals, and electronics.

This large-size company has grown sales and earnings at annualized rates of 2.5% and 8.9% over the last 10 years, respectively. Lines are somewhat up and parallel. Sales has a long flat time (from ’14-’21) while EPS dips in ’17 (TCJA?).

Over the last decade, PTPM leads peer and industry averages while trending higher from 13.0% (’14) to 22.9% (’23) with a last-5-year mean of 24.4%. ROE slightly lags peer and industry averages despite increasing from 12.7% (’14) to 16.2% (’23) with a last-5-year mean of 15.9%. Debt-to-Capital is less than peer and industry averages while ranging from 23.1% in ’19 to 46.8% in ’16 with a last-5-year mean of 36.8%.

Quick Ratio is 1.5 and Interest Coverage is 16.4. Value Line gives an “A++” for Financial Strength. M* gives a Capital Allocation rating of “Exemplary” and has recently upgraded the company to “Wide” for Economic Moat.

With regard to sales growth:

I am forecasting toward the lower end of the range at 3.0% per year.

With regard to EPS growth:

My 6.0% per year forecast is below the range of five long-term estimates (mean 9.3%). My initial value will be ’23 EPS of $10.30/share rather than 2024 Q1 EPS of $10.45 (annualized).

My Forecast High P/E is 24.0. Over the last 10 years, high P/E generally trends higher from 27.7 (’14) to 31.9 (’23) with a last-5-year mean of 33.0 and a last-5-year-mean average P/E of 27.3. I am projecting near the bottom of the range (21.0 in ’16).

My Forecast Low P/E is 18.0. Over the last 10 years, low P/E ranges from 15.3 in ’16 to 26.9 in ’21 with a last-5-year mean of 21.7. I am forecasting near the bottom of the range (only ’16 is less).

My Low Stock Price Forecast (LSPF) is the default value of $185.40 based on $10.30 initial value. This is 21.5% below the previous closing price and 12.6% less than the 52-week low.

Over the last decade, Payout Ratio ranges from 48.8% (’16) to 71.9% (’17) with a last-5-year mean of 62%. I am forecasting below the range at 48.0%.

These inputs land APD in the HOLD zone with a U/D ratio of 1.9. Total Annualized Return (TAR) is 9.0%.

PAR (using Forecast Average—not High—P/E) of 6.4% is less than I seek for a large company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I start by comparing my inputs with those of Member Sentiment (MS). Based on 115 studies (my study and 47 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.4%, 8.9%, 28.0, 21.1, and 62.2%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 23.5 is lower than MS (24.6) and higher than mine (21.0).

MS high / low EPS are $16.07 / $10.40 versus my $13.78 / $10.30 (per share). My high EPS range is lower due to a lower growth rate. Value Line’s high EPS is greater than both at $17.00.

MS LSPF of $208.30 implies a Forecast Low P/E of 20.0: lower than the above-stated 21.1. MS LSPF is 5.1% less than the default $6.28/share * 10.3 = $219.44 resulting in more conservative zoning. MS LSPF is 12.4% greater than mine, however.

TAR (over 15.0% preferred) is much lower than MS 16.1%. MOS is robust in the current study.

With regard to valuation, PEG is 2.6 and 3.6 per Zacks and my projected P/E, respectively: both significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is a bit cheap at 0.83.

APD is a BUY under $221. With a forecast high price ~$330, my TAR criterion won’t be met until ~$165/share. With other compelling things about the company and stock, I probably would not wait that long.

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