Guru Analysis
| Strategy: Patient Investor
Based on: Warren Buffett |
| Simulations Plus, Inc. (Simulations Plus) develops and produces software for use in pharmaceutical research and for education, and provides consulting and contract research services to the pharmaceutical industry. The Company offers five software products for pharmaceutical research. ADMET (Absorption, Distribution, Metabolism, Excretion and Toxicity) Predictor is a computer program that takes molecular structures as inputs and predicts over 140 different properties for them at the rate of about 200,000 compounds per hour. MedChem Designer includes a small set of ADMET Predictor property predictions, allowing the chemist to modify molecular structures. MedChem Studio is a tool for medicinal and computational chemists for both data mining and for designing new drug-like molecules. DDDPlus simulates in-vitro laboratory experiments used to measure the rate of dissolution of the drug. GastroPlus simulates the absorption, pharmacokinetics, and pharmacodynamics of drugs. |
STAGE 1: "Is this a Buffett type company?"
A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.
LOOK FOR EARNINGS PREDICTABILITY: PASS
Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 0.08, 0.13, 0.17, 0.17, 0.18, 0.18, 0.23, 0.29, 0.33, 0.42. Buffett would consider SLP's earnings predictable. In fact EPS have increased every year. SLP's long term historical EPS growth rate is 15.4%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 14.2% per year in the future, based on the analysts' consensus estimated long term growth rate. For the purposes of our analysis, we will use the more conservative of the two EPS growth numbers.
LOOK AT THE ABILITY TO PAY OFF DEBT PASS
Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt. SLP has no long term debt and therefore would pass this criterion.
LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: PASS
Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for SLP, over the last ten years, is 19.1%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 12.2%, 15.9%, 18.4%, 18.3%, 20.3%, 19.5%, 19.6%, 21.8%, 22.1%, 22.7%, and the average ROE over the last 3 years is 22.2%, thus passing this criterion.
LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: PASS
Because some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. Return On Total Capital is defined as the net earnings of the business divided by the total capital in the business, both equity and debt. The average ROTC for SLP, over the last ten years, is 19.1% and the average ROTC over the past 3 years is 22.2%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 12.2%, 15.9%, 18.4%, 18.3%, 20.3%, 19.5%, 19.6%, 21.8%, 22.1%, 22.7%, thus passing this criterion.
LOOK AT CAPITAL EXPENDITURES: PASS
Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. SLP's free cash flow per share of $0.16 is positive, indicating that the company is generating more cash than it is consuming. This is a favorable sign, and so the company passes this criterion.
LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: PASS
Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $0.83 and compares it to the gain in EPS over the same period of $0.34. SLP's management has proven it can earn shareholders a 40.8% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.
HAS THE COMPANY BEEN BUYING BACK SHARES: NEUTRAL
Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. SLP's shares outstanding have not fallen in either the current year or the last 3 or 5 years and so it fails this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.
The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate SLP quantitatively.
STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return.
CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail]
Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $0.44 and divide it by the current market price of $37.15. An investor, purchasing SLP, could expect to receive a 1.18% initial rate of return. Furthermore, he or she could expect the rate to increase 14.2% per year, based on the analysts' consensus estimated long term growth rate, as this is how fast earnings are growing.
COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: PASS
Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.00%. Compare this with SLP's initial yield of 1.18%, which will expand at an annual rate of 14.2%, based on the analysts' consensus estimated long term growth rate. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.
CALCULATE THE FUTURE EPS: [No Pass/Fail]
SLP currently has a book value of $2.05. It is safe to say that if SLP can preserve its average rate of return on equity of 19.1% and continues to retain 48.85% of its earnings, it will be able to sustain an earnings growth rate of 9.3% and it will have a book value of $5.00 in ten years. If it can still earn 19.1% on equity in ten years, then expected EPS will be $0.95.
CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now take the expected future EPS of $0.95 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (85.1) (5 year average P/E in this case), which is 39.8 and you get SLP's projected future stock price of $37.96.
CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now add in the total expected dividend pool to be paid over the next ten years, which is $5.02. This gives you a total dollar amount of $42.98. These numbers indicate that one could expect to make a 1.5% average annual return on SLP's stock at the present time. The return is unacceptable to Buffett.
CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail]
If you take the EPS growth of 14.2%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $1.66. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (85.1) (5 year average P/E in this case), which is 39.8. This equals the future stock price of $66.13. Add in the total expected dividend pool of $5.02 to get a total dollar amount of $71.16.
CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail]
Now you can figure out your expected return based on a current price of $37.15 and the future expected stock price, including the dividend pool, of $71.16. If you were to invest in SLP at this time, you could expect a 6.72% average annual return on your money. Buffett likes to see a 15% return, and would even go down to 12%.
LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: FAIL
Based on the two different methods, you could expect an annual compounding rate of return somewhere between 1.5% and 6.7%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 4.1% on SLP stock for the next ten years, based on the current fundamentals. Buffett accepts a 12% return, although 15% is preferable. This return is unacceptable to Buffett, thus failing the criterion. |
| Strategy: Value Investor
Based on: Benjamin Graham |
| NK Lukoil PAO is an energy company. The primary activities of LUKOIL and its subsidiaries are oil exploration, production, refining, marketing and distribution. Its segments include Exploration and Production; Refining, Marketing and Distribution, and Corporate and other. The Exploration and Production segment includes its exploration, development and production operations related to crude oil and gas. These activities are located within Russia, with additional activities in Azerbaijan, Kazakhstan, Uzbekistan, the Middle East, Northern and Western Africa, Norway, Romania and Mexico. The Refining, Marketing and Distribution segment includes refining, petrochemical and transport operations, marketing and trading of crude oil, natural gas and refined products, generation, transportation and sales of electricity, heat and related services. The Corporate and other segment includes operations related to finance activities, production of diamonds and certain other activities. |
SECTOR: PASS
LUKOY is neither a technology nor financial Company, and therefore this methodology is applicable.
SALES: PASS
The investor must select companies of "adequate size". This includes companies with annual sales greater than $1 billion. LUKOY's sales of $125,912.1 million, based on trailing 12 month sales, pass this test.
CURRENT RATIO: FAIL
The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. LUKOY's current ratio of 1.62 fails the test.
LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: PASS
For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for LUKOY is $8,097.0 million, while the net current assets are $8,753.1 million. LUKOY passes this test.
LONG-TERM EPS GROWTH: FAIL
Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 10 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. LUKOY's EPS growth over that period of -8.0% fails the EPS growth test.
P/E RATIO: PASS
The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. LUKOY's P/E of 8.70 (using the 3 year PE) passes this test.
PRICE/BOOK RATIO: PASS
The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. LUKOY's Price/Book ratio is 0.89, while the P/E is 8.70. LUKOY passes the Price/Book test. |
PENNYMAC FINANCIAL SERVICES INC |
| Strategy: Small-Cap Growth Investor
Based on: Motley Fool |
| PennyMac Financial Services, Inc. is a specialty financial services firm. The Company conducts business in three segments: production, servicing (together, production and servicing comprise its mortgage banking activities) and investment management. Production segment performs mortgage loan origination, acquisition and sale activities. Servicing segment performs mortgage loan servicing for its own account and for others, including for PennyMac Mortgage Investment Trust (PMT). Investment management segment represents its investment management activities, which include the activities associated with investment asset acquisitions and dispositions, such as sourcing, due diligence, negotiation and settlement; managing correspondent production activities for PMT; and managing the acquired investments for PMT. Its primary subsidiaries are: PNMAC Capital Management, LLC, PennyMac Loan Services, LLC and PNMAC Opportunity Fund Associates, LLC. |
PROFIT MARGIN: PASS
This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. PFSI's profit margin of 13.82% passes this test.
RELATIVE STRENGTH: FAIL
The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although PFSI's relative strength of 89 is below the acceptable level, yet it is very close. Keep an eye on the stock as it could move into the acceptable range.
COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: PASS
Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for PFSI (31.43% for EPS, and 58.41% for Sales) are good enough to pass.
INSIDER HOLDINGS: PASS
PFSI's insiders should own at least 10% (they own 41.14% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well.
CASH FLOW FROM OPERATIONS: PASS
A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. PFSI's free cash flow of $8.60 per share passes this test.
PROFIT MARGIN CONSISTENCY: PASS
PFSI's profit margin has been consistent or even increasing over the past three years (Current year: 6.42%, Last year: 7.24%, Two years ago: 4.85%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.
R&D AS A PERCENTAGE OF SALES: NEUTRAL
This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in PFSI's case.
CASH AND CASH EQUIVALENTS: FAIL
PFSI does not have a sufficiently large amount of cash, $155.29 million, on hand relative to its size. Although this criteria does not apply to companies of this size, we defined anything greater than $500 million in cash as having 'a lot of cash' to allow analysis of these companies. PFSI will have more of a difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criterion.
ACCOUNT RECEIVABLE TO SALES: PASS
This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for PFSI was 1.95% last year, while for this year it is 2.45%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.
"THE FOOL RATIO" (P/E TO GROWTH): PASS
The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (PFSI's is 0.23), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. PFSI passes this test.
The following criteria for PFSI are less important which means you would place less emphasis on them when making your investment decision using this strategy:
AVERAGE SHARES OUTSTANDING: PASS
PFSI has not been significantly increasing the number of shares outstanding within recent years which is a good sign. PFSI currently has 79.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.
SALES: FAIL
Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. PFSI's sales of $1,649.7 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.
DAILY DOLLAR VOLUME: PASS
PFSI passes the Daily Dollar Volume (DDV of $8.7 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."
PRICE: PASS
This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. PFSI with a price of $28.43 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.
INCOME TAX PERCENTAGE: FAIL
PFSI's income tax paid expressed as a percentage of pretax income either this year (8.69%) or last year (11.34%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%). |
NAPCO SECURITY TECHNOLOGIES INC |
| Strategy: Small-Cap Growth Investor
Based on: Motley Fool |
| NAPCO Security Technologies, Inc. is a manufacturer of security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products. These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold across the world principally to independent distributors, dealers and installers of security equipment. The Company manufactures and markets various products for alarm systems, which include automatic communicators, control panels, combination control panels/digital communicators and digital keypad systems, fire alarm control panel and area detectors. It manufactures a range of door locking devices, including microprocessor-based electronic door locks with push button, card reader and bio-metric operation, door alarms, mechanical door locks and simple dead bolt locks. It also markets peripheral and related equipment manufactured by other companies. |
PROFIT MARGIN: PASS
This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. NSSC's profit margin of 11.65% passes this test.
RELATIVE STRENGTH: PASS
The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. NSSC, with a relative strength of 98, satisfies this test.
COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: FAIL
Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for NSSC (70.00% for EPS, and 13.24% for Sales) are not good enough to pass.
INSIDER HOLDINGS: PASS
NSSC's insiders should own at least 10% (they own 37.92% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well.
CASH FLOW FROM OPERATIONS: PASS
A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. NSSC's free cash flow of $0.35 per share passes this test.
PROFIT MARGIN CONSISTENCY: PASS
NSSC's profit margin has been consistent or even increasing over the past three years (Current year: 8.34%, Last year: 6.41%, Two years ago: 6.99%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.
R&D AS A PERCENTAGE OF SALES: NEUTRAL
This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in NSSC's case.
CASH AND CASH EQUIVALENTS: FAIL
NSSC's level of cash and cash equivalents per sales, 5.28 %, does not pass this criteria of roughly 20%(a number we determined to be appropriate based on various examples). NSSC will have a more difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criteria.
INVENTORY TO SALES: PASS
This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for NSSC was 30.00% last year, while for this year it is 26.74%. Since the inventory to sales is decreasing by -3.26% the stock passes this criterion.
ACCOUNT RECEIVABLE TO SALES: PASS
This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for NSSC was 23.20% last year, while for this year it is 24.78%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.
LONG TERM DEBT/EQUITY RATIO: PASS
NSSC's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow.
"THE FOOL RATIO" (P/E TO GROWTH): FAIL
The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider shorting shares when the company's Fool Ratio is greater than 1.30. NSSC's PEG Ratio of 2.55 is excessively high.
The following criteria for NSSC are less important which means you would place less emphasis on them when making your investment decision using this strategy:
AVERAGE SHARES OUTSTANDING: PASS
NSSC has not been significantly increasing the number of shares outstanding within recent years which is a good sign. NSSC currently has 19.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.
SALES: PASS
Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. NSSC's sales of $100.6 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". NSSC passes the sales test.
DAILY DOLLAR VOLUME: PASS
NSSC passes the Daily Dollar Volume (DDV of $6.8 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."
PRICE: PASS
This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. NSSC with a price of $33.90 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.
INCOME TAX PERCENTAGE: FAIL
NSSC's income tax paid expressed as a percentage of pretax income either this year (5.28%) or last year (11.11%) is below 20% which is cause for concern. Because the tax rate is below 20% this could mean that the earnings that were reported are unrealistically inflated due to the lower level of income tax paid. However, we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%). |
| Strategy: Small-Cap Growth Investor
Based on: Motley Fool |
| Medpace Holdings, Inc. is a clinical contract research organization. The Company provides clinical research-based drug and medical device development services. The Company partners with pharmaceutical, biotechnology, and medical device companies in the development and execution of clinical trials. The Company's drug development services focus on full service Phase I-IV clinical development services and include 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. The Company also provides bio-analytical laboratory services, clinical human pharmacology, imaging services, and electrocardiography reading support for clinical trials. The Company's operations are principally based in North America, Europe, and Asia. |
PROFIT MARGIN: PASS
This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. MEDP's profit margin of 11.27% passes this test.
RELATIVE STRENGTH: PASS
The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. MEDP, with a relative strength of 91, satisfies this test.
COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: PASS
Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for MEDP (62.22% for EPS, and 25.84% for Sales) are good enough to pass.
INSIDER HOLDINGS: PASS
MEDP's insiders should own at least 10% (they own 23.58% ) of the company's outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well.
CASH FLOW FROM OPERATIONS: PASS
A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. MEDP's free cash flow of $3.81 per share passes this test.
PROFIT MARGIN CONSISTENCY: PASS
MEDP's profit margin has been consistent or even increasing over the past three years (Current year: 10.39%, Last year: 8.97%, Two years ago: 3.18%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.
R&D AS A PERCENTAGE OF SALES: PASS
MEDP is either maintaining the same levels of R&D expenditures(currently $0.0 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant.
CASH AND CASH EQUIVALENTS: FAIL
MEDP does not have a sufficiently large amount of cash, $23.28 million, on hand relative to its size. Although this criteria does not apply to companies of this size, we defined anything greater than $500 million in cash as having 'a lot of cash' to allow analysis of these companies. MEDP will have more of a difficult time paying off debt (if it has any) or acquiring other companies than a company that passes this criterion.
ACCOUNT RECEIVABLE TO SALES: PASS
This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for MEDP was 19.05% last year, while for this year it is 18.94%. Since the AR to sales is decreasing by -0.11% the stock passes this criterion.
LONG TERM DEBT/EQUITY RATIO: PASS
MEDP's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow.
"THE FOOL RATIO" (P/E TO GROWTH): PASS
The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (MEDP's is 0.50), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. MEDP passes this test.
The following criteria for MEDP are less important which means you would place less emphasis on them when making your investment decision using this strategy:
AVERAGE SHARES OUTSTANDING: PASS
MEDP has not been significantly increasing the number of shares outstanding within recent years which is a good sign. MEDP currently has 37.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.
SALES: FAIL
Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. MEDP's sales of $786.2 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.
DAILY DOLLAR VOLUME: FAIL
MEDP does not pass the Daily Dollar Volume (DDV of $33.4 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it.
PRICE: PASS
This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. MEDP with a price of $79.94 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.
INCOME TAX PERCENTAGE: PASS
MEDP's income tax paid expressed as a percentage of pretax income this year was (22.21%) and last year (36.21%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern. |
| Strategy: Growth Investor
Based on: Martin Zweig |
| OneMain Holdings, Inc. is a financial services holding company. The Company is a consumer finance company, which is engaged in providing personal loan products; credit and non-credit insurance, and service loans owned by it and service or subservice loans owned by third-parties. The Company's segments include Consumer and Insurance; Acquisitions and Servicing; Real Estate, and Other. It is engaged in pursuing strategic acquisitions and dispositions of assets and businesses, including loan portfolios or other financial assets. The Company originates and services personal loans (secured and unsecured) through two business divisions: branch operations and centralized operations. As of December 31, 2016, its combined branch operations included over 1,800 branch offices in 44 states. It offers optional credit insurance products to its customers, including credit life insurance, credit disability insurance, credit involuntary unemployment insurance and collateral protection insurance. |
P/E RATIO: PASS
The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. OMF's P/E is 8.18, based on trailing 12 month earnings, while the current market PE is 18.00. Therefore, it passes the first test.
REVENUE GROWTH IN RELATION TO EPS GROWTH: FAIL
Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. OMF's revenue growth is 18.44%, while it's earnings growth rate is 31.71%, based on the average of the 3 and 5 year historical eps growth rates using the current fiscal year eps estimate. Therefore, OMF fails this criterion.
SALES GROWTH RATE: FAIL
Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (11%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12.6%) of the current year. Sales growth for the prior must be greater than the latter. For OMF this criterion has not been met and fails this test.
The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.
CURRENT QUARTER EARNINGS: PASS
The first of these criteria is that the current EPS be positive. OMF's EPS ($1.42) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS
The EPS for the quarter one year ago must be positive. OMF's EPS for this quarter last year ($0.05) pass this test.
POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS
The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. OMF's growth rate of 2,740.00% passes this test.
EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS
Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for OMF is 15.85%. This should be less than the growth rates for the 3 previous quarters, which are 113.73%, 39.77%, and 23.08%. OMF passes this test, which means that it has good, reasonably steady earnings.
This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: PASS
If the growth rate of the prior three quarter's earnings, 49.57%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 2,740.00%, (versus the same quarter one year ago) then the stock passes.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: PASS
The EPS growth rate for the current quarter, 2,740.00% must be greater than or equal to the historical growth which is 31.71%. OMF would therefore pass this test.
EARNINGS PERSISTENCE: FAIL
Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. OMF, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 4.38, -1.72, 1.59, 1.95, and 3.29, fails this test.
LONG-TERM EPS GROWTH: PASS
One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. OMF's long-term growth rate of 31.71%, based on the average of the 3 and 5 year historical eps growth rates using the current fiscal year eps estimate, passes this test.
INSIDER TRANSACTIONS: PASS
A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. For OMF, this criterion has been met, indicating an insider buy signal. |
| Strategy: Small-Cap Growth Investor
Based on: Motley Fool |
| D.R. Horton, Inc. is a homebuilding company. The Company has operations in 84 markets in 29 states across the United States. The Company's segments include its 44 homebuilding divisions, its financial services operations and its other business activities. In the homebuilding segment, the Company builds and sells single-family detached homes and attached homes, such as town homes, duplexes, triplexes and condominiums. The Company's 44 homebuilding divisions are aggregated into six segments: East Region, South Central Region, Midwest Region, West Region, Southwest Region and Southeast Region. In the financial services segment, the Company sells mortgages and collects fees for title insurance agency and closing services. The Company has subsidiaries that conduct insurance-related operations; construct and own income-producing rental properties; own non-residential real estate, including ranch land and improvements, and own and operate oil and gas-related assets. |
PROFIT MARGIN: PASS
This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. DHI's profit margin of 9.28% passes this test.
RELATIVE STRENGTH: FAIL
The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. DHI, with a relative strength of 78, fails this test.
COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: FAIL
Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for DHI (6.78% for EPS, and 10.62% for Sales) are not good enough to pass.
INSIDER HOLDINGS: FAIL
DHI's insiders should own at least 10% (they own 8.24%) of the company's outstanding shares. This does not satisfy the minimum requirement, and companies that do not pass this criteria are less attractive.
CASH FLOW FROM OPERATIONS: PASS
A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. DHI's free cash flow of $0.57 per share passes this test.
PROFIT MARGIN CONSISTENCY: PASS
DHI's profit margin has been consistent or even increasing over the past three years (Current year: 9.09%, Last year: 7.37%, Two years ago: 7.29%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.
R&D AS A PERCENTAGE OF SALES: NEUTRAL
This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in DHI's case.
CASH AND CASH EQUIVALENTS: PASS
DHI has a large amount of cash $1,473.1 million on hand. Although this criteria does not apply to companies of this size, we define anything greater than $500 million in cash as having 'a lot of cash' to allow analysis of these companies. A company like DHI has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.
INVENTORY TO SALES: PASS
This methodology strongly believes that companies, especially small ones, should have tight control over inventory. It's a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Inventory to Sales for DHI was 65.55% last year, while for this year it is 64.69%. Since the inventory to sales is decreasing by -0.86% the stock passes this criterion.
ACCOUNT RECEIVABLE TO SALES: PASS
This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for DHI was 0.95% last year, while for this year it is 0.85%. Since the AR to sales is decreasing by -0.11% the stock passes this criterion.
LONG TERM DEBT/EQUITY RATIO: FAIL
DHI's trailing twelve-month Debt/Equity ratio (27.52%) is too high, according to this methodology. You can find other more superior companies that do not have to borrow money in order to grow.
"THE FOOL RATIO" (P/E TO GROWTH): PASS
The "Fool Ratio" is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (DHI's is 0.44), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. DHI passes this test.
The following criteria for DHI are less important which means you would place less emphasis on them when making your investment decision using this strategy:
AVERAGE SHARES OUTSTANDING: FAIL
DHI has either issued a significant amount of new shares over the past year or has been issuing more and more shares over the past five years. DHI currently has 377.0 million shares outstanding. Neither of these are a good sign. Generally when a small-cap company issues more stock, the existing stock becomes devalued by the market, and hence diluted.
SALES: FAIL
Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. DHI's sales of $17,059.1 million based on trailing 12 month sales, are too high and would therefore fail the test. It is companies with $500 million or less in sales that are most likely to double or triple in size in the next few years.
DAILY DOLLAR VOLUME: FAIL
DHI does not pass the Daily Dollar Volume (DDV of $196.9 million) test. It exceeds the maximum requirement of $25 million. Stocks that fail the test are too liquid for a small individual investor and many institutions have already discovered it.
PRICE: PASS
This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. DHI with a price of $50.34 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.
INCOME TAX PERCENTAGE: PASS
DHI's income tax paid expressed as a percentage of pretax income this year was (23.74%) and last year (35.19%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern. |
| Strategy: Price/Sales Investor
Based on: Kenneth Fisher |
| Skechers U.S.A., Inc. is a designer and marketer of Skechers-branded lifestyle footwear for men, women and children, and performance footwear for men and women under the Skechers Performance brand name. It also offers apparel, accessories, eyewear, scrubs and other merchandise. It sells its footwear in department, specialty and independent stores, as well as through its Skechers retail stores and online at skechers.com. The Company operates through three segments: domestic wholesale sales, international wholesale sales, and retail sales, which includes e-commerce sales. Its lifestyle brands include Skechers USA, Skechers Sport, and Skechers Active and Skechers Sport Active. Its Performance Brands include Skechers Performance, Skechers Kids and Skechers Work. As of December 31, 2017, the Company's products are available in over 170 countries and territories through its network of subsidiaries in Asia, Europe, Canada, Central America and South America. |
PRICE/SALES RATIO: PASS
The prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratio between .75 and 1.5 are good values. SKX's P/S ratio of 1.02 based on trailing 12 month sales, falls within the "good values" range for non-cyclical companies and is considered attractive.
TOTAL DEBT/EQUITY RATIO: PASS
Less debt equals less risk according to this methodology. SKX's Debt/Equity of 5.34% is acceptable, thus passing the test.
PRICE/RESEARCH RATIO: PASS
This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. SKX is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable.
PRELIMINARY GRADE: Some Interest in SKX At this Point
Is SKX a "Super Stock"? NO
PRICE/SALES RATIO: FAIL
The prospective company should have a low Price/Sales ratio. To be considered a "Super Stock", non-cyclical (non-Smokestack) companies should have Price/Sales ratios below .75. However, SKX, who has a P/S of 1.02, does not fall within the "Super Stock" range. It does fall between 0.75 and 1.5, which is considered the "good values" range for non-cyclical companies. Nonetheless, it does not pass this "Super Stock" criterion.
LONG-TERM EPS GROWTH RATE: PASS
This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. SKX's inflation adjusted EPS growth rate of 19.45% passes the test.
FREE CASH PER SHARE: PASS
This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. SKX's free cash per share of 2.72 passes this criterion.
THREE YEAR AVERAGE NET PROFIT MARGIN: PASS
This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. SKX, whose three year net profit margin averages 5.87%, passes this evaluation.
|
INTELLIGENT SYSTEMS CORPORATION |
| Strategy: Small-Cap Growth Investor
Based on: Motley Fool |
| Intelligent Systems Corporation is engaged in the business of providing technology solutions and processing services to the financial technology and services market. The Company's financial transaction solutions and services (FinTech) operations are conducted through its CoreCard Software, Inc. (CoreCard) subsidiary. CoreCard and its affiliate companies in Romania and India, as well as the corporate office provide administrative, human resources and executive management support. The Company also has two subsidiaries, CoreCard SRL in Romania and ISC Software in India, that perform software development and testing, as well as processing operations support for CoreCard. CoreCard designs, develops, and markets a suite of software solutions to accounts receivable businesses, financial institutions, retailers and processors to manage their credit and debit cards, prepaid cards, private label cards, fleet cards, loyalty programs, and accounts receivable and small loan transactions. |
PROFIT MARGIN: PASS
This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. INS's profit margin of 32.66% passes this test.
RELATIVE STRENGTH: PASS
The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. INS, with a relative strength of 99, satisfies this test.
COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: PASS
Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for INS (91.67% for EPS, and 64.33% for Sales) are good enough to pass.
INSIDER HOLDINGS: PASS
INS's insiders should own at least 10% (they own 39.74% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well.
CASH FLOW FROM OPERATIONS: PASS
A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. INS's free cash flow of $0.65 per share passes this test.
PROFIT MARGIN CONSISTENCY: PASS
INS's profit margin has been consistent or even increasing over the past three years (Current year: 31.04%, Last year: 4.03%, Two years ago: -13.57%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.
R&D AS A PERCENTAGE OF SALES: NEUTRAL
This criterion is not critically important for companies that are not high-tech or medical stocks because they are not as R&D dependant as companies within those sectors. Not much emphasis should be placed on this test in INS's case.
CASH AND CASH EQUIVALENTS: PASS
INS's level of cash $19.3 million passes this criteria. If a company is a cash generator, like INS, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.
ACCOUNT RECEIVABLE TO SALES: PASS
This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for INS was 13.29% last year, while for this year it is 21.44%. Although the AR to sales is rising, it is below the max 30% that is allowed. The investor can still consider the stock if all other criteria appear very attractive.
"THE FOOL RATIO" (P/E TO GROWTH): FAIL
The "Fool Ratio" is an extremely important aspect of this analysis. Unfortunately, INS's "Fool Ratio" is not available due to a lack of one or more important figures. Hence, an opinion cannot be given at this time.
The following criteria for INS are less important which means you would place less emphasis on them when making your investment decision using this strategy:
AVERAGE SHARES OUTSTANDING: PASS
INS has not been significantly increasing the number of shares outstanding within recent years which is a good sign. INS currently has 9.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.
SALES: PASS
Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. INS's sales of $26.0 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". INS passes the sales test.
DAILY DOLLAR VOLUME: PASS
INS passes the Daily Dollar Volume (DDV of $8.8 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."
PRICE: PASS
This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. INS with a price of $54.59 passes the price test, even though it doesn't fall in the preferred range. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.
INCOME TAX PERCENTAGE: FAIL
INS's income tax paid for the current year is not available. This could be the cause for some concern according to this strategy. However, because this is not a critical criterion, it should not make or break your investment decision. In order to ensure that you receive a fair analysis we have utilized a sophisticated formula so that the appropriate figures reflect a 'normal' tax rate (35%). |
| Strategy: Patient Investor
Based on: Warren Buffett |
| MasterCard Incorporated is a technology company that connects consumers, financial institutions, merchants, governments and businesses across the world, enabling them to use electronic forms of payment. The Company operates through Payment Solutions segment. The Company allows user to make payments by creating a range of payment solutions and services using its brands, which include MasterCard, Maestro and Cirrus. The Company provides a range of products and solutions that support payment products, which customers can offer to their cardholders. The Company's services facilitate transactions on its network among cardholders, merchants, financial institutions and governments. The Company's products include consumer credit and charge, commercial, debit, prepaid, commercial and digital. The Company's consumer credit and charge offers a range of programs that enables issuers to provide consumers with cards allowing users to defer payment. |
STAGE 1: "Is this a Buffett type company?"
A bedrock principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers. While you should be easily able to explain where the company's pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.
LOOK FOR EARNINGS PREDICTABILITY: PASS
Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. Annual earnings per share from earliest to most recent were 1.12, 1.41, 1.48, 2.19, 2.56, 3.09, 3.35, 3.69, 4.47, 5.52. Buffett would consider MA's earnings predictable. In fact EPS have increased every year. MA's long term historical EPS growth rate is 16.7%, based on the average of the 3, 4 and 5 year historical eps growth rates.
LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: PASS
Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage. US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for MA, over the last ten years, is 54.6%, which is high enough to pass. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 35.0%, 33.2%, 30.8%, 37.5%, 39.4%, 50.8%, 60.8%, 69.2%, 84.9%, 104.3%, and the average ROE over the last 3 years is 86.2%, thus passing this criterion.
LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON ASSETS: PASS
Buffett also requires, for financial companies, that the average Return On Assets (ROA) be at least 1% and consistent. Return On Assets is defined as the net earnings of the business divided by the total assets of the business. The average ROA for MA, over the last ten years, is 20.5%, which is high enough to pass. It is not enough that the average be at least 1%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROA must be at least 1% for Buffett to feel comfortable that the ROA is consistent. The ROA for the last 10 years, from earliest to latest, is 16.4%, 19.5%, 16.9%, 20.8%, 20.7%, 22.5%, 22.6%, 21.0%, 21.8%, 22.6%, thus passing this criterion.
LOOK AT CAPITAL EXPENDITURES: PASS
Buffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive. MA's free cash flow per share of $4.46 is positive, indicating that the company is generating more cash than it is consuming. This is a favorable sign, and so the company passes this criterion.
LOOK AT MANAGEMENT'S USE OF RETAINED EARNINGS: PASS
Buffett likes to see if management has spent retained earnings in a way that benefits shareholders. To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $24.50 and compares it to the gain in EPS over the same period of $4.40. MA's management has proven it can earn shareholders a 18.0% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.
HAS THE COMPANY BEEN BUYING BACK SHARES: BONUS PASS
Buffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares. This indicates that management has been using excess capital to increase shareholder value. MA's shares outstanding have fallen over the past five years from 1,115,369,995 to 1,025,000,000, thus passing this criterion. This is a bonus criterion and will not adversely affect the ability of a stock to pass the strategy as a whole if it is failed.
The preceding concludes Buffett's qualitative analysis. If and when he gets positive responses to all the above criteria, he would then proceed with a price analysis. The price analysis will determine whether or not the stock should be bought. The following is how he would evaluate MA quantitatively.
STAGE 2: "Should I buy at this price?" Although a firm may be a Buffett type company, he won't invest in it unless he can get a favorable price that allows him a great long term return.
CALCULATE THE INITIAL RATE OF RETURN: [No Pass/Fail]
Buffett compares his type of stocks to bonds, and likes to see what a company's initial rate of return is. To calculate the initial rate of return, take the trailing 12-month EPS of $6.42 and divide it by the current market price of $280.77. An investor, purchasing MA, could expect to receive a 2.29% initial rate of return. Furthermore, he or she could expect the rate to increase 16.7% per year, based on the average of the 3, 4 and 5 year historical eps growth rates, as this is how fast earnings are growing.
COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: PASS
Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Nonetheless, he has invested in companies with low initial rates of return, as long as the yield is expected to expand rapidly. Currently, the long-term treasury yield is about 2.00%. Compare this with MA's initial yield of 2.29%, which will expand at an annual rate of 16.7%, based on the average of the 3, 4 and 5 year historical eps growth rates. The company is the better choice, as the initial rate of return is close to or above the long term bond yield and is expanding.
CALCULATE THE FUTURE EPS: [No Pass/Fail]
MA currently has a book value of $4.93. It is safe to say that if MA can preserve its average rate of return on equity of 54.6% and continues to retain 85.01% of its earnings, it will be able to sustain an earnings growth rate of 46.4% and it will have a book value of $223.22 in ten years. If it can still earn 54.6% on equity in ten years, then expected EPS will be $121.89.
CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now take the expected future EPS of $121.89 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (43.8) (5 year average P/E in this case), which is 31.2 and you get MA's projected future stock price of $3,796.73.
CALCULATE THE EXPECTED RATE OF RETURN BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now add in the total expected dividend pool to be paid over the next ten years, which is $24.80. This gives you a total dollar amount of $3,821.53. These numbers indicate that one could expect to make a 29.8% average annual return on MA's stock at the present time. Buffett would consider this an absolutely fantastic expected return.
CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail]
If you take the EPS growth of 16.7%, based on the average of the 3, 4 and 5 year historical eps growth rates, you can project EPS in ten years to be $30.11. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (43.8) (5 year average P/E in this case), which is 31.2. This equals the future stock price of $937.99. Add in the total expected dividend pool of $24.80 to get a total dollar amount of $962.79.
CALCULATE THE EXPECTED RETURN USING THE AVERAGE EPS GROWTH METHOD: [No Pass/Fail]
Now you can figure out your expected return based on a current price of $280.77 and the future expected stock price, including the dividend pool, of $962.79. If you were to invest in MA at this time, you could expect a 13.11% average annual return on your money. Buffett likes to see a 15% return, but nonetheless would accept this return.
LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: PASS
Based on the two different methods, you could expect an annual compounding rate of return somewhere between 13.1% and 29.8%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 21.5% on MA stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion. |
Watch List
The top scoring stocks not currently in the Hot List portfolio.
| Ticker |
Company Name |
Industry |
Current
Score |
| RGEN |
REPLIGEN CORPORATION |
Biotechnology & Drugs |
63% |
| EME |
EMCOR GROUP INC |
Construction Services |
63% |
| FIZZ |
NATIONAL BEVERAGE CORP. |
Beverages (Non-Alcoholic) |
57% |
| FL |
FOOT LOCKER, INC. |
Retail (Apparel) |
55% |
| GGAL |
GRUPO FINANCIERO GALICIA S.A. (ADR) |
Regional Banks |
55% |
| GPS |
GAP INC |
Retail (Apparel) |
55% |
| HSY |
HERSHEY CO |
Food Processing |
54% |
| URBN |
URBAN OUTFITTERS, INC. |
Retail (Apparel) |
53% |
| MBT |
MOBIL'NYE TELESISTEMY PAO (ADR) |
Communications Services |
50% |
| CDW |
CDW CORP |
Software & Programming |
50% |
|
