Guru Analysis
GRUPO FINANCIERO GALICIA S.A. (ADR) |
| Strategy: Growth/Value Investor
Based on: James P. O'Shaughnessy |
| Grupo Financiero Galicia S.A. (Grupo Financiero Galicia) is a financial services holding company. The Company's segments include Banking, Regional Credit Cards, CFA, Insurance and Other Grupo Galicia Businesses. Banco de Galicia y Buenos Aires S.A. (Banco Galicia) is a subsidiary of the Company. Its banking business segment represents Banco Galicia consolidated line by line with Banco Galicia Uruguay S.A. (Galicia Uruguay). It operates the regional credit cards segment through Tarjetas Regionales S.A. and its subsidiaries. Its CFA business segment extends unsecured personal loans to low and middle-income segments of the Argentine population. The Company operates the insurance segment through Sudamericana Holding S.A. and its subsidiaries. Its Other Grupo Galicia Businesses segment includes the results of Galicia Warrants S.A., Galicia Administradora de Fondos S.A. Sociedad Gerente de Fondos Comunes de Inversion and Net Investment S.A. |
MARKET CAP: PASS
The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. GGAL, with a market cap of $2,930 million, passes this criterion.
EARNINGS PER SHARE PERSISTENCE: PASS
The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. GGAL, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.05, 0.07, 0.10, 0.17 and 0.22, passes this test.
PRICE/SALES RATIO: PASS
The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. GGAL's Price/Sales ratio of 1.25, based on trailing 12 month sales, passes this criterion.
RELATIVE STRENGTH: PASS
The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. GGAL, whose relative strength is 52, is in the top 50 and would pass this last criterion. |
| Strategy: Patient Investor
Based on: Warren Buffett |
| Banco Macro S.A. offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. In addition, the Bank performs certain transactions through its subsidiaries, including mainly Banco del Tucuman, Macro Bank Limited, Macro Securities S.A., Macro Fiducia S.A. and Macro Fondos S.G.F.C.I. S.A. It has approximately two categories of customers, such as retail customers, including individuals and entrepreneurs and corporate customers, which include small, medium and large companies and major corporations. In addition, it provides services to over four provincial governments. It provides its corporate customers with traditional banking products and services, such as deposits, lending (including overdraft facilities), check cashing advances and factoring, guaranteed loans and credit lines for financing foreign trade and cash management services. |
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 0.04, 0.04, 0.06, 0.11, 0.10, 0.13, 0.18, 0.28, 0.40, 0.57. Buffett would consider BMA's earnings predictable, although earnings have declined 1 time(s) in the past seven years, with the most recent decline 6 years ago. The dips have totaled 9.1%. BMA's long term historical EPS growth rate is 27.6%, based on the 10 year average EPS growth rate, and it is expected to grow earnings 25.7% 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 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 BMA, over the last ten years, is 23.9%, 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 15.6%, 14.1%, 22.8%, 28.8%, 20.3%, 24.3%, 24.3%, 27.8%, 29.7%, 30.9%, and the average ROE over the last 3 years is 29.5%, 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 BMA, over the last ten years, is 3.3%, 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 2.5%, 1.9%, 2.9%, 3.6%, 2.5%, 2.8%, 3.1%, 4.1%, 4.6%, 4.7%, 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. BMA's free cash flow per share of $4.61 is positive, indicating that the company is generating more cash that 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 $1.69 and compares it to the gain in EPS over the same period of $0.53. BMA's management has proven it can earn shareholders a 31.4% 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. BMA's shares outstanding have fallen over the past five years from 573,250,000 to 58,000,000, 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 BMA 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 $7.53 and divide it by the current market price of $71.39. An investor, purchasing BMA, could expect to receive a 10.55% initial rate of return. Furthermore, he or she could expect the rate to increase 25.7% 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 2.25%. Compare this with BMA's initial yield of 10.55%, which will expand at an annual rate of 25.7%, 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]
BMA currently has a book value of $22.52. It is safe to say that if BMA can preserve its average rate of return on equity of 23.9% and continues to retain 84.07% of its earnings, it will be able to sustain an earnings growth rate of 20.1% and it will have a book value of $140.06 in ten years. If it can still earn 23.9% on equity in ten years, then expected EPS will be $33.41.
CALCULATE THE FUTURE STOCK PRICE BASED ON THE AVERAGE ROE METHOD: [No Pass/Fail]
Now take the expected future EPS of $33.41 and multiply them by the lower of the 5 year average P/E ratio or current P/E ratio (9.5) (5 year average P/E in this case), which is 6.3 and you get BMA's projected future stock price of $209.13.
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 $51.93. This gives you a total dollar amount of $261.06. These numbers indicate that one could expect to make a 13.8% average annual return on BMA's stock at the present time. Although, the return is slightly below the liking of Buffett, the return would still be somewhat acceptable.
CALCULATE THE EXPECTED FUTURE STOCK PRICE BASED ON AVERAGE EPS GROWTH: [No Pass/Fail]
If you take the EPS growth of 25.7%, based on the analysts' consensus estimated long term growth rate, you can project EPS in ten years to be $74.22. Now multiply EPS in 10 years by the lower of the 5 year average P/E ratio or current P/E ratio (9.5) (5 year average P/E in this case), which is 6.3. This equals the future stock price of $464.59. Add in the total expected dividend pool of $51.93 to get a total dollar amount of $516.52.
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 $71.39 and the future expected stock price, including the dividend pool, of $516.52. If you were to invest in BMA at this time, you could expect a 21.88% average annual return on your money. Buffett would consider this a great 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 13.8% and 21.9%. 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 17.9% on BMA stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion. |
STURM RUGER & COMPANY INC |
| Strategy: Value Investor
Based on: Benjamin Graham |
| Sturm, Ruger & Company, Inc. and subsidiary, is engaged in the design, manufacture and sale of firearms to domestic customers. The Company operates through two segments: firearms and castings. The firearms segment manufactures and sells rifles, pistols and revolvers to a range of federally licensed, independent wholesale distributors located in the United States. The castings segment manufactures and sells steel investment castings, and metal injection molding parts. Its castings segment provides castings and MIM parts for the Company's firearms segment. In addition, the castings segment produces some products for various customers in a range of industries. It offers products in three industry product categories: rifles, pistols and revolvers. Its firearms are sold through independent wholesale distributors to the commercial sporting market. It manufactures and sells investment castings made from steel alloys and metal injection molding parts for internal use in the firearms segment. |
SECTOR: PASS
RGR 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 $340 million. RGR's sales of $654.9 million, based on trailing 12 month sales, pass this test.
CURRENT RATIO: PASS
The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. RGR's current ratio of 2.71 passes 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 RGR is $0.0 million, while the net current assets are $145.9 million. RGR passes this test.
LONG-TERM EPS GROWTH: PASS
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 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. RGR's EPS growth over that period of 1,926.4% passes 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. RGR's P/E of 14.80 (using the 3 year PE) passes this test.
PRICE/BOOK RATIO: FAIL
The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. RGR's Price/Book ratio is 3.78, while the P/E is 14.80. RGR fails the Price/Book test. |
| Strategy: Price/Sales Investor
Based on: Kenneth Fisher |
| MAXIMUS, Inc. provides business process services (BPS) to Government health and human services agencies. The Company is primarily focused on operating Government-sponsored programs, such as Medicaid, children's health insurance program (CHIP), health insurance exchanges and other health care reform initiatives, Medicare, welfare-to-work, child support services and other Government programs. It provides health and human services to Governments in the United States, Australia, Canada, the United Kingdom and Saudi Arabia. The Company's United States federal services business provides various contract vehicles. The Company's Health Services segment provides a range of business process services, as well as related consulting services, for state, provincial and federal Government programs. The Company's Human Services segment provides federal, national, state and county human services agencies with a range of business process services, as well as related consulting services. |
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. MMS's P/S ratio of 1.49 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. MMS's Debt/Equity of 22.11% 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. MMS 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 MMS At this Point
Is MMS 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, MMS, who has a P/S of 1.49, 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%. MMS's inflation adjusted EPS growth rate of 17.91% 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. MMS's free cash per share of 1.84 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. MMS, whose three year net profit margin averages 7.83%, passes this evaluation.
|
| Strategy: Price/Sales Investor
Based on: Kenneth Fisher |
| Tractor Supply Company is an operator of rural lifestyle retail stores in the United States. The Company operates in the retail sale of products that support the rural lifestyle segment. The Company focuses on supplying the lifestyle needs of recreational farmers and ranchers, as well as tradesmen and small businesses. It operates over 1,490 retail stores in over 50 states under the names Tractor Supply Company, Del's Feed & Farm Supply and HomeTown Pet. It also operates a Website under the name TractorSupply.com. The Company's stores offer merchandise, which includes equine, livestock, pet and small animal products; hardware, truck, towing and tool products; seasonal products, including heating, lawn and garden items, power equipment, gifts and toys; work/recreational clothing and footwear, and maintenance products for agricultural and rural use. The Company's products are offered under various brands, which include 4health, Blue Mountain and Countyline. |
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. TSCO's P/S ratio of 1.48 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. TSCO's Debt/Equity of 21.94% 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. TSCO 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 TSCO At this Point
Is TSCO 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, TSCO, who has a P/S of 1.48, 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%. TSCO's inflation adjusted EPS growth rate of 16.60% 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. TSCO's free cash per share of 0.66 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. TSCO, whose three year net profit margin averages 6.48%, passes this evaluation.
|
CAPELLA EDUCATION COMPANY |
| Strategy: Value Investor
Based on: Benjamin Graham |
| Capella Education Company is an online postsecondary education services company. The Company's academic programs are delivered through its subsidiary, Capella University (the University), which is an online academic institution offering online postsecondary education services primarily to working adults. The Company also offers educational programming through its other subsidiaries, including Arden University, Ltd., which is a provider of United Kingdom university distance learning qualifications that markets, develops and delivers these programs across the world; Sophia Learning LLC (Sophia), which supports self-paced learning; Capella Learning Solutions (CLS), provides online training solutions and services to corporate partners, which are delivered through the Company's online learning platform, and Hackbright Academy, which is a non-degree software engineering school for women. The Company's subsidiary, DevMountain, LLC, is involved in software coding industry. |
SECTOR: PASS
CPLA 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 $340 million. CPLA's sales of $427.6 million, based on trailing 12 month sales, pass this test.
CURRENT RATIO: PASS
The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. CPLA's current ratio of 3.02 passes 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 CPLA is $0.0 million, while the net current assets are $117.2 million. CPLA passes this test.
LONG-TERM EPS GROWTH: PASS
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 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. CPLA's EPS growth over that period of 180.0% passes the EPS growth test.
P/E RATIO: FAIL
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. CPLA's P/E of 23.91 (using the current PE) fails this test.
PRICE/BOOK RATIO: FAIL
The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. CPLA's Price/Book ratio is 4.91, while the P/E is 23.91. CPLA fails the Price/Book test. |
| Strategy: Value Investor
Based on: Benjamin Graham |
| Sanderson Farms, Inc. is a poultry processing company. The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and the preparation, processing, marketing and distribution of processed and prepared chicken items. The Company sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, primarily under the Sanderson Farms brand name to retailers, distributors and casual dining operators principally in the southeastern, southwestern, northeastern and western United States, and to customers reselling frozen chicken into export markets. The Company conducts its chicken operations through Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), and its prepared chicken business through Sanderson Farms, Inc. (Foods Division). Its prepared chicken product line includes approximately 70 institutional and consumer packaged partially cooked or marinated chicken items. |
SECTOR: PASS
SAFM 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 $340 million. SAFM's sales of $2,704.8 million, based on trailing 12 month sales, pass this test.
CURRENT RATIO: PASS
The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. SAFM's current ratio of 4.07 passes 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 SAFM is $0.0 million, while the net current assets are $475.7 million. SAFM 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 5 years. EPS for SAFM were negative within the last 5 years and therefore the company fails this criterion.
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. SAFM's P/E of 13.16 (using the current 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. SAFM's Price/Book ratio is 1.62, while the P/E is 13.16. SAFM passes the Price/Book test. |
| Strategy: P/E/Growth Investor
Based on: Peter Lynch |
| Drew Industries Incorporated, through its subsidiaries, supplies an array of components in the United States and abroad for the manufacturers of recreational vehicles (RVs) and manufactured homes. The Company also supplies components for adjacent industries, including buses; trailers used to haul boats, livestock, equipment and other cargo; pontoon boats; modular housing, and mobile office units. It operates in two segments, which include the recreational vehicle products segment (the RV Segment), and the manufactured housing products segment (the MH Segment). RVs are motorized (motorhomes) or towable, such as travel trailers, fifth-wheel travel trailers, folding camping trailers and truck campers. It manufactures and distributes a range of products used primarily in the production of RVs and manufactured homes, such as electronic components, windows, slide-out mechanisms and solutions, furniture and mattresses, chassis components, and thermoformed bath, kitchen and other products. |
DETERMINE THE CLASSIFICATION:
This methodology would consider DW a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (20.75) relative to the growth rate (21.31%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for DW (0.97) makes it favorable.
SALES AND P/E RATIO: PASS
For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. DW, whose sales are $1,610.2 million, needs to have a P/E below 40 to pass this criterion. DW's P/E of (20.75) is considered acceptable.
INVENTORY TO SALES: PASS
When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for DW was 11.13% last year, while for this year it is 12.18%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.05%) is below 5%.
EPS GROWTH RATE: PASS
This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for DW is 21.3%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.
TOTAL DEBT/EQUITY RATIO: PASS
This methodology would consider the Debt/Equity ratio for DW (9.40%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.
FREE CASH FLOW: NEUTRAL
The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for DW (0.72%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.
NET CASH POSITION: NEUTRAL
Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for DW (-1.51%) is too low to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. |
WADDELL & REED FINANCIAL, INC. |
| Strategy: Growth Investor
Based on: Martin Zweig |
| Waddell & Reed Financial, Inc. is a mutual fund and asset management company. The Company provides investment management, investment advisory, investment product underwriting and distribution and shareholder services administration to Waddell & Reed Advisors group of mutual funds, Ivy Funds, Ivy Funds Variable Insurance Portfolios, InvestEd Portfolios and 529 college savings plan (collectively, the Funds), and the Ivy Global Investors Fund SICAV and its Ivy Global Investors sub-funds (the IGI Funds), and institutional and separately managed accounts. Its retail products are distributed through third parties, such as other broker/dealers, registered investment advisors and various retirement platforms or through its sales force of independent financial advisors. The Company also markets its investment advisory services to institutional investors, either directly or through consultants. It operates its investment advisory business through Waddell & Reed Investment Management Company. |
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. WDR's P/E is 8.33, based on trailing 12 month earnings, while the current market PE is 17.00. Therefore, it passes the first test.
REVENUE GROWTH IN RELATION TO EPS GROWTH: PASS
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. WDR's revenue growth is 8.60%, while it's earnings growth rate is 9.88%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, WDR passes 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 (-19.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-19%) of the current year. Sales growth for the prior must be greater than the latter. For WDR 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. WDR's EPS ($0.65) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS
The EPS for the quarter one year ago must be positive. WDR's EPS for this quarter last year ($0.58) 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. WDR's growth rate of 12.07% passes this test.
EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: FAIL
Compare the earnings growth rate of the past four quarters with long-term EPS growth rate. Earnings growth in the past 4 quarters should be at least half of the long-term EPS growth rate. A stock should not be considered if it posted several quarters of skimpy earnings. WDR had 3 quarters of skimpy growth in the last 2 years.
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, -36.96%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 12.07%, (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, 12.07% must be greater than or equal to the historical growth which is 9.88%. WDR 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. WDR, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 2.01, 2.25, 2.96, 3.71, and 2.94, fails this test.
LONG-TERM EPS GROWTH: FAIL
The final important criterion in this approach is that Earnings Growth be at least 15% per year. WDR's long-term growth rate of 9.88%, based on the average of the 3, 4 and 5 year historical eps growth rates, fails the minimum required.
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. Zweig calls this an insider buy signal. For WDR, this criterion has not been met (insider sell transactions are 85, while insiders buying number 7). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion. |
| Strategy: Small-Cap Growth Investor
Based on: Motley Fool |
| NIC Inc. is a provider of digital government services that help governments use technology. The Company operates through Outsourced Portals segment. The Other Software & Services category includes its subsidiaries that provide software development and services, other than outsourced portal services, to state and local governments, as well as federal agencies. The Company offers its services through two channels: primary outsourced portal businesses, and software & services businesses. In its primary outsourced portal businesses, it enters into long-term contracts with state and local governments to design, build, and operate Internet-based, enterprise-wide portals on their behalf. These portals consist of Websites and applications that the Company has built to allow businesses and citizens to access government information online and secure transactions, such as applying for a permit, retrieving government records, or filing a government-mandated form or report. |
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. EGOV's profit margin of 16.47% 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. EGOV, with a relative strength of 77, 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 EGOV (26.32% for EPS, and 7.09% for Sales) are not good enough to pass.
INSIDER HOLDINGS: FAIL
EGOV's insiders should own at least 10% (they own 4.39%) 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. EGOV's free cash flow of $0.69 per share passes this test.
PROFIT MARGIN CONSISTENCY: PASS
EGOV's profit margin has been consistent or even increasing over the past three years (Current year: 14.36%, Last year: 14.36%, Two years ago: 12.85%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.
R&D AS A PERCENTAGE OF SALES: FAIL
EGOV did not have any R&D expenditures for the current year which is unacceptable. EGOV could be jepordizing the future in order to boost current EPS numbers.
CASH AND CASH EQUIVALENTS: PASS
EGOV's level of cash $98.4 million passes this criteria. If a company is a cash generator, like EGOV, 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 EGOV was 21.12% last year, while for this year it is 27.48%. 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
EGOV'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. EGOV's PEG Ratio of 1.94 is excessively high.
The following criteria for EGOV are less important which means you would place less emphasis on them when making your investment decision using this strategy:
AVERAGE SHARES OUTSTANDING: PASS
EGOV has not been significantly increasing the number of shares outstanding within recent years which is a good sign. EGOV currently has 66.0 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. EGOV's sales of $310.7 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". EGOV passes the sales test.
DAILY DOLLAR VOLUME: PASS
EGOV passes the Daily Dollar Volume (DDV of $5.0 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. EGOV with a price of $24.70 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
EGOV's income tax paid expressed as a percentage of pretax income this year was (37.62%) and last year (38.03%) 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. |
Watch List
The top scoring stocks not currently in the Hot List portfolio.
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SUPREME INDUSTRIES, INC. |
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LEGACYTEXAS FINANCIAL GROUP INC |
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| CGNX |
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46% |
| WNC |
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46% |
| FIZZ |
NATIONAL BEVERAGE CORP. |
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44% |
| CSTE |
CAESARSTONE LTD |
Constr. - Supplies & Fixtures |
43% |
| AMWD |
AMERICAN WOODMARK CORPORATION |
Constr. - Supplies & Fixtures |
40% |
| HXL |
HEXCEL CORPORATION |
Electronic Instr. & Controls |
40% |
| PII |
POLARIS INDUSTRIES INC. |
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| UFPI |
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|
