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GNRC Stock Study (2-6-23)

Posted by on October 27, 2022 at 06:40 | Last modified: March 2, 2023 14:33

I recently* did a stock study on Generac Holdings Inc. (GNRC) with a closing price of $122.44.

M* writes:

     > Generac Power Systems designs and manufactures power generation
     > equipment serving residential, commercial, and industrial markets.
     > It offers standby generators, portable generators, lighting,
     > outdoor power equipment, and a suite of clean energy products.

This medium-sized company has grown sales and earnings at annualized rates of 11.2% and 18.6%, respectively, over the last 10 years. Lines are mostly up and parallel except for sales/EPS declines in ’14 and ’15 along with EPS decline in recent quarters. PTPM has been cyclical—ranging from 9.3% (’15) to 18.8% (’13) with a last-5-year average of 15.7%. This is higher than peer (stated as SPXC, IR, and GTES) and industry averages.

Excluding an upside outlier of 66.9% in ’13, ROE has ranged from 15.1% (’15) to 38.3% (’14) with a last-5-year average of 30%. This leads peer and industry averages. Debt-to-Capital has trended lower since 2012 from 65.8% to 37.4% with a last-5-year average of 49.1%. This is mostly higher than peer and industry averages. Interest Coverage is 14 and Current Ratio is 2.1 (sans inventory, the Quick Ratio is 0.70).

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

I assume long-term annualized EPS growth of 5% based on the following:

My projected growth rate is somewhat of a compromise. Seeing that ’22 is not complete, my guess is that analyst long-term estimates are based on the last annualized number. As this effectively raises the High Stock Price Forecast, I will do so with a lower growth forecast: 5% rather than 6%.

My Forecast High P/E is 22. Over the last 10 years, high P/E has ranged from 17.1 (’18) to 63.2 (upside outlier in ’21) with a last-5-year average (excluding the outlier) of 26.7.

My Forecast Low P/E is 12. Over the last 10 years, low P/E has ranged from 12 (’19) to 26.8 (upside outlier in ’21) with a last-5-year average (excluding the outlier) of 12.8.

My Low Stock Price Forecast of $79.80 is the default value. This is about 35% below the last closing price and 7.5% lower than the 52-week low price.

All this results in an U/D ratio of 2.6, which makes GNRC a HOLD. The Total Annualized Return (TAR) computes to 13.7%.

PAR is 8%, which is a bit lower than I’d like to see for a medium-sized company.

I use member sentiment (MS) to assess margin of safety (MOS) in deciding how likely it is that TAR rather than PAR can be realized. Out of 378 studies over the past 90 days (excluding my own along and 50 others with invalid low prices), projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E average 11%, 12%, 24.8, and 14.3, respectively. I am lower on all inputs. Value Line’s estimate, perhaps the most optimistic of all, seems like an upside outlier. They project a future average annual P/E of 27.5, which far outpaces my 17 and is also higher than MS 19.5.

MOS appears to be alive and well in this study.

MS Low Stock Price Forecast is $84.33: 5.7% above my own. This is not unreasonable and would put me just on the cusp of the BUY zone. I am sticking with my Forecast Low P/E, however, which results in a HOLD on these shares at $118 or higher.

*—Publishing in arrears as I’ve been doing one daily stock study while posting only two blogs per week.

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PKG Stock Study (2-3-23)

Posted by on October 21, 2022 at 07:04 | Last modified: March 1, 2023 14:48

I recently* did a stock study on Packaging Corp. of America (PKG) with a closing price of $145.09.

M* writes, “Packaging Corp of America is the third-largest containerboard and corrugated packaging manufacturer in the United States.”

This medium-sized company has grown sales and earnings at annualized rates of 6.8% and 9.8%, respectively, over the last 10 years. Lines are mostly up and parallel except for EPS declines in ’14, ’19, and ’20. PTPM has trended higher over the last 10 years from 11.3% to 16.1% with a last-5-year average of 13.4%. This is significantly higher than peer (stated as CAS.TO, SEE and REYN) and industry averages.

ROE has trended mostly flat since 2014 with a last-5-year average of 23%. Debt-to-Capital has trended lower since 2013 with a last-5-year average of 46.1% (data not available for ’22), which is significantly lower than peer and industry averages. Quick Ratio and Interest Coverage seem acceptable at 1.92 and 11, respectively.

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

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

My Forecast High P/E is 14. Over the last 10 years, high P/E has ranged from 14.4 (’13) to 28.7 (upside outlier in ’20) with a last-5-year average (excluding the outlier) of 16.4.

Forecast Low P/E is 8. Over the last decade, low P/E has ranged from 8.5 (’13) to 14.7 (’20) with a last-5-year average of 12.

My Low Stock Price Forecast of $88.10 is default. This is 39% below the last closing price. The low of the last two years is $110.60, but given such dim growth prospects, the Forecast Low P/E seems reasonable.

All this results in an U/D ratio of 0.3, which makes PKG a SELL. The Total Annualized Return computes to 4.7%.

Over the last 10 years, Payout Ratio has ranged from 33.8% (’13) to 69.6% (upside outlier in ’20) with a last-5-year average (excluding the outlier) of 42.5%. I used 34% as a conservative estimate.

Although the current yield (3.4%) is a bright point for this stock, a PAR (using Forecast Average, not High, P/E) of 0.5% is an exclamation point for what is otherwise a depressing stock study. One of BI’s core principles is to buy stock in high-quality growth companies. While PKG has demonstrated consistent historical growth, the outlook for future growth is muddy at best. With the stock up about 17% in just over three months, it’s now far past the BUY zone.

I like to assess margin of safety (MOS) by comparing my inputs with Member Sentiment (MS). Out of 68 studies over the past 90 days, projected sales, projected EPS, Forecast High P/E, and Forecast Low P/E average 5.4%, 6.3%, 17.8, and 11.8. I am dramatically lower on all inputs. Value Line also projects an average annual P/E of 19, which is higher than MS 14.8 and much higher than my 11. I do see a large MOS in this study, but with the wide range of long-term EPS estimates on either side of zero, I also see good reason to be conservative.

MS has a Low Stock Price Forecast of $107.55, which seems reasonable being 20%+ below the last closing price. I just cannot be convinced to raise mine at this time, however [which would increase the U/D ratio]. Seven long-term EPS growth estimates average 1.7%. My forecast is not much lower, and I would not be surprised to see P/E fall to the bottom of its 10-year range given such anemic growth.

*—Publishing in arrears as I’ve been doing one daily stock study while posting only two blogs per week.

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NFLX Stock Study (2-2-23)

Posted by on October 13, 2022 at 07:04 | Last modified: July 25, 2023 10:51

I recently* did a stock study on Netflix Inc. (NFLX) with a closing price of $361.99.

CFRA writes, “Netflix is the world’s largest Internet subscription service for accessing TV shows and movies.”

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

ROE has trended up from 9.2% to 21.6% over the last 10 years with a last-5-year average of 26%. Debt-to-Capital increased from 27.3% in ’13 to 66.4% in ’18 before declining to 40.9% in ’22. The last-5-year average is 56.5%, which is higher than desired. Interest Coverage is somewhat reassuring at 8, but Quick Ratio offers little comfort at 0.96. As of Q2 2022, the M* analyst describes the company “in a decent position” with $14.2B long-term debt and $7.8B cash. Management has stated the firm should not need to tap the credit market in the future to fund its ongoing content spending, but this can always change.

I assume long-term annualized sales growth of 8% based on the following:

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

I’m forecasting near the bottom of the long-term-estimate range (8.9% – 26%). Because a rebound is forecast following a sharp [quarterly] EPS drop in ’22, I decided to override projection from the last annual (vs. quarterly) data point.

My Forecast High P/E is 35. High P/E has come down from 210 in ’13 to 61.3 in ’22 with a last-5-year average trending lower at 93.9. At some point, I expect P/E to fall into a “normal” range.

My Forecast Low P/E is 25. Low P/E has come down from 49.1 in ’13 to 16.4 in ’22. The last-5-year average is trending lower at 48.1. Again, at some point I expect this to fall into a “normal” range and we may already be starting to see this.

My Low Stock Price Forecast of $247.7 is default. This is 31.2% below the last closing price. The 52-week low price is $162.7.

All this results in an U/D ratio of 1.3, which makes NFLX a HOLD. The Total Annualized Return (TAR) is projected at 7.2%.

A PAR (using Forecast Average, not High, P/E) of 3.9% dictates waiting for a lower price. I certainly see room for downside stock volatility as my Low Stock Price Forecast is > 50% above the 52-week low.

If I can glean any current optimism for buying prospects then it would be in the margin of safety, which I can assess through comparison with Member Sentiment (MS). Out of 333 studies over the past 90 days, projected sales, projected EPS, High P/E, and Low P/E average 12.9%, 11.8%, 65.3, and 54.3, respectively. I am lower on all inputs—especially on P/E. Value Line projects a future average annual P/E of 35.5, which is also higher than my 30.

MS has a Low Stock Price Forecast ~$239, which is lower than mine. A closer look reveals some projected lows over $300 (some much higher than the current price) and some under $100. When I exclude these 67 studies, the MS Low Stock Price Forecast drops to $198.69. While that would pull NFLX even farther from the Buy zone in my study, at -31.2% I think my Low Stock Price Forecast is sufficient.

Projected High Price is where my study really diverges from MS: $511 vs. their $1,135.

*—Publishing in arrears as I’ve been doing one daily stock study while posting only two blogs per week.

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AMZN Stock Study (2-1-23)

Posted by on October 7, 2022 at 06:52 | Last modified: February 27, 2023 17:01

I recently* did a stock study on Amazon.com Inc. (AMZN) with a closing price of $103.13.

Value Line writes:

     > Amazon.com is the largest online retailers [sic]. The company opened
     > its virtual doors in 1995. Sales breakdown (2021): North America;
     > 59% of sales. International sales, 27% of total. Amazon Web Services
     > (AWS), 14%. Third-party sellers (Marketplace) account for about 20%
     > of sales. Seasonality: Q4 accounted for 29% of ’21 revenue.
     > Acquired Audible.com, ’08, Zappos, ’09, Whole Foods Market, ’17.

This mega-sized (> $50B annual revenue) company has grown sales at an annualized rate of 26.1% over the last 10 years and EPS 71.1% per year since 2016 (excluding previous years with tiny EPS that skew the historical average even higher). Lines are mostly up and parallel except for EPS decline in ’22. PTPM has trended higher over the last 10 years from ~1% to ~8% with a last-5-year average of 5.3%. This slightly trails peer (stated as VIPS, JDD, and PDD) and industry averages.

ROE has trended up from ~0% to ~27% over the last 10 years with a last-5-year average of 22.1%. Debt-to-Capital has increased from 31.9% to 45.7% with a last-5-year average of 49.8%. This is lower than peer and industry averages. Although Interest Coverage is only 5.6 and the Quick Ratio only 0.68, the M* analyst writes:

     > The balance sheet is sound with a net cash position and only modest
     > gross debt. We expect the balance sheet to remain sound as the
     > company has typically maintained a conservative balance sheet and
     > generates more than enough FCF from [Amazon Web Services] and
     > advertising to fund growth throughout the business.

I assume long-term annualized sales growth of 8% based on the following:

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

I’m forecasting near the bottom of the long-term-estimate range (8.9% – 26%). Because a rebound is forecast following a sharp [quarterly] EPS drop in ’22, I decided to override projection from the last annual (vs. quarterly) data point.

My Forecast High P/E is 35. Since 2016, high P/E has eased from 173 to 58.2 (2021). The last 5-year average is 106.1. At some point, I expect P/E to fall into a “normal” range, but predicting when this happens is like taking a shot in the dark.

My Forecast Low P/E is 25. Since 2016, low P/E has eased from 97 to ~44 (2021) with a last 5-year average of 65.3. I expect this to fall into a “normal” range eventually (I’m astounded that this hasn’t happened already to the mega-sized company).

My Low Stock Price Forecast is $81. The default low price is $27.30 based on the depressed $1.09 EPS. This does not seem reasonable. Instead, I will use the 2020 low price of $81.30, which is 21% below the last closing price.

All this results in an U/D ratio of 3.2. This makes AMZN a BUY with a Total Annualized Return (TAR) of 11.1%.

AMZN’s 17% ownership stake in RIVN is what makes this analysis so complex. AMZN lost $10.4B over the first nine months of 2022 due to the drop in RIVN stock price. This is why analysts forecast -100% EPS growth for 2022 and why some 2023 [provided that RIVN shares do not continue the precipitous decline] growth projections are over 1000%. In my view, any math amounting to a 20%+ long-term (e.g. 3-5) EPS growth rate after years 1-2 are negative is suspect.

While TAR is decent, PAR (using forecast average, not high, P/E) is only 7.7%. Is it reasonable to expect the former, which is consistent with the highest long-term analyst estimates?

To answer this, I assess margin of safety (MOS) by comparing my inputs with Member Sentiment (MS). Out of 1142 studies over the past 90 days, projected sales, projected EPS, high P/E, and low P/E average 13.9%, 17%, 78.6, and 67, respectively. I am dramatically lower on all inputs.

To calculate average MS Low Stock Price Forecast, I excluded 199 studies using $100 or more. At least half of these were four digits, and I deem all them to be unreasonable and/or invalid. The revised averages are 13.1%, 16.4%, 73.6, and 61.5, respectively: still well higher than mine. The average Low Stock Price Forecast is $70.50, which is lower than mine and would have resulted in a HOLD for this study rather than BUY. I’m not sure how meaningful this is as I would similarly have had a lower Low Stock Price Forecast had I chosen to use the 2020 low—a decision one could argue to be unreasonable.

While my aim is to use MS to evaluate MOS, I wonder if such comparison here might be apples-to-oranges because I don’t know how many changed projection from the last quarterly (default) to annual data point. Nevertheless, both my growth rate and P/E projections are lower than MS. Even if the conservativism of one set effectively offsets the [more aggressive decision to] override from quarterly to annual data point, I still have the other conservative set providing MOS.

And Value Line has a projected average annual P/E of 40 compared to my 30, which further bolters the conservative case.

Despite the lackluster PAR, given the apparent MOS I like a BUY on these shares up to $104.

*—Publishing in arrears as I’ve been doing one daily stock study while only posting two blogs per week.

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FOXF Stock Study (1-31-23)

Posted by on September 29, 2022 at 06:45 | Last modified: February 23, 2023 16:40

I recently* did a stock study on Fox Factory Holding Corp. (FOXF) with a closing price of $113.39.

Value Line writes:

     > Fox Factory Holding Corp. designs, engineers, manufactures, and
     > markets performance ride dynamics products for customers
     > worldwide. Fox Factory Holding is the holding company of Fox
     > Factory, Inc. The company’s premium brand ride dynamics products
     > are used primarily on bicycles, side-by-side vehicles, onroad
     > vehicles with off-road capabilities, off-road vehicles and
     > trucks, all-terrain vehicles, snowmobiles, specialty vehicles
     > and applications, and motorcycles.

This medium-sized company has grown sales and EPS at annualized rates of 19.8% and 25.5% over the last 10 years. Lines are mostly up and parallel with slight EPS pullbacks in ’15 and ’20. PTPM over the last 10 years has increased from 9.5% to 14.5% with a last-5-year average of 13.8%. This beats peer (stated as THRM, ALSN, and GTX) and industry averages.

ROE has trended down from 28.5% in ’13 to 19.2% in ’21 with the last five years averaging 20.3%: slightly better than peer and industry averages. Debt-to-Capital has ranged from 8% (’13) to 35.5% (’20) over the last nine years with a last-5-year average of 25.2%: lower than peer and industry averages. Interest Coverage is 28, and the company has no long-term debt.

I assume long-term annualized sales growth of 8% based on the following:

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

I’m forecasting beneath the range (12.6%) of four long-term estimates.

My Forecast High P/E is 27. High P/E has ranged from 26.1 (’14) to 51.1 (’20) and trended higher since 2013. The last-5-year average is 42.9.

My Forecast Low P/E is 15. Low P/E has ranged from 14.7 (’16) to 26.3 (’21) since 2013. The last-5-year average is 20.6.

My Low Stock Price Forecast is $67.20, which is the default value. This is 40% less than the previous closing price and just below the 52-week low of 69.3. The stock has had a big run-up in price over the last few months.

All this results in an U/D ratio of 1.6, which makes FOXF a Hold. Total Annualized Return (TAR) is 10.4%.

While TAR is decent, PAR (using Forecast Average, not High, P/E) is only 5%. I want more from a medium-sized company.

For more context, I like to assess margin of safety (MOS) by comparing with Member Sentiment (MS). Out of 212 studies over the past 90 days, projected sales, projected EPS, Forecast High P/E, and Forecast Low P/E average 12.9%, 13.2%, 31.3, and 18.9, respectively. I’m lower on all inputs and also lower than Value Line’s projected average annual P/E of 25 (vs. 26.1 for MS and 21 for me). The average MS Low Stock Price Forecast is also above mine at $68.87.

The MOS is alive and well in this study: enough to preclude a buy over $97/share.

*—Publishing in arrears as I’ve been doing one stock study per day while usually posting two blogs per week.

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BOOT Stock Study (1-26-23)

Posted by on September 23, 2022 at 06:50 | Last modified: February 23, 2023 11:27

I recently* did a stock study on Boot Barn Holdings Inc. (BOOT) with a closing price of $74.37.

From M*:

     > Boot Barn Holdings Inc operates specialty retail stores.
     > The company sells western and work-related footwear,
     > apparel, and accessories in the United States. It is a
     > single operating segment, which includes net sales
     > generated from its retail stores and e-commerce websites.

This medium-sized company has grown sales at an annualized rate of 18.5% over the last 10 years and EPS 41.8% per year since ’14. Lines are mostly up, straight, and parallel. PTPM over the last 10 years has risen from 0.6% to 17% (upside outlier) with a last 5-year average (excluding the outlier) of 6.6%. This was below peer (stated as BURL and VSCO) and industry averages until ’20.

ROE has increased from 10.1% in ’14 to 34% in ’21 with the latter appearing to be an upside outlier. The last 5-year average is 18.9%, which seems slightly below (above) industry (peer) averages. Debt-to-Capital has averaged 45.7% over the last five years and was higher than peer and industry averages until 2019. The company has no long-term debt [operating leases], though, and Interest Coverage is over 60.

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

I assume long-term annualized EPS growth of 5% based on the following:

My Forecast High P/E is 20. High P/E has ranged from 19.3 (’17) to 93.1 (upside outlier in ’15) since 2014. The last 5-year average is 25.6.

My Forecast Low P/E is 6. Low P/E has ranged from 4.9 (’19) to 31.3 (upside outlier in ’14) since 2014. The last 5-year average is 7.2.

My Low Stock Price Forecast is $36.50. This is the default value and 51% below the previous closing price. While this is more than the 20% rule of thumb, given the earnings contraction projected over the next couple years, I don’t see good reason to override (which would effectively be using a higher Forecast Low P/E).

All this results in an U/D ratio of 2.1, which makes BOOT a Hold. Total Annualized Return is 15.9%.

While the total return projection is impressive, PAR (using forecast average, not High, P/E) is a lukewarm 6.3%. I want more from a medium-sized company.

For added context, I like to assess margin of safety (MOS) by looking to Member Sentiment. Out of 120 studies over the past 90 days, projected sales, projected EPS, High P/E, and Low P/E average 10.7%, 9.8%, 21.9, and 8.5, respectively (two studies excluded with Projected High P/E’s of 100 and 2128, which skewed the average Projected High P/E to 39.8). I’m lower on all inputs. Same goes for the average projected low price of $41.90, which is $5.40 higher than mine.

Finally, Value Line has projected average annual P/E at 17 compared to my 13.

It will suffice to say that the MOS is alive and well in this analysis. I’m a buyer on a stock price below $66.

*—Publishing in arrears as I’ve been doing one stock study per day while usually posting two blogs per week.

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Introduction to BetterInvesting

Posted by on September 15, 2022 at 07:10 | Last modified: January 13, 2023 14:42

I mentioned BetterInvesting in the last paragraph here. This is something I plan to use to help manage individual stock positions as part of a longer-term portfolio.

I subscribed to BetterInvesting late last year after finding the organization in fall 2021. From their website:

> Today NAIC [National Association of Investment Clubs] is known as BetterInvesting, a 501(c) (3)
> nonprofit association that remains dedicated to helping individuals and investment clubs learn and
> practice our fundamental approach to stock investing. Passionate volunteers, who follow our
> principles and practice the SSG [Stock Selection Guide], teach our educational programs. The SSG
> is available online 24/7, making it even easier to study and invest in stocks.

I don’t think of it like a service to be sold as much as I do a tool for analyzing stocks. Their approach covers a wide breadth and if someone is going to do fundamental analysis to any degree, then something to organize all the inputs and a process guiding what to do with them can be extremely valuable. One could do without such a tool and if this is something you try, then I’d be interested to hear what you do to get all the information and just how long it takes.

Personally, learning the BetterInvesting approach has given me a process to gather relevant data and make investment decisions in 1-2 hours per stock. Prior to this, I really had no idea. If I wanted to make decisions based on fundamental analysis, then I could look at suggested buy lists, perhaps investment newsletters (which I think are generally a waste of money), and some other places.

In 2001, I developed a stock screen after some book reading that was effectively the beginning to managing my own portfolio. It took me about an hour per week and I fared well with it on an absolute basis. I never revisited this once I discovered options in 2006. While I’ve thought about rekindling the original stock screening effort in recent years, I have also become a true believer in classic fundamental analysis for longer-term purposes. This is more the BetterInvesting way.

Any explanatory content I publish under the category BetterInvesting might be better studied in the video education library on their website since I’m a new member rather than an official instructor or volunteer. I might actually like to become a volunteer if it got me out to the community to teach the process to other like-minded individuals.

This would then beg the question whether their process is the best? I think we’re far away from having enough information to answer that question with any validity. I believe having a process and sticking with something repeatable to optimize efficiency is probably as good as anything else.

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