CONTENTS

 [To Read Any Post from 2010, 2009 & 2008, Just Click on the Blue Title]

 

2010:

 

- Measuring Medtronic (MDT): Part 2, January 22, 2010

- Brainstorming BRLI (Bio-Referece Laboratories) , January 2, 2010 

 

 

 

2009:

 

- Scrutinizing Stryker (SYK), December 22, 2009

- Studying Strayer (STRA), November 29, 2009

- Contemplating Cognizant (CTSH), November 19, 2009

- Checking Out Coach (COH), November 6, 2009

- Researching RMD (ResMed), October 16, 2009

- Measuring Medtronic (MDT), October 3, 2009

- Monitoring Microsoft (MSFT), September 19, 2009

- Flirting With Fresenius (FMS), September 9, 2009

- Pouring Over Pepsi (PEP), August 30, 2009

- Projecting Growth at Patterson (PDCO), August 18, 2009

- Determining What’s Reasonable and What’s Not: An Update, July 15, 2009

- Considering Costco (COST), July 2, 2009

- Banking on Bard (BCR), June 19, 2009

- Gauging Growth at Gilead (GILD), June 1, 2009 

- Discovering Danaher (DHR), May 22, 2009

- Investigating Industry Info  , May 8, 2009

- Analyzing Amedisys (AMED) and Mulling Over More Methods, April 11, 2009

- Pondering the Preferred Procedure, March 28, 2009

- Studying Stryker (SYK), Part 2, March 16, 2009

- Boning-Up on Buckle (BKE), March 11, 2009

- Estimating EPS , March 5, 2009

- Quantifying Quality Systems (QSII), February 15, 2009

- Studying Stryker (SYK) and Mulling Over Methods, January 31, 2009

- Grappling With Grainger (GWW), January 23, 2009

- Zeroing-In On Zebra (ZBRA), January 7, 2009

 

 

2008:

 

- Figuring-Out Fastenal (FAST), December 31, 2008

- Monitoring Microsoft (MSFT), December 26, 2008

- Oogling Google (GOOG) , December 11, 2008

- Looking at Lowe’s (LOW), November 12, 2008

- Appraising Amazon.com (AMZN), November 7, 2008

- Judging Jack Henry (JKHY): a Shorty,  October 24, 2008

- Assessing Ansys (ANSS), October 5, 2008

- Knowing Neogen (NEOG), September 7, 2008

- Examining EMC, September 6, 2008

- Probing the Performance of Paychex (PAYX), August 30, 2008

- Pondering POT (Potash Corp), August 27, 2008

- Determining What’s Reasonable and What’s Not, July 13, 2008

- Stryker (SYK): Looking Strong and Solid, July 3, 2008

- Gambling on Garmin (GRMN), June 2, 2008

- Workshop on Comparing SSGs for Staples, Procter & Gamble, Colgate-Palmolive, and CVS Caremark, May 30, 2008

- Understanding UEIC, February 21, 2008

- Figuring Out FactSet (FDS), February 4, 2008

- All About SSGs, January 20, 2008

- Analyzing Apple (AAPL), January 9, 2008

 

 

2007:

 

- Investigating Infosys (INFY), October 18, 2007

- Savoring Starbucks (SBUX): Molto Grande Growth, September 8, 2007

- Coach (COH): Better Investing’s Growth Company for the Year 2007, September 3, 2007

- Oracle Corp (ORCL): Another BI Stock To Study, May 13, 2007

- Peering into PRAA (Portfolio Recovery Associates), May 7, 2007

- Wondering About Wyeth (WYE), a Major Pharma, April 8, 2007

 

 

2006:

 

- Comparing SSGs for Walgreen (WAG), December 25, 2006

- Ceradyne (CRDN): Growth Company of the Year 2006, November 20, 2006

- UNH Follow-up: Greed and Wrongdoing Become Public, October 15, 2006

- Considering Kohl’s (KSS) and Reconsidering NAIC’s Preferred Procedure, September 13, 2006

- Two Small Company Stocks: Cognizant Technology Solutions (CTSH) and Jack Henry and Associates (JKHY), September 5, 2006

- ShuffleMaster (SHFL): A Small Company Stock, August 17, 2006

- Red-Flag Warning Signs at Cardinal Health (CAH), August 8, 2006

- GameStop Corp (GME): The Stock To Study for September, August 4, 2006

- Analyzing Amgin (AMGN), July 30, 2006

- Something’s Seriously Wrong at UnitedHealth Plan (UNH), July 21, 2006

- Comparing SSGs for Johnson and Johnson (JNJ), July 13, 2006

- Declining Growth Rates at JNJ Are Troubling, July 12, 2006

- What Are The SSG and PERT-A?, July 11, 2006 

Measuring Medtronic (MDT): Part 2

- Medtronic (MDT) is a large medical technology and equipment company with $14.6 B in revenues last year.  MDT currently operates in seven segments:

 ** Cardiac Rhythm Disease Management (34% of FY 09 revenues: pace-makers and implantable defibrillators);

 ** Spinal (23%: artificial spinal discs);

 ** Cardiovascular (17%: heart valves, stents);  

 ** Neuromodulation (10%: neurological and urological devices);

 ** Diabetes (8%: insulin pumps);

 ** Surgical Technologies (6%: minimally invasive ENT products);

 ** Physio-Control (2%: defibrillators for hospitals and public access).

 - Medtronic was the Online Stock Study for January 2010 at the Better Investing website.  It was led by Avi Horwitz, a Director of the BI Volunteer Board and was different from prior studies in several respects:

** Avi used his completed SSG as the primary reference for polling the study participants, neither MDT’s business nor participant voting was set forth in the study’s Presentation Slides, and (sadly) there was no Consensus SSG.

 ** Questions about the Study may be answered by the recorded session which is not available at this time.  Sooooo, I decided to discuss MDT in more depth (including its quality, competitors, and legal battles) and this post is longer than usual as a result.

Discussion:

- The table below compares Avi’s completed SSG with two of mine and with Take Stock.  Armin-1 was part of “Measuring Medtronic”, a post I did here in September 2009, while Armin-2 is current.  Take Stock is a computerized one-click program at the Stock Central website that is designed to produce a conservative result.

Medtronic          (MDT)	Avi’s SSG	Armin-2           (new)	Armin-1          (old)	Take Stock
Date	12-23-09	1-8-10	9-23-09	1-8-10
Data	S&P	Same	Same	Hemscott-Morningstar
Price	$44.40	$45.99	$32.04	$45.75
52 week High & Low Price	$44.43 & $24.06	$45.81 &          Same	$52.97 & Same	Not Included
Last Q of Reported Data	Q2 ending       10-31-09	Same	Q1 ending      7-31-09	Q2 ending          10-31-09
Software Used	TK5	Same	Same	Online TS
Project Growth From End of	Last FY	Last Q	Same	Last FY
Sales Growth	9.00%	10.00%	Same	7.90%
EPS Growth	8.90%     (from PP)	10.00%	Same	7.90%
High PE	18.0	20.4                  (from 2008)	Same	23.1
High EPS	$4.29	$4.67	$4.56	$4.65
High Price	$77.20	$95.30	$93.00	$107.19
Value Line Estimated High Price = $80-100 as of 11-27-09
Low PE	9.0	8.6                     (from 2008)	Same	17.3
Low EPS	$2.90 (ttm)	Same	$2.83 (ttm)	$3.29
Low Price	$26.10            (low EPS x       low PE)	$24.30               (low EPS x        low PE)	$22.20     (60% x curr price)	$56.82                 (higher than current  price)
Upside/Down	1.8	2.3	3.8	Impossible to Calculate
Total Return	12.8%	11.6%	21.1%	20.2%
SSG Buy Under	N/A	$42.05	N/A	$57.49
RV/PRV	72.5/66.6        (no outliers)	87.8/79.7           (04 & 05 out)	72.4/65.7 (same)	Not Included
RV/PRV                (no outliers)	72.5/66.6	75.4/68.3	N/A	Not Included
Quality	N/A	S&P = A-	S&P = A-	TS = 3.2 unacceptable
PTPM – 5 yr ave	30.00%   trend down	Same	Same	30.50%              trend N/A
ROE – 5 yr ave     Ending Equity	24.70%           trend even	Same	Same	Not Included
ROE – 5 yr ave    Starting  Equity	N/A	26.90%             trend even	Same	28.50%                     trend N/A
Debt to Equity – 5 yr ave	N/A	46.10%             trend up	Same	Not Included

(1) Future Growth Projected From:

- SSG Software allows us to project future growth from the end of the last Fiscal Year, the last Quarter, or the Trend Line.  The Online SSG only projects growth from the end of the last FY.

- Avi’s SSG used the Toolkit 5 software, not the Online SSG, but chose to project growth from the last FY.  Armin-1 and Armin-2, on the other hand, projected from the last Q.

 (2) Estimating Future Sales Growth:

- Avi’s SSG estimated 9.00% Sales growth and offered the study participants five choices to make their estimate: much higher, at least 13.00%; a little higher, 10-12%; 9.00%, seems good; a little lower, 6-8.00%; and no higher than 5.5%.

** Morningstar was estimating 6.00% Sales growth through FY 2014 and Zacks.com 9.57% for the next 5 years, neither of which Avi mentioned.  The Presentation Slides also don’t explain why Avi estimated 9.00%.

[** The recorded session, which became available after I posted this write-up, reveals that Avi’s 9.00% estimate was based on MDT’s recent sales growth (8.00% last FY, 7.5% last Q) plus a little extra to reflect his optimism.] 

(3) Estimating Future EPS Growth:

Consensus SSG & Avi SSG

- Avi used the NAIC/BI Preferred Procedure to estimate future EPS growth and the PP involves four estimates for the next 5 years: Sales Growth [less] Pre-Tax Profit Margin [less] Taxes [divided by] Shares Outstanding [equals] EPS growth. His PP worked out to be 8.90% and that was what he used for his SSG.

- To estimate future EPS growth, Avi offered four choices to the participants: much higher than his estimate, at least 13.00% (the ten-year historical growth rate); a little higher, 10-13.00% (the S&P estimate was $4.76 or 11.00%); 8.90%, Avi’s estimate; and no higher than 8.00%. 

Armin’s SSGs 

- When I did Armin-2, the seven analysts I always check were closely estimating long-term EPS, averaging 10.90% with Zacks.com high at 11.18% and Value Line low at 10.50%.  That’s a very small spread of .68% between the highest and lowest of the seven estimates.

- The 10.90% average was slightly higher than when I did Armin-1 three months earlier.   Armin-1 estimated 10.00% EPS and I decided to use the same for Armin-2.

- For how I estimate EPS for all my SSGs, see Estimating EPS.

(4) Forecasting Future High and Low PEs:

Avi’s SSG

- Avi used 18.0 as his Forecast High PE (down from the historical average of 24.5) and 9.0 as his Forecast Low PE (down from the 11.8 average), and gave the group three choices for their forecast: too high, too low, or just about right.

** The Presentation Slides do not indicate how Avi determined his 18.0 & 9.0.  Slide 54 does show that both High & Low PEs have been trending down each year for the last 5 years with 2008 the lowest at 20.4 & 8.6.

Armin’s SSGs

- Armin-1 and Armin-2 both used 20.4 & 8.6 as the Forecast High & Low PEs, from 2008 and the lowest PEs in the last 5 years.

** When PEs are trending down, I most often use the lowest High and Low PEs in the last 5 years (and when trends are up, I usually begin with TK 5’s Alt-M command, especially when I know nothing about the company).

(5) Final Results:

Avi’s SSG

- His Forecast High Price in the next 5 years (Forecast High PE x High EPS) was $77.20, slightly below the low end of Value Line’s estimated $80-100 High Price.

** I never want to substantially exceed or fall below VL’s estimate, at least not without a very good reason.  For how I determine what’s reasonable for my SSGs, see: Determining What’s Reasonable and What’s Not: An Update.

- Avi got an Upside/Downside Ratio of 1.8 which does not satisfy the minimum SSG Buy criteria of 3.0.  His Total Return was 12.8% which does not satisfy the second, minimum Buy criteria of 15.0%.

[** The recorded session also reveals that the Consensus agreed with each one of Avi’s 5 judgments (Sales and EPS growth, High & Low PEs, and Low Price), perhaps largely because Avi labeled each one as “seems good” or “just about right.”]

[** And, at the very end of the recording, Avi reveals that his SSG was probably “a little too conservative.”]

Armin’s SSGs

- Armin-1 got a 3.8 U/D and a 21.1% TR which do satisfy the SSG Buy criteria.  However, Armin-2, with essentially the same judgments, got a 2.3 U/D and an 11.6% TR which do not satisfy the minimum Buy criteria.

- The reason for this dramatic change is that MDT’s price increased from $32.04 in Armin-1 to $45.99 in Armin-2, up some $13.95 or 43% per share in three months.

Take Stock

- Take Stock got a $107.14 Forecast High Price that was slightly higher than the high end of VL’s estimated High Price of $80-100.

- However, it’s Forecast Low Price was $56.82 and substantially exceeded MDT’s current price of $45.75.  This is a SSG NO-NO according to the BI/NAIC SSG Manual, but this is one of several issues where Take Stock is deliberately designed to be different.

** I think a Low Price that’s not low but high is a serious defect and, when it exceeds the stock’s current price, is especially nutsy!

(6) Quality:

- S&P rated MDT an A- for Quality which is third highest out of its 8 rankings.

- Take Stock gave MDT an unsatisfactory Quality Rating of 3.2 as a minimum of 3.4 is required to pass muster, 6.7 is desired and 10.0 is the max.

(7) Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE):

PTPM

- MDT’s Pre-Tax Profit Margin is trending down which is usually a red-flag warning sign to consider abandoning the SSG.   Avi did not show this downtrend in the Presentation Slides, but did show it in the Extra Handout Slides.

** Avi did point out the so-called barbed-wire fence (Slide 49) which is not to be crossed if the company’s Quality is questionable. Why he crossed the barbed-wire fence was not explained.

- However, I determined that MDT’s PTPM is way better than its industry average using S&P data (30.0% vs 15.9%, Health Care Equipment industry) and also way better with Hemscott/Morningstar data (30.0% vs 16.2%, Medical Appliances & Equipment industry).  Moreover, MDT ranks 8 out of 118 companies with Hemscott data. 

** Soooooo, I would not cease any analysis just because of MDT’s PTPM trend.

- To learn more about using Industry Info, see: Investigating Industry Info.

 ROE

- No problems are indicated by the ROE trends as they are even and not going down.  Although MDT is better than its industry average with S&P data (24.7% vs 13.3%), it is well below its industry average with Hemscott/Morningstar data (26.2% vs 68.7%).  Here, the problem is the industry average, not MDT.

** The Hemscott/Morningstar industry average is distorted by one company (KCI, 2430% ROE) and when that one company is removed, MDT is much better than the adjusted industry average (26.2% vs 16.2%). 

** Hemscott data at the StockCentral website allows us to easily spot outliers and adjust any industry average because it includes the data for each company in the industry as well as the industry averages.

(8) Competitors:

- According to YahooFinance and Hoovers.com, MDT’s direct competitors are BSX, JNJ and STJ.

- MDT’s latest 10K report lists competitors in each of its seven segments and BSX, JNJ and STJ are mentioned most often:

** BSX and STJ in the CRDM segment; JNJ in spinal; BSX and JNJ in cardiovascular; BSX and STJ in neuromodulation; JNJ in diabetes; and JNJ in surgical technologies.

(9) Legal Problems:

- In October 2007, MDT volintarily stopped the worldwide sale and distribution off its Sprint Fidelis leads which the FDA classified as a Class 1 recall.  Leads are sophisticated wires that directly connect the heart to a defibrillator.  Some Fidelis leads had broken and been involved in unnecessary shocks and at least 16 deaths acknowledged by MDT.

** By August 2009, according to MDT’s latest 10K report, some 1250 lawsuits had been filed against the company including 37 class actions involving 2300 individual personal injury cases.  These suits seek money damages and allege negligence, breach of warranty and other claims.

- In October 2009, after MDT’s 10K had been filed, a Hennepin County (MN) court dismissed 600 of these suits.  Its ruling was based on a 2008 US Supreme Court decision that federal law, the Medical Device Amendments of 1976,  explicitly preempts and essentially prohibits litigation after the FDA has approved a medical device as safe and effective following a full review.

** An article in the New England Journal of Medicine summarized the meaning of this Supreme Court decision: “Patients injured by poorly designed but FDA-approved medical devices now have no recourse.” [emphasis added]

- If you’re interested in learning more about MDT’s other legal problems as well as its business and growth plans, checkout my 10/3/09 post: Measuring Medtronic (MDT)

Armin

*** [I'd appreciate some feedback about this post, especially if you think it's too long. Other suggestions, of course, are also welcome] *** 

 

Brainstorming BRLI (Bio-Reference Labs)

 - Bio-Reference Laboratories (BRLI) is the third largest full service laboratory in the U.S., according to the company’s website, and the largest independent regional laboratory in the Northeast.  It is primarily a clinical testing lab that serves physician offices, mostly in the greater New York City metropolitan area.  

- Based on BI/NAIC criteria, BRLI is a small sized company with annual sales under $500 M (it had $301 M in 2008).  SSGers often have difficulty finding small companies to buy and, in 2009, I analyzed two others; click the following links if you’re interested:

** Studying Strayer (STRA), Nov 29, 2009 ($245.5 M sales in 2008)

** Quantifying Quality Systems (QSII), Feb 15, 2009 ($396.3 M sales in 2008)

Company Background:

- BRLI operates two clinical laboratories, two pathology labs, and three other specialty labs.  In addition to routine testing, BRLI also specializes in esoteric testing which includes molecular diagnostics, anatomical pathology and correctional health care.

 ** Routine lab tests generate about 50% of its net revenue as do esoteric tests which cost more.

 - BRLI also operates as a national oncology laboratory under its GenPath brand and a national lab for sexually transmitted diseases and Women’s Health.  Moreover, GeneDx, a wholly owned subsidiary, is the BRLI genetics laboratory.

- Through its PSIMedica unit, BRLI also operates a clinical knowledge management service.  This system uses data from lab results, prescription drugs, and claims to provide administrative and clinical support.

- And, through its CareEvolve subsidiary, BRLI also operates a web-based portal to provide ordering and lab results to its physician customers.

- BRLI has averaged 20% or more Sales growth over the last 5, 3 and 1 years with S&P data.  EPS growth has averaged 19% over the last 5 years, increasing to 27.5% 3 years ago, and down to 22% last year.

- Its Q3 sales of 25% Sales was the best ever in the company’s history; EPS was up 35%.

Financial Condition:

- There is no Morningstar financial appraisal because there is no Morningstar report and there is no Value Line assessment because BRLI is only covered in VL’s small and mid-cap edition which does not evaluate the company’s financial condition.

- The Bob Adams one-click annual report spreadsheet is especially useful here because all public companies can be evaluated.  It gives BRLI’s latest A.R. a 63 out of 100 with nine bullish and seven bearish results:

** The bullish, good things include: sales are increasing and increasing faster than their related costs; gross profit margin is increasing; debt is decreasing; and gross profit margin is increasing and is greater than the industry average;

** The bearish, not-so-goods include: accounts receivable are increasing; free cash flow should be higher and is less than sales growth;

** You can get a link to this free, super-duper spreadsheet and an explanation of its several features by going to my Favorite Links page: click here.

SSG Discussion:

- The table below compares two SSGs from the BI First Cut page with one of mine and with Take Stock.  After the table, I discuss several ssues identified by the comparison.

Bio-Reference Labs (BRLI)	JulieM	BobM	Armin	Take Stock
Date	9-30-09	11-15-09	12-2-09	Same
Data	S&P	Same	Same	Hemscott Morningstar
Price	$39.26	$32.52	$33.51	Same
52 week High  & Low Price	$36.13 & $18.35	$36.25 &       $20.00	Same &              $20.08	N/A
Last Q of Reported Data	Q3 ending        7-31-09	Same	Same	Same
Software Used	TK 6	Same	TK 5	Online TS
Project Growth     From End of	Last Q	Same	Same	Last FY
Sales Growth	15.00%	17.00%	12.00%	20.00%
EPS Growth	15.00%	16.10%	14.00%	10.40%
High PE	30.0	29.0                  (from 2008, rounded)	29.1                    (from 2008)	28.2
High EPS	$2.74	$2.87	$2.40	$1.83
High Price	$82.20	$83.20	$69.80	$51.61
Value Line Small Cap Edition Estimated High Price = NOT AVAIABLE
Low PE	15.0	15.2	16.2                        (from 2008)	11.3
Low EPS	$1.23                (Last FY)	$1.36             (TTM)	Same               Same	$1.20
Low Price	$18.50	$20.70	$22.00	$13.56
Upside/Down	3.0	4.3	3.2	0.91 (imputed)
Total Return	19.10%	20.70%	15.80%	09.00%
SSG Buy Under	N/A	N/A	$33.95	$23.06
RV/PRV (no outs)	99.6/86.6	94.5/81.4	97.2/87.0	N/A
Quality	S&P = N/A	S&P = N/A	S&P = B	3.2 (un-acceptable)
PTPM – 5 yr ave	08.60%       Trend even	09.00%            (05 out)          Trend even	08.60%              Trend even	08.50%   Trend N/A
ROE – 5 yr ave End Equity	17.20%    Trend down	19.90%            (04 out)    Trend even	17.20%              Trend down	N/A
ROE – 5 yr ave   Start Equity	N/A	N/A	21.20%                Trend down	20.6%              Trend N/A
Debt to Equity – 5 yr ave	09.60% Trend down	Same             Same	09.30%             Same	N/A

Estimating Future EPS Growth:

- Julie wanted to be conservative and chose the same 15% EPS growth rate as her Sales estimate.

- Bob used the NAIC/BI Preferred Procedure and got 18.1% EPS but, because that was higher than an analyst estimate of 16.3%, he also wanted to be conservative and used 16.1%.

- When I did my SSG, the seven analysts I always check were closely estimating long-term EPS at an average of 18.60% with FactSet CallStreet via CNNMoney.com high at 20.00% and Zacks.com low at 17.67%.  VL was 17.7%, Reuters was 18.25%, Thompson Reuters via YahooFinance was 18.75%, and FactSet via Morningstar.com was 19.30%

** The 3 analysts at FactSet CallStreet via CNNMoney ranged from a low of 16.0% to a high 0f 20.0% while the 4 at FactSet via Morningstar ranged from a low of 15.0% to a high of 20.0%.

** The average less 1 Standard Deviation was 17.7% and the average less 2 SDs was 16.9%

** Usually, I don’t go lower than the average less 2 SDs, but wanted to show that I could still satisfy the SSG Buy criteria with an even lower estimate.  So, I chose 12.00% EPS growth.  For how I estimate EPS for all my SSGs, see Estimating EPS 

- Take Stock used 10.4% primarily because it determined that historical growth was only 11.1%.  TS did not explain how it derived 10.4%.

** When I looked at Hemscott data, I saw that 11.1% was the EPS growth for the last two years, but that 14.9% was the rate for the last 3 and 17.1% for the last 5 years.

 Relative Value/Projected Relative Value:

- Bob uses an RV standard of 85-100 for every SSG he completes.  Bob, Julie and I all satisfied that criteria while Take Stock does not use the RV or PRV concepts.

- I am not a fan of the RV (the current PE divided by the five-year average PE) for several reasons:

** First, RV changes due to the PE outliers we eliminate.  Often, SSGers don’t agree on outliers and/or don’t tell one another what they’ve eliminated when they discuss SSGs.  Here, none of us removed any outliers so our RVs were comparable;

** Second, RV looks better as the price and then the PE drop.  During our current recession, as the Ps and Es have both dropped, I think RV sends a misleading signal. See: BI/NAIC Stock Selection Handbook written by Bonnie Biafore, page 63;

** Bonnie’s understanding of RV is considerably different than Bob’s: she applies a different standard (110 is her upper limit, not 100) and she uses the average PE after outliers have been removed (which Bob does not do).  BI/NAIC Handbook, page 113.

Pre-Tax Profit Margin (PTPM), Return On Equity (ROE):

- For how I investigate PTPM, ROE and competitors, see Investigating Industry Info

PTPM:

- With S&P data, BRLI’s Pre-Tax Profit Margin is the same as its industry average (Health Care Services industry, 8.60%).

** Julie thought BRLI’s average was low, but hadn’t checked industry averages or competitors;

** Bob eliminated 2005, presumably because it was a low outlier, so his PTPM average was different and not factually comparable;

- With Hemscott data, BRLI’s PTPM (8.50%) was substantially below its industry average (15.3%, Medical Labs and Research industry).  None of the 30 companies distorted the average and BRLI ranked 9^th.

 ROE:

- With S&P data, BRLI’s Return on Equity (17.2%) was slightly better than its industry (15.4%).

** Julie didn’t address the downtrend in ROE

** Bob eliminated 2004, presumably because it has a high outlier, but that changed the trend to even from down which he missed or ignored.

 - With Hemscott data, BRLI’s ROE (16.7%) was slightly below its adjusted industry average (18.6%) after I removed AIQ’s ROE (266%) which distorted the average.

 

Armin

 

Scrutinizing Stryker (SYK)

[AF: The Online Stock Study of Stryker Corp, discussed below, is also summarized in the March 2010 issue of Better Investing magazine.]

Two months ago, Stryker Biotech LLC and its top executives were indicted by a federal grand jury.  The core charges involve marketing  a new bone growth product for uses not approved by the FDA. 

The parent, Stryker Corp (SYK), is  a large and highly regarded medical technology and equipment company that was the subject of the Online Stock Study for December at the BI website.  The SYK study was conducted differently than prior studies as no Consensus SSG was produced and Ann Cuneaz, who led the study, made all the judgments.  Ann is a very well respected volunteer educator and, most recently, the Education Program Manager for Better Investing. 

The Presentation Slides, Completed SSG, Value Line reports, and handout materials are all available to BI members for downloading.  A recording of the entire session should be available sometime soon.

Company Background:

- The 2008-2009 Stryker Fact Book explains that the company consists of two segments: Orthopedic Implants (59% of 2008 Sales, up 11%) and Medical Surgical Equipment (41%, up 14%).  Orthopedic Implants include artificial knees, hips, trauma and cranio-maxillofacial, and spine.  Med Surg Equipment includes operating room equipment, endoscopy, beds and stretchers. 

- The Fact Book estimates the worldwide orthopedic market at $35.6B and 10% growth in dollars with Stryker ranked first in terms of orthopedic sales and market share ($5.5B, 15%) followed by JNJ ($4.5B, 13%), ZMH ($3.9B, 11%), and MDT ($3.7B, 10%).

- With almost $3B in cash assets, Stryker has made several recent acquisitions: $525M to acquire privately held Ascent Health Care Solutions (2008 sales of $100M) which reprocesses and remanufactures medical devices; and $67M (plus up to $36M more) to acquire the assets to produce and sell Sonopet Ultrasonic equipment.

- Stryker has also raised its divided to $0.10 per share in 2009 and to $0.15 in 2010, and will now pay on a quarterly basis.

- Stryker is a favorite holding of BI investment clubs, ranking second out of the top 100 companies in 2009, behind GE with JNJ third, WAG fourth and MSFT fifth.

Legal Problems:

- Stryker announced in late October that one of its units, Stryker Biotech LLC, had been indicted along with several current and former top executives by a federal grand jury in Massachusetts.  The charges involve wire fraud, conspiracy to defraud the FDA, distribution of a misbranded device involving its OP-1 bone growth product, and false statements to the FDA.

** One allegation is very troubling, that patients were harmed by the use of the untested and unauthorized bone growth product;

** SYK’s press release did not deny the charges and acknowledged that conviction could result in significant fines and exclusion of the unit from federal and state health programs.

** Morningstar reported that the OP-1 bone growth product may be discontinued, given the FDA’s repeated concerns, and that it was excluding the product’s sales from its forecasts as well as including provision for a substantial fine or settlement.

** In March, I tried to assess the implications of the initial grand jury subpoena at:  Studying Stryker, Part 2

 - Value Line reported that Stryker has received four warning letters from the FDA involving quality and compliance issues at it plants in Ireland, New Jersey and Massachusetts.

** The company is spending some $200 M at all 21 of its facilities to improve quality and compliance, and VL thought SYK would continue its spending even after all the FDA letters were resolved (three remain open).

SSG Discussion:

- The table below compares Ann’s SSG with two of mine and with Take Stock.  My two SSGs are identical except Armin-1 uses S&P data (like Ann did) while Armin-2 uses Hemscott-Morningstar data.  Take Stock is a one-click, computerized program at the Stock Central website that is designed to produce a conservative result..

- After the comparison table that follows, I discuss several issues that were identified by the comparisons.

Stryker                   (SYK)	AnnC	Armin-1	Armin-2	Take Stock
SSG Date	12-2-09	12-7-09	Same	12-4-09
Data	S&P	S&P	Hemscott-Morningstar	Same
Price	$51.20	$51.61	Same	$51.81
52 week High &       Low Price	$51.32 &  $30.82	$52.62 &             Same	Same &             Same	Not Included
Last Q of                  Reported Data	Q3 ending          9-30-09	Same	Same	Same
Software Used	Online SSG	TK 5	Same	TS Online
Project Growth From End of	Last FY	Last Q	Same	Last FY
Sales Growth	08.00%	11.00%	Same	11.10%
EPS Growth	08.00%	10.40%	Same	11.10% initial   09.46% final
High PE	22.0	Same	Same	30.0
High EPS	$4.16	$4.71	$4.70	$4.46
Forecast                    High Price	$91.52               (3.6% < VL)	$103.60	$103.40	$133.67               (16% > VL)
Value Line Estimated High Price = $95-115 as of 11-27-09
Low PE	11.0	12.0	Same	19.8
Low EPS	$2.83	$2.87	$2.86	Same
Forecast                   Low Price	$31.13	$34.40	$34.30	$56.63               Higher than Current Price
Upside/Down	2.0	3.0	Same	Impossible to Calculate
Average Payout	15.0%	Same	Same	Unknown
Total Return	12.98%	15.6%	Same	21.5%
SSG Buy Under	Not Included	$51.70	$51.58	$68.61
RV/PRV                       (no outliers)	Not Included	67.9/61.5	67.7/61.4	Not Included
Quality Rating	S&P = Not Available	S&P =                   A+	Hemscott = Not Included	TS= 2.6 Unacceptable
PTPM – 5 yr ave	21.84%              Trend N/I	21.8%                Trend up	22.3%                Trend up	22.3%                   Trend N/A
ROE – 5 yr ave         with End Equity	20.29%          Trend N/I	20.3%                  Trend even	20.1%               Trend up	Not Included
ROE – 5 yr ave         with Start Equity	Not Included	24.5%                 Trend down	24.2%         Trend down	24.2%                 Trend N/A
Debt to Equity –   5 yr ave	Not Included	01.1%                   Trend down	01.1%              Trend down	Not Included

Ann’s SSG:

Estimating Future Sales Growth:

- Ann identified SYK’s historical Sales growth as 14.6% over the past 10 years, 12.0% over the last 5, and zero over the past quarter.

** Alhough not mentioned by the Presentation Slides, SYK’s sales growth also has held up well during our current recession averaging over 11.0% for the last 3 and 2 years.

- Ann also found several estimates of future Sales growth: Value Line at 8.5%; Morningstar, flat in 2009 & up to 12% through 2014; ACE, zero in 2009 & 7.0% in 2010; and Manifest Investing, 10.1%.

** VL’s 8.5% estimate is for Sales/share, not Sales; the ACE, or Analyst’s Consensus Estimate, was not identified, but it looks like it was derived from S&P’s Stock Report.

[** The recorded session, which was made available at the BI website long after I wrote this post, reveals that the Analyst’s Consensus Estimate was from Yahoo Finance, not S&P.]

- Ann decided to estimate 8.00% which became the first factor in her NAIC/BI Preferred Procedure.

Estimating Future EPS Growth:

- Ann’s PP consisted of: 8.00% Sales growth [less] 23.0% Pre-Tax Profit Margin, up from 21.8% and the only change in the default values [less] 27.5% Taxes [divided by] 397.7 M shares outstanding [equals] 7.9% EPS

- She identified SYK’s historical EPS growth as 24.1% over the past 10 years, 18.0% over the last 5, and 4.5% over the past quarter;

** SYK’s EPS growth also has held up well during this recession averagibg over 17.0% over the last 3 and 2 years

- She also found several estimates of future EPS growth: Value Line at 12.0%; Morningstar at 11.0%; ACE at 4.0% for 2009, 11.0% for 2010, and 10.6% for the next 5 years; and MI at $4.72 or 10.5%.

- Ann decided to estimate 8.00% future EPS growth which was almost the same as her PP.

Estimating the Forecast High and Low PEs:

- Presentation slide #37 shows the 5 year Average PE as 26.47 and the Current PE as 16.98.  This indicates a downtrend which Ann did not comment on.

- Slide #37 also mentioned several estimates that Ann uncovered: 22 average PE by VL for the next 3-5 years, 21 by MI, and 17 x 2010 one year target by S&P.

- Ann decided to use 22.0 as the Forecast High PE and 11.0 as the Forecast Low PE.

 Final Results:

- There is a conflict between the Presentation Slides and the Completed SSG because the Slides are based on a price $48.73, as of 11-23 when they were created, while the SSG uses a higher price of $51.20 as of 12-2 when the Online Study was conducted.

** Slide 34 shows a Upside/Downside of 2.43 while the SSG shows a U/D of 2.00;

** Slide 41 shows a Total Return of 14.12% while the SSG shows a TR of 12.98%

** What’s important here is that neither the Slides nor the SSG satisfy the minimum Buy criteria of 3.0 U/D and a 15.0% TR

** What’s also important is that SYK was selling close to its 52 week high and would be a SSG Buy with Ann’s judgments if it dropped to $46 per share.

[** The recording also has a panel discussion that followed the Study and the two panelists both thought Anne’s SSG was too conservative.]

Armin’s SSG:

Estimating Future EPS Growth:

- When I did my SSG, the seven analysts I always check were closely estimating long-term EPS growth an average at 11.20% with Reuters.com high at 12.10% and FactSet CallStreet via CNNMoney.com low at 10.00%.  S&P was 10.40%, Thomson Reuters via YahooFinance was 10.68%, Zacks was 11.63%, FactSet via Morningstar.com was 11.70%, and Value Line was 12.00%.

** The nine analysts at FactSet CallStreet via CNNMoney ranged from a high of 20.0% to a low of 5.0% as did the 11 analysts at Reuters.com.

** The average less 1 Standard Deviation was 10.38% and less 2 SDs was 9.54%.

- I decided to estimate 10.4% which was based on the average less 1 Standard Deviation (rounded).

Estimating the Forecast High and Low PEs:

- Stryker’s High & Low PEs have fallen from 40.3 & 28.2 in 2004 to 26.5 & 17.5 in 2008.

** Forecasting downtrends is largely a matter of guesswork since no one can foresee when and to what extent those trends will change direction.

- I decided to use 22.0 as my Forecast High PE, the same as Ann, and 12.0 as my Forecast Low PE, close to her 11.0.

Final Results:

- Unlike Ann, I satisfied the SSG Buy criteria: with Armin-1 (S&P data), I got a 3.0 U/D and 15.6% TR and with Armin-2 (Hemscott data) using the same judgments, I got the same results.

- The primary difference between our SSGs was that I estimated a higher EPS growth rate for the next 5 years (10.4% vs her 8.0%).  The seven analysts I checked were averaging 11.2% and I think any over-optimism was wrung out by reducing the average by 1 Standard Deviation.

** For how I estimate EPS for all my SSGs, see Estimating EPS

** For how I determine what’s reasonable and what’s not, see Determining What’s Reasonable and What’s Not: An Update

- Another difference, although not as significant, was that I projected growth from the end of the last Quarter while Ann, who used the BI Online SSG, had no option but to project from the end of the last Fiscal Year. 

Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE):

- The calculation of the annual averages and the 5-year averages for PTPM and ROE involve no judgment as the software automatically calculates them from the raw data.

** However, the assessment of those averages does involve judgment: does a downtrend indicate a red-flag warning sign of deteriorating fundamentals or, on the other hand, an unsustainable high average that’s becoming less extreme.

- Hemscott data at the StockCentral website provides the most complete picture.  It places Stryker in the Medical Instruments and Supplies Industry along with 115 companies total.

** Without the one company (DXR) that skews the PTPM industry average, Stryker’s 5 year PTPM average is substantially better than its adjusted industry average (21.8% vs 15.533%) and ranks 10^th out of 114 companies.

** And, without the two companies that skew the ROE industry average (EYE and REPR), Stryker’s 5 year ROE average is also way better than its adjusted industry average (20.1% vs 13.264%) and ranks 9^th out of 113 companies.

- S&P places Stryker in the Health Care Equipment Industry, but the data is not broken down by individual companies and it seems likely that those averages are skewed by the same 3 companies and maybe by others as well. 

Questions:

- What do you think:  are you troubled by SYK’s downtrend in ROE with Starting Equity or is my analysis satisfactory?  If not, what else would you want to look at?? 

- How do you estimate Future EPS Growth and would you estimate more or less than Ann’s 8.00% or my 10.40%?  How do you decide??

  

- Armin

Studying Strayer (STRA)

[AF addendum: Strayer Education , discussed below, is also the subject of a short article by Cy Lynch, BI’s growth stock guru, and his completed SSG both appear in the January 2010 on-line issue of Better Investing Magazine.]

- One purpose of this post is to demonstrate the powerful effect of projecting future growth from the last quarter of reported data vs. the last fiscal year.

** With that single change, my Forecast High EPS was some 16% greater than the Ken Kavula/Consensus SSG Forecast High EPS for Strayer Education (STRA).  Strayer was the Online Stock Study for October, we both used the same EPS estimate, and the only difference was that I projected growth from the end of the last Q while Ken & the Consensus projected from the end of the last FY. 

- Another purpose is to evaluate the different judgments that led Ken & the Consensus to decide that STRA was a SSG Buy while I concluded that it was a SSG Don’t Buy.

Online Stock Study:

- Strayer Education (STRA) was the Online Stock Study for October 2009 at the Better Investing website and was led by Ken Kavula, chairman of the BI Advisory Board and a small company guru. 

- BI members can download the Audio Presentation (54 mins), Presentation Slides, Value Line Reports, and the Completed SSG.

Company Background:

- Strayer Education (STRA) and its subsidiary, Strayer University, are for-profit companies.  At the end of 2008, SU had some 46,000 students at 71 campuses in 15 states (mostly on the SE coast) and a large online student body.

- SU offered the following degrees: Bachelor’s (54%), Master’s (27%) and Associates (11%) and its students were majoring in Business/Economics (61%), Information Systems (16%), and Accounting (12%). 

 - Morningstar reported that enrollment growth has averaged 18% per year for the last 5 years due to additional online students and new campuses.  Strayer currently seeks to add about 6-11 campuses annually.

- Morningstar also reported that Strayer has a lower cost structure than traditional schools, but offers its courses at similar prices.  And, according to Reuters, online courses are priced the same as on-campus offerings with over 32,000 students participating in SU’s online programs.

- Strayer’s revenue comes from three sources according to Wikinvest: about half is paid via federally insured loans, about 20% is paid by companies whose employees attend SU, and the rest is paid directly by students.

- Graduate level tuition at SU costs $2050 per course and undergraduate tuition costs $1515 per course for full-time students and $1590 for part-timers.  A BBA degree requires 180 credit hours and costs (at 3 credits per course) some $95,000.

- In Q 3, which ended 9/30/09, revenues increased 31% due to increased enrollment and a 5% tuition increase that was effective January 1^st. Enrollment increased 22% to 54,317 students with 39,129 taking at least one online class.

Company Financials:

- Value Line gave Strayer an “A” for Financial Strength, reported no debt and $38.6 M in cash as of 6/30/09.

- Morningstar says that Strayer is in “excellent” financial health with no debt and has the highest score for financial responsibility from the US Dept of Education.

  Discussion:

- The following table compares the Consensus & Ken Kavula SSG with two of mine and with Take Stock.  The only difference between my two SSGs is that Armin-1 uses S&P data while Armin-2 uses Hemscott-Morningstar data.  After the table, I discuss issues identified by the comparison.

Strayer Education  (STRA)	Consensus & KenK’s SSG	Armin’s                  SSG-1	Armin’s                SSG-2	Take Stock
Date	10/6/2009	Same	Same	10/3/09
Data	S&P	S&P	Hemscott-Morningstar	Hemscott-Morningstar
Price	$221.10	Same	Same	$211.83
52 week High &        Low Price	$239.99 &      $143.53	Same	Same	Not Included
Last Q of Reported Data	Q2 ending 06/30/09	Same	Same	Q2 ending 06/30/09
Software Used	Online SSG	TK 5	Same	TS Online
Project Growth         From End of	Last FY	Last Q	Last Q	Last FY
Sales Growth	19.00% (Consen.) 18.00% (Ken)	Same	Same	20.00%
EPS Growth	19.00%	Same	Same	18.50%
High PE	35.0 (Ken)	30.0	Same	30.0
High EPS	$13.53	$15.77	$15.74	$13.24
High Price	$473.55                    (4.0% > VL)	$473.10                    ($4.0% > VL)	$499.80                    (9.8% > VL)	$397.20
Value Line Estimated High Price = $335-455 as of 7/31/09
Low PE	25.0 (Ken)	18.7	Same	16.5
Low EPS	$6.61	Same	$6.60	$6.28
Low Price	$165.77	$123.60	$123.40	$156.60 (yield supported low)
Upside/Down	4.52	2.60	2.90	3.36 (imputed)
Total Return	17.91%	17.00%	18.8%	15.10%
SSG Buy Under	Not Included	$210.98	$217.50	$213.97
RV/PRV                        (no outliers)	Not Included	101.5/85.4	95.2/89.5	Not Included
RV/PRV                        (2004 out)	Not Included	106.4/89.5              (2004 out)	101.0/89.6             (2004 out)	Not Included
Quality	Ken = Pass	S&P = A	None	TS = 10 (highest)
PTPM –  5 yr ave	33.94%                  Trend N/A	33.9%                    Trend Down	Same                    Same	33.90%            Trend N/A
ROE – 5 yr ave          End Equity	33.47%                    Trend N/A	33.5%                       Trend Up	Same                     Same	Not Included
ROE – 5 yr ave          Start Equity	N/A	36.7%                        Trend Up	49.1                Trend Down	47.1%                 Trend N/A
Debt to Equity –         5 yr ave	-0-                              Trend Even	Same	Same                       Same	Not Included

(1) CONSENSUS & KEN’S SSG:

Future Sales Growth:

- Ken gave the group 5 choices to estimate STRA’s future Sales growth: 22.00%, its ten year historical growth; 21.00%, its five year historical growth; 22.80%, Value Line’s estimate [??]; 19.00%, Morningstar’s estimate; and Other.

** Value Line makes no long-term Sales estimate and Ken did not explain how he determined that 22.80% was VL’s estimate.

- The Consensus (49%) agreed on 19.00%, Morningstar’s estimate, but Ken decided that 18.00% was better even though it was not offered as a choice.

- Ken has a strange understanding of consensus decision-making!!

Future EPS Growth:

- Ken used the NAIC/BI Preferred Procedure as one estimate of future EPS growth and relied essentially on the software default values: Sales = 18.0%; Pre-Tax Profit Margin = 34.0% (the only change from the 33.9% default); Taxes = 38.5%; and Shares Outstanding = 14.0 M.  His PP result was 19.0% EPS.

** One participant asked why he didn’t use VL’s higher estimate of 14.5 M shares outstanding in the next 3-5 years and Ken said he thought VL’s report on Strayer was too aggressive.

- Ken gave the group 5 choices to estimate future EPS growth: 20.00%, the S&P estimate; 18.60%, STRA’s 10 year historical growth; 24.60%, VL’s estimate; 19.00%, Ken’s PP; and Other.

- The Consensus (47%) agreed on 19.00%, Ken’s PP, and not surprisingly Ken did not disagree this time.

Forecast High PE:

- Ken offered 5 choices: 40.4, the 5 year average High PE; 38.2, the 10 year average; 42.6, the 2 year average; 42.3, the most recent year High PE; and Other.

- Before the vote, Ken said he personally would only use the “Other” choice, but gave no further guidance.  It’s no surprise that the Consensus (76%) chose “Other” and Ken then chose 35.0, but gave no reason.

Forecast Low PE:

- Ken gave participants 5 choices: 25.3, the 5 year average Low PE; 21.1, the 10 year average; 24.2, the 2 year average; 25.1, the most recent year Low PE.

- The Consensus (39%) chose 21.1, the 10 year average, but Ken again disregarded the Consensus and selected 25.0, and again gave no reason.

Final Results:

- Neither the Forecast High nor Low Prices involve judgment with the Onlune SSG:

** The Forecast High Price is simply the product of the Forecast High PE (30.0) multiplied by the Forecast High EPS ($13.53) which totaled $473.10, some 4.00% greater than the high end of VL’s $335-455 High Price estimate.  I guess this VL estimate was not too aggressive for Ken.

** The Online SSG offers no options to decide the Forecast Low Price, unlike our SSG software, and relies soley on the Low PE x Low EPS which totaled $165.77.

 (2) Armin’s SSG:

Projecting Growth From:

- SSG software lets us choose from three options to project future growth (Last FY, Last Q, the historical trend line) and I chose the Last Q in order to demonstrate the powerful effect of this decision.

- Ken chose to use the Online SSG which offers no options and always projects growth from the Last FY.

 Future EPS Growth:

- I deliberately used 19.00% EPS growth, just as Ken did, and got a High EPS of $15.77 compared to his $13.53, a difference of 16.6% with S&P or with Hemscott-Morningstar data which, to me, is no small potatoes.

** The difference would have been 23.3% if I had projected from STRA’s Q3 which ended on 9/30/09, but was reported after the Online Stock Study, and Ken & the Consensus continued to use the Online SSG and project growth from the last FY.

- The seven different analysts I always check for every SSG were estimating long-term EPS at 21.06% with Value Line high at 25.00% and FactSet via Morningstar.com low at 19.50%.  S&P and FactSet CallStreet via CNNMoney.com were both 20.00%, Zacks.com was 20.44%, Reuters was 21.24%, and Reuters Thomson via Yahoo Finance was 21.25%.

- The six analysts at FactSet Call Street via CNN Money.com ranged from a low of 14.00% to a high of 23.0%.  The six analysts at Reuters.com ranged from a low of 18.00% to a high of 24.40%. 

 - Any EPS estimate lower than 14.00% is way too low for me while higher than 24.40 or 25.00% seems way too high.  These low and high estimates are how I determine what’s reasonable and what’s not; see: Determining What’s Reasonable and What’s Not: An Update 

- For how I estimate EPS for all my SSGs, see: Estimating EPS

Forecast High PE:

- I used 30.0 compared to Ken’s 35.0 which I thought was too high.  Toolkit’s Alt-M command usually is the most conservative option.  It eliminates the 5 highest High PEs in the last 10 years, averages the rest, and shows 31.9 with S&P data (31.5 with Hemscott data).  The Online SSG that Ken used does not include the Alt-M command.

Forecast Low PE:

- The major difference between Ken’s SSG and mine is our Forecast Low PEs.  Ken used 25.0 while I used 18.7.  This explains why I got a SSG Don’t Buy while Ken got a SSG Buy.

(3) Pretax Profit Margin (PTPM) and Return on Equity (ROE):

- Ken missed or ignored the 5 year downtrend in PTPM (Presentation Slide 26) which typically signals a red-flag warning sign of potential trouble.

- STRA’s PTPM us better than its Industry Average (33.9% vs 14.4%), but the company’s ROE is worse than its Industry Average (33.5% vs 39.9%).

- Ken compared STRA to three peers: Apollo Group (APOL), ITT Educational (ESI) and DeVry (DV).  He found that STRA was better than the three peers in terms of PTPM, but worse than 2 of the three in terms of ROE.

 - Armin

Contemplating Cognizant (CTSH)

This year, Forbes, Business Week and Fortune magazines all have recognized Cognizant Technology Solutions (CTSH) as an outstanding growth company.  Wikipedia mentions six, noteworthy achievements:

- In 2009, CTSH ranked #7 on Forbes’ 25 Fastest Growing Tech Stocks, #31 on BusinessWeek’s Top 50 Companies, #51 on BusinessWeek’s 100 Hottest Tech Companies, #90 on Fortune’s 100 Fastest Growing Companies (seventh consecutive year on the list), #716 on the Fortune 1000, and was also listed on Forbes’ The Global 2000 (no rankings, Software and Services Industry).  [See footnote 1 for URLs]

COMPANY BACKGROUND:

- CTSH is a global information technology, consulting and outsourcing services company headquartered in New Jersey, with some 50 IT or development centers worldwide, and with most of its 62,000 employees in India.

- According to its latest Annual Report, CTSH is organized into four segments and its 2008 revenue was: 46% from financial services (up 28%), 24% from healthcare services (up 36%), 16% from retail/manufacturing/logistics (up 38%), and 14% from communications and other high tech. About 79% of its total revenue came from customers located in North America.

- Morningstar thinks CTSH’s business model provides a competitive advantage because its management is based in the U.S. and key employees are located on-site.  In 2008, Cognizant had some 565 customers (up from 500 in the prior year and 400 two years ago), with 12,000 of its employees based in North and South America and 2,700 in Europe.

- With either Hemscott or S&P data, sales growth has been spectacular averaging more than 47% per year over the last 10, 5 and 3 years, and EPS growth more than 41% over the same periods. 

** Growth has slowed: last year’s annual Sales were 32% and EPS was 25% (Hemscott) or 26% (S&P).

** Growth in Quarter 3 was up a solid 16% Sales and 18% EPS (so far only reported by S&P) while Q2 growth was up 13% Sales and over 34% EPS (both S&P and Hemscott). 

- Value Line’s latest report concluded that CTSH’s stock price has risen over 115% since the start of 2009, and over 15% since its August report, and now offers limited price appreciation over the next 3-5 years.

COMPANY FINANCIALS:

- VL rated Cognizant an “A” for Financial Strength with no debt and almost $1 B in cash assets.  Morningstar said much the same.

- The one-click Annual Report spreadsheet by Bob Adams gave Cognizant’s 2008 A.R. a 44 out of 100 with 9 Bullish and 6 Bearish results:

** The 9 Bullish or good things included: Sales are increasing and are increasing faster than related costs, no long-term debt, and gross profit margin is growing;

** The 6 Bearish or not-so-goods included: Accounts Receivable are increasing, free cash flow growth is less than sales growth, and shares outstanding are increasing.

DISCUSSION:

The following table compares the SSG by BudS, which I got from Better Investing’s First Cut page, with two of mine and with Take Stock.  The only difference between my two SSGs is that Armin-1 uses Hemscott-Morningstar data from the StockCentral website (like Bud did) while Armin-2 uses S&P data from the BI website.

After the table, I discuss issues identified by the comparison and, once again, ask some questions that I hope you’ll respond to (there are no “right” answers).

Cognizant Technology  (CTSH)	BudS	Armin-1	Armin-2	Take                   Stock
Date	10-7-09	11-13-09	Same	Same
Data	Hemscott-Morningstar	Hemscott-Morningstar	S&P	Hemscott-Morningstar
Price	$39.47	$44.77	Same	Same
52 week High &                  Low Price	$39.61 &         $14.38	$44.77 &         Sane	Same &              Same	Not Included
Last Q of Reported             Data Ending on	Q2 ending         6-30-09	Q2 ending       6-30-09	Q3 ending          9-30-09	Same
Software Used	TK 6	TK 5	Same	TS Online
Project Growth                  From End of	Last Q	Same	Same	Last FY
Sales Growth	15.00%	16.00%	Same	20.00%
EPS Growth	15.00%	16.00%	Same	20.00%
High PE	33.3	25.5                 (from 2008)	25.8                    (from 2008)	30.0
High EPS	$3.23	$3.37	$3.53	$3.59
High Price	$107.60          (65% > VL on 8-21-09)	$85.90            (32% > VL)	$91.10              (40% > VL)	$107.70             (65% > VL)
Value Line Estimated High Price = $40-65 on 8-21-09 and $50-75 on 11-20-09
Low PE	22.4	10.2                 (from 2008)	10.0                  (from 2008)	17.7
Low EPS	$1.15                 (from 2007)	$1.60              (ttm)	$1.68                (ttm)	$1.58
Low Price	$17.30(“other”           option)	$16.30             (low PE x        low EPS)	$16.80              (low PE x             low EPS)	$22.07                  (low PE x                low EPS)
Upside/Down	3.1	1.4	1.7	3.9 imputed
Total Return	22.2%	13.9%	15.3%	22.3%
SSG Buy Under	N/A	$33.70	$35.38	$41.98
RV/PRV (no outs)	70.7/61.6	80.2/69.3	85.3/73.6	Not Included
Quality	Not Included	Same	B+	3.2 unacceptable
PTPM – 5 yr ave	19.8%              trend down	Same               Same	Same                 Same	19.8%                 Same
ROE – 5 yr aveEnd Equity	Not Included	21.5%               trend even	21.0%                trend even	Not Included
ROE – 5 yr aveStart Equity	31.1%               trend down	Same              Same	30.5%           trend down	31.2%                  trend down
Debt to Equity –5 yr ave	-0-                      trend even	Same                Same	Same                   Same	Not Included

Data Differences:

- CTSH ended its last quarter on 9-30-09, but that data is only reported by S&P at this time.  This doesn’t happen often, but is something to be aware of because the choice of SSG data from either Hemscott or S&P can make a noticeable difference whenever we project growth from the last quarter (as I usually do).

- My SSGs were done 5 weeks after Bud’s and, in the interim, CTSH’s price rose 15% to a 52-week high.  I hope he bought it below $40 per share.

Estimating Future EPS Growth:

(A) Bud estimated 15.00% EPS growth and his First Cut write-up explained that he was being conservative “since few companies average over 15% over the long haul.”

** CTSH is, in fact, one of those exceptional companies and its historic EPS growth has averaged much more than 15% over the long haul: 40.5% over the last ten years; 42.5% over the last five; 32.8% over the last three; and 25.0% last year, it’s lowest ever (all with Hemscott data which Bud used).

(B) The seven analysts I always check for every SSG were estimating long-term EPS at an average of 20.03% with Value Line high at 28.50% and FactSet via Morningstar low at 17.30%.  Reuters and FactSet CallStreet via CNNMoney were both 18.00%, Zacks was 18.14%, S&P was 20.00%, and Thomson-Reuters via Yahoo Finance was 20.30%.

** The consensus of the 8 analysts at FactSet CallStreet ranged from a high of 20.0% to a low of 12.0% as did the 9 analysts at Reuters.  And, without Value Line’s estimate of 28.50%, which looks like an outlier to me and which didn’t change in its 11-20 report, the average of the six other analysts dropped to 18.62%. That average less 1 Standard Deviation equals 17.40% and less 2 SDs = 16.18%.

** I projected 16.00% EPS growth based on the analyst average without VL less 2 SDs which, I think, is a conservative approach based on reason.  My 16% estimate is not much different than Bud’s 15%, but at least I’m relying on a rational method, not my gut feelings, and also learned what’s unduly conservative or excessive.  For example, I thought the 12.0% low estimates at FactSet Call Street and at Reuters were too low by comparison.

** For how I estimate EPS for all my SSGs, see: Estimating EPS

 (C) Take Stock used 20.00% EPS which is the highest it will ever estimate for any company no matter how high its actual growth.  In this regard, Take Stock is like Bud as both set (arbitrary) limits on future growth that are unrelated to the company’s actual growth.  

Forecast High and Low PEs:

(A) Bud did not explain, but his 33.3 Forecast High PE seems to be based on eliminating the three years 2004-2006 and his 22.4 Forecast Low PE on eliminating the 2 years 2004-2005. 

(B) I saw that CTSH’s High and Low PEs were trending down and used 2008, the lowest in the last five years, as my Forecast High and Low PEs (25.5 and 10.2).

(C) Take Stock used 30.0 as its Forecast High PE, isn’t designed to look for trends, and always uses a two-step methodology:

** TS first eliminates the five highest High PEs in the last 10 years and averages the rest.  It then limits High PEs to 1.5 times its estimated EPS growth or, in this case, to 30.0 (1.5 x 20.00 = 30.0) which is the maximum it will ever forecast no matter how high the company’s actual PEs.  A 30.0 High PE is equivalent to a 1.5 High PEG maximum.

** TS used 14.7 as its Forecast Low PE which came from eliminating the five highest Low PEs in the last 10 years and averaging the rest. If that average was more than 20.0 (not the case here), TS would limit the Low PE to a Low PEG of 1.0 max (1.0 x 20.00 = 20.0).

Forecast High Price:

(A) With his 15.00% estimated EPS and 33.3 High PE, Bud got $107.60 for his Forecast High Price which was a whopping 65% greater than the high end of Value Line’s estimated $40-65 High Price on 8-21-09 and 43% greater than VL’s updated $50-75 estimate on 11-20-09.

** That’s way too high for me and I never want to substantially exceed VL’s estimate; see: Determining What’s Reasonable and What’s Not: An Update

(B) With my 16.00% estimated EPS and 25.5 High PE, I got $85.90 for my Forecast High Price which was 32% greater than VL (and only 14.5% greater than VL’s updated estimate).

** 32% is usually too high for me and I prefer to be no more than 20-25% higher than VL.  Because both of my SSGs did not statisfy the Buy criteria (UD >3.0 and TR >15%), there was no point to lower my judgments.

(C) With its 20.00% estimated EPS and 30.0 High PE, Take Stock got $107.70 for its Forecast High Price which, like Bud, was also a whopping 65% greater than the high end of Value Line’s estimated High Price of $40-65 and also 43% greater than VL’s updated estimate.

Forecast Low Price:

(A) Bud inexplicably reduced his Forecast Low EPS to 2007’s $1.15 and then disregarded the Low EPS x Low PE option, which is most appropriate for growth companies like CTSH, and decided to use $17.30 which he also did not explain.

(B) & (C) Take Stock and I used the same method (Low PE x Low EPS), but got much different results because TS used a much higher Low PE than I did (17.7 vs 10.2).

Quality:

(A) Bud and Armin-1 used Hemscott-Morningstar data which does not provide any Quality rating.

(B) Armin-2 used S&P data and gave Cognizant a B+ Quality rating which ranked fourth out of its 8 ratings.

(C) Although Take Stock gave Cognizant high marks for its recent and historic growth, CTSH’s downtrend in PTPM resulted in an overall Quality rating of 3.2 which is unacceptable.  TS requires a 3.4 minimum to pass muster and a 6.7 is desired.

Pretax-Profit Margin (PTPM) and Return on Equity (ROE):

-  Cognizant’s five-year average PTPM of 19.8% is trending down which usually is a red-flag warning sign.  However, CTSH is better than its Industry Average of 16.7% (Business Software & Services, Hemscott data) and ranks 14^th out of 135 companies.

- Cognizant’s five-year average ROE of 21.5% is also trending down.  But, that is far less than CTSH’s industry average of 78.3% which is substantially distorted by 5 companies with ROEs over 100%.  Nevertheless, CTSH still ranks 15^th out of 135 despite the distorted average.

-  For more on using Industry Information to inform our SSGs, see: Investigating Industry Info

Questions:

(1) Are you bothered by Cognizant’s PTPM and ROE downtrends, or does my assessment satisfy you that they are not red-flag warning signs of potential trouble?  If you’re not satisfied, what else would you want to look at??

(2) CTSH has excellent Sales and EPS growth (both historic and expected), but does not satisfy the SSG’s minimum BUY criteria of a 15.00% Total Return and a 3.0 Upside/Downside Ratio. 

At this time, would you buy Cognizant based on my SSG with its 13.9% TR and 1.4 U/D? Would you have bought it based on Bud’s SSG with a 22.2% TR and a 3.1 U/D??

I like CTSH a lot and have followed it for several years; see:  Two Small Company Stocks: Cognizant Technology Solutions (CTSH) and Jack Henry and Associates (JKHY), September 5, 2006 (CTSH is no longer considered a small company).

- Armin

  _________________________________________________

Footnote 1:

Forbes 25 Fastest Growing Tech Stocks (#7 in 2009),  http://www.forbes.com/forbes/2009/0216/048b.html

BusinessWeek’s Top 50 Companies (#31 in 2009),   http://images.businessweek.com/ss/09/03/0326_bw50/21.htm

BusinessWeek’s Hottest Tech Companies in 2009 (# 51),  http://images.businessweek.com/ss/09/05/0521_IT_100/52.htm

Fortune 100 Fastest Growing Companies (seventh consecutive year, #90 in 2009),  http://money.cnn.com/magazines/fortune/fortunefastestgrowing/2009/snapshots/90.html

Fortune 1000 (#716 in 2009),  http://money.cnn.com/magazines/fortune/fortune500/2009/full_list/701_800.html

Forbes The Global 2000 (no rankings, 2009 Software & Services Industry) , http://www.forbes.com/lists/2009/18/global-09_The-Global-2000-Software-Services_9Rank.html

Checking Out Coach (COH)

[AF addendum: PV’s SSG and First Cut write-up, discussed below, are also summarized in the January 2010 issue of Better Investing magazine.]

- Coach (COH) designs, makes and sells luxury apparel, primarily expensive women’s handbags, and has been hard hit by our current recession.  My software’s PERT-A shows steadily declining EPS growth for the last 8 consecutive quarters with COH’s worst performance in the last quarter (ending 9-30-09) at -8.1% EPS, worse than its -6.8% in the prior quarter.

- However COH’s stock price has gained 60% in the last 12 months (from around $12 per share to $33), some 35% in the last 6 months, and almost nothing in the last month.

-  Is Coach a good SSG Buy at this time which means, to SSGers, is it a good growth company that is selling at a good price? Let’s see.

Company Background:

- According to Wikinvest and COH’s latest Annual Report, the company operates in two segments: Direct-to-Consumer that consists of Coach-operated retail stores in North America, Japan, Hong Kong, Macau, and mainland China (84% of FY 2009 sales); and the Indirect segment that includes twp units, United States Wholesale and Coach International, both of which supply department stores and other authorized retailers.

** Women’s handbags are the company’s main driver of sales even though Coach has been trying to diversify its product lines.  Handbags have gone from 65% of sales in FY 2006 to 62% in FY 2009 while accessories have increased from 28 to 29% and all other products also have increased from 7 to 9%.

** In addition to product diversification, Coach has several other plans to spur future growth: 

>> a new ultra-luxury division that will sell expensive apparel in a small number of independent boutiques, not in Coach stores;

>> a new Poppy collection that is targeted to younger women which, in Q1 FY 2010, increased the company’s sales by 1%;

>> aggressive expansion into China, to capitalize on the emergence of its growing middle class, with plans to open 50 retail stores in the next 5 years and increase its market share from 3 to 10%.

- Coach has 330 full price stores and 111 factory stores in North America, 155 stores in Japan, and 128 stores in other parts of the Far East.

- Two years ago, COH was BI’s Growth Company of the year.  At that time it was selling for $44.53 per share and looked like a SSG Buy to me.  See:  Coach (COH): Better Investing’s Growth Company for the Year 2007,  September 3, 2007  

Company Financials:

- Value Line rated Coach an “A” for Financial Strength with $800 M in cash assets and only $25 M in debt.  Morningstar held that Coach was in “excellent” financial health with little debt and the ability to turn about 20% of its sales into free cash flow.

- The super-duper Annual Report spreadsheet by Bob Adams gave Coach’s 2009 A.R a 44 out of 100 with 9 Bullish and 9 Bearish results:

** The Bullish-good things included increasing sales and they are increasing faster than cash flow, reasonable debt to equity, and good return on free cash flow.  The Bearish not-so-goods included increasing accounts receivable and inventories, the cost of sales increasing faster than sales, and free cash flow less than sales growth;

** You can get this free spreadsheet and an explanation of its many features by going to my Favorite Links page: click here.

- In April 2009, the Coach Board voted to initiate a cash dividend of $0.30 per share.

Discussion:

- Here’s a table comparing P.V.’s SSG, which I got from the BI First Cut page, with two of mine and with Take Stock.  The only difference between my two SSGs is that Armin-1 uses S&P data from the Better Investing website while Armin-2 uses Hemscott-Morningstar data from the StockCentral website.

- After the table, I discuss issues identified by the comparison.

Coach                   (COH)	P.V.	Armin-1	Armin-2	Take Stock
Date	10-21-09	10-29-09	Same	Same
Data	S&P	S&P	Morningstar- Hemscott	Same
Price	$33.14	$32.87	Same	$31.83
52 week High       & Low Price	$35.47 &         $11.41	Same &             Same	Same &             Same	Not                             Included
Last Quarter              of Reported Data	Q1 ending             9-30-09	Same	Q4 ending              6-30-09	Same
Software Used	TK 5	Same	Same	Online TS
Project Growth        From End of	Last FY	Last Q	Same	Last FY
Sales Growth	12.00%	13.00%	Same	01.50%
EPS Growth	15.40%	13.00%	Same	-10.80%
High PE	27.0	21.1                   (3 yrs out)	21.5                   (Same)	25.2
High EPS	$3.91	$3.54	$3.53	$1.88
High Price	$105.60             (78% > VL as    of 8-7-09)	$74.70               (25% > VL)	$75.90             (27% > VL)	$27.21                    (15% < current price
Value Line Estimated High Price =$40-60 as of 8-7-09 and $45-65 as of 11-6-09
L ow PE	11.0	8.6                      (3 yrs out)	8.7                   (Same)	10.2
Low EPS	$1.92	Same	$1.91	$1.91
Low Price	$15.00               (“other” option)	$16.50                 (low PE x low EPS option)	$16.60             (Same)	$19.48
Upside/Down	4.0	2.6	1.7	Impossible to Calculate
Total Return	26.6%	17.8%	13.1%	-02.8%
SSG Buy Under	Not Available	$36.05	$27.55	$13.78
RV/PRV	82.4/71.2           (no outs)	114.8/101.7        (3 yrs out)	113.9/105.5 (Same)	Not                  Included
RV/PRV(no outs)	82.4/71.2	81.4/72.1		Not                         Included
Quality	Not Available	S&P = B+	Hemscott =       Not Included	1.10 (unacceptable)
PTPM – 5 yr ave	36.7%         Trend down	Same                 Same	36.2%               Same	Same                   Trend N/A
ROE – 5 yr  ave      End Equity	38.0%         Trend down	Same                  Same	38.6%                Same	Not                                Included
ROE – 5 yr ave     Start Equity	Not                       Available	45.9%                  Trend down	46.5%               Same	Same                         Trend N/A
Debt to Equity –      5 yr ave	Not                        Available	0.5%                   Trend up	Same              Same	Not                                Included

Estimating Future EPS Growth:

(1) P.V. used the BI/NAIC Preferred Procedure to estimate 15.40% EPS and wrote that unidentified analysts were estimating 15.30% which I did not find.

(2) I now check seven different analysts (up from six) for their long-term EPS estimates which averaged 13.71% for Coach with FactSet via Morningstar.com (the new source) high at 15.60% and Value Line low at 7.50%.  Thomson Reuters via YahooFinance was 13.08%, Reuters.com was 14.35%, S&P and FactSet CallStreet via CNN Money were both 15.00%, and Zacks.com was 15.41%.

** The 9 analysts at FactSet CallStreet via CNN Money ranged from a low of 8.00% to a high of 25.00% as did the 11 analysts at Reuters.

** Value Line’s estimate of 7.50% looks like an outlier so the average without VL is 14.74% [VL’s 7.50% estimate remained unchanged in its 11-6-09 report].  That average less 1 Standard Deviation is 13.82% and less 2 SDs is 12.90%.

** I decided to use 13.00% (12.90% rounded) and thought that the 8.00% low estimates at CNN Money and at Reuters as well as VL’s 7.50% were too low compared to the other estimates.  My estimate is conservative based on the average without VL less 2 SDs.  Unlike PV, whose estimate was optimistic, I saw no turn-around in COH’s declining EPS growth or any other ground to be optimistic.

** For how I estimate EPS for all my SSGs, see Estimating EPS which I have updated to include the new source, FactSet via Morningstar.com.

(3) Take Stock estimated -10.8% (that’s a negative 10.8%) EPS growth for the next 5 years which seems way, way unreliable, untrustworthy and unreasonable compared to the other estimates.

Forecast High Price:

(1) P’s 27.0 Forecast High PE (times) his $2.70 Estimated High EPS (equaled) his $105.60 Forecast High Price which was a whopping 78% greater than Value Line’s High Price estimate of $40-60.

** That’s way too much for me!! See: Determining What’s Reasonable and What’s Not: An Update.

(2) My 21.1 Forecast High PE (2005-06-07 eliminated as outliers) x my $3.54 Estimated High EPS = my $74.70 Forecast High Price which was 25% greater than VL’s estimate.

** Usually, I don’t like to exceed Value Line by such a la.rge amount, but I thought VL’s estimates were low-balls, especially its 7.50% EPS estimate. 

** Just as importantly, I still did not satisfy the SSG Buy criteria despite my high Forecast High Price as my 2.6 Upside/Downside Ratio was below the 3.0 requirement.

(3) Take Stock got a $27.21 Forecast High Price in the next 5 years which was less than Coach’s current price of $31.83.  Bizarre! Implausible!! Unbelievable!!!

Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE):

(1) P did not address the down trends in Coach’s PTPM and ROE, although he did find that COH’s 5-year averages were better than the averages for what he called the Apparel Industry.

(2)  I found that S&P places Coach in the Textile – Apparel & Luxury Goods Industry and that COH was much better than those Industry Averages, although my industry numbers were somewhat lower than P’s.

(3) I also found that Hemscott-Morningstar places Coach in the Apparel, Accessories & Luxury Goods Industry where COH is also much better than its Industry Averages ranking #2 out of 24 companies for both PTPM and ROE.

** While Take Stock uses Hemscott data, TS sadly does not make industry comparisons.

Final Results:

(1) P.V. satisfied the SSG Buy criteria (a minimum 3.0 Upside/Downside and 15% Total Return) with a 4.0 U/D and a 26.6% TR.  However, to do so, his Forecast High Price exceeded Value Line’s estimate by a enormous 78%.

** Any SSG can be prepared that satisfies the Buy criteria if we are not concerned with using reasonable judgments.  Just claiming “This or that seems reasonable” is not adequate.

(2) Armin-1 and Armin-2 did not satisfy the SSG Buy criteria as both got a U/D under the minimum 3.0 criteria even though my Forecast High Price was 25% greater than VL’s estimate with S&P data and 27% greater with Hemscott data.

(3) Take Stock got a -2.8% Total Return (that’s a negative 2.8%) and deliberately does not use the Upside/Downside concept.

** Take Stock’s analysis was doomed from the start when it began with a -10.8% (that’s a negative 10.8%) EPS estimate.  As a result, its Forecast High Price was less than its current price which makes it impossible even impute any U/D.

** Lastly, a Forecast High Price that is low, and that is lower than the stock’s current price, is absurd in my judgment.

-Armin

Researching RMD (ResMed)

ResMed (RMD) manufactures medical devices to treat and manage sleep-disordered breathing, primarily sleep apnea.  RMD’s latest Investor Update explains that Q4 2009 is the 58^th consecutive quarter of revenue growth for the company.

Company Background:

- ResMed’s primary focus is sleep apnea which occurs when a person’s airway temporarily collapses while asleep, therby restricting breathing and interrupting their sleep repeatedly throughout the night.  RMD’s products include airflow generators and breathing masks that introduce the airflow and pressure needed to prop open the respiratory pathway during sleep.

- According to its 2009 10-K Report, ResMed estimates that its global market is $2.5 Billion which is less than 10% penetrated.  In the U.S., RMD estimates 40 million people, about one in five adults, have some form of sleep apnea with less than 10% diagnosed or treated.

- RMD’s 10-K mentions studies that show sleep-disordered breathing is present in about 80% of patients with drug-resistant hypertension, 72% of patients with Type 2 diabetes, and some 80% of patients with congestive heart failure.

- In March 2008, The Center for Medicare and Medicaid as well as Aetna Insurance approved home testing to diagnose patients with sleep-disordered breathing which RMD sees as a major opportunity for growth.

- Morningstar reports that ResMed was the second company to enter its field (Respironics, now part of Phillips Electronics, was first) and that RMD has had to differentiate itself with technically superior products which have tended to make patients more comfortable and loyal.

 ** As of June 2009, RMD had 2100 patents and 1100 design registrations granted or pending; in FY 2009, it invested 7% of its revenues (about $63.1 Million) in research & product development according to its lastest 10-K.

- Morningstar was unhappy with the perks and compensation given to RMD’s Chairman and other executives, such as: personal use of company aircraft; club memberships; and very expensive cars.  Also, the Chairman received $2.8 M in compensation last year after stepping down as CEO.

- The one-click Annual Report spreadsheet by Bob Adams gives RMD’s 2009 A.R. a 68 out of 100 with 17 green flags, 12 caution flags, 1 red flag, 8 Bullish results and 8 Bearish results. 

** The Bullish-good things include increasing sales that are also increasing faster than the cost of sales; growing gross profit margin; good return on free cash flow.  The Bearish-not so goods include inadequate return on equity; return on assets should be higher; increasing accounts receivable.  The one red flag is that the price to sales ratio is high.

** You can get this super-duper spreadsheet and an explanation of its many features by going to my Favorite Links page and scrolling down: click here.

Discussion:

The table below compares the SSG by CarolT, which I got from Better Investing’s First Cut page, with two of mine and with Take Stock.  The only difference between Armin-1 and Armin-2 is that they use different EPS estimates (13.00% and 16.00%).  After the table, I discuss issues identified by the comparison.

ResMed          (RMD)	CarolT	Armin-1	Armin-2	Take Stock
Date	9-28-09	10-5-09	Same	Same
Data	S&P	Same	Same	Hemscott-Morningstar
Price	$44.00	$43.18	Same	Same
52 week High &       Low Price	$44.65 &              $28.90	Same &             Same	Same &      Same	Not Included
Last Q of                   Reported Data	Q4 ending             6-30-09	Same	Same	Same
Software Used	TK 6	TK 5	Same	TS Online
Project Growth        From End of	Last Q	Same	Same	Last FY
Sales Growth	15.00%	13.00%	Same	10.00%
EPS Growth	15.00%	13.00%	16.00%	10.00% initial 08.34% final
High PE	26.0                (2009, lowest        in last 5 yrs)	25.0	Same	30.0
High EPS	$3.90	$3.57	$4.07	$2.88
High Price	$101.40                (12% > VL)	$89.20	$101.80         (12% > VL)	$86.53
Value Line Estimated High Price = $70-90 as of 8-28-09
Low PE	15.0                         (2009, lowest        in last 5 yrs)	Same	Same	18.5
Low EPS	$1.93                      (TTM)	Same	Same	$1.92
Low Price	$28.90	Same	Same	$35.52
Upside/Down	3.6	3.2	4.1	5.7                       (imputed)
Total Return	17.9%	15.6%	18.7%	14.9%
SSG Buy Under	N/A	$43.98	$47.13	$43.27
RV/PRV	80.2/69.8          (no outliers)	94.9/83.9          (3 yrs out)	Same/81.7      (Same)	Not Included
RV/PRV (no outs)	80.2/69.8	77.8/68.7	Same/67.0	Not Included
Quality	N/A	B+	Same	3.2 (unacceptable)
PTPM – 5 yr ave	22.3%                    Trend even	Same                 Same	Same             Same	20.7%          Trend N/I
ROE – 5 yr ave       Ending Equity	12.5%                     Trend up	Same                  Same	Same               Same	Not Included
ROE – 5 yr ave      Starting Equity	N/A	15.4%                Trend down	Same              Same	13.7%                 Trend N/I
Debt to Equity –       5 yr ave	10.9%                    Trend down	Same                  Same	Same              Same	N/I

Estimating Sales Growth:

- RMD’s Sales growth has been trending down from 22.8% five years ago to 15.1% three years ago to 10.2% last year.  Sales growth dropped to 7.1% in the last quarter.

- Morningstar estimated 14.00% Sales growth for RMD through FY 2013 while Zacks estimated a whopping and unbelievable 22.87% for the next 5 years.

- CarolT estimated 15.00% which became important because she decided to use it as an upper limit for her EPS estimate.

Estimating EPS:

(A) CarolT’s SSG

- Carol checked EPS estimates from Value Line and NASDAQ which, when I looked, were estimating 15.00% and 19.00% for long-term EPS.

- She decided to estimate 15.00%, the same as her estimate of Sales growth for the next five years.  Carol wrote: << Matching the sales growth at 15% seemed reasonable. >>

(B) Armin’s SSG-1 and SSG-2

- When I did my SSGs, the six different analysts I always check were estimating long-term EPS at an average of 16.81% with Reuters.com high at 21.00% and YahooFinance low at 11.87%.  FactSet CallStreet via CNN Money.com was 16.00%, Zacks.com was 18.00%, and S&P was 19.00%.

- FactSet’s 4 analysts ranged from a high of 32.00% to a low of 16.00%; Reuters’ 5 analysts also ranged from a high of 32.00% to a low of 16.00%.

- YahooFinance’s 11.87% looks like an outlier and the average becomes 17.80% after I disregard it.  That average less 1 Standard Deviation = 15.41% and less 2 SDs = 13.03%.

- Because relatively few analysts contributed to these consensus estimates, and because they varied substantially (SD = 2.39 without Yahoo, 3.23 with), I decided to estimate 13.00% EPS (the average without Yahoo less 2 SDs) for Armin-1.  For Armin-2, I used 16.00%, the lowest EPS estimate by FactSet and by Reuters.

- For a more thorough discussion of how I estimate EPS, see: Estimating EPS

(C) Take Stock

- Take Stock initially estimated 10.00% EPS which, like Carol, was limited by its Sales growth estimate.  Then, Take Stock lowered it to 8.34% based on its Business Model which is another name for the NAIC/BI Preferred Procedure.

- Here, Take Stock’s 8.34% estimate seems patently unreasonable compared to the average of the 13.03% from 5 analysts less 2 SDs.  Even the average less 3 SDs (10.64%) is way greater than Take Stock’s EPS.  For how to determine what’s reasonable and what’s not, see: Determining What’s Reasonable and What’s Not: An Update

Pre-Tax Profit Margin (PTPM) & Return on Equity (ROE):

(A) PTPM

- With S&P data, RMD is much better than its industry average in terms of its 5 year average Pre-Tax Profit Margin (22.30% vs 16.48, Health Care Equipment industry).

- Moreover, RMD’s trend is even (a down trend would be a red flag warning sign, but not an even trend).

(B) ROE

- Carol expressed concern that ResMed’s average ROE was low compared to other companies in its industry which ranged, she wrote, from the low teens to the low twenties.

- With S&P data, I found that RMD’s average of 12.5% was only slightly below its industry average of 13.7%.  However, the industry average was somewhat distorted by Kinetic Concepts (KCI) with a 5 year average ROE of 62.7%.

- More importantly, ResMed’s ROE is currently trending up!

- Carol poses a difficult question to answer because the industry data available to the public is so limited and confusing:

** The S&P data used by the Online SSG at the Better Investing website places RMD in a different industry (Electromedical & Electrotherapeutic Apparatus Manufacturing) than the S&P data subscription I get from BI (Health Care Equipment).  That discrepancy seems nuts to me;

** The 13.7% ROE industry average I found was from the Mid-Michigan BI Chapter which posts S&P industry data on its website, but the Online SSG with its different S&P industry for RMD shows a 15.82% ROE industry average.

** Unlike the Hemscott data at the Stock Central website, none of the S&P data is broken down by company so outliers that distort the average cannot be identified.

Final Results:

- Carol got a SSG Buy with a 3.6 Upside/Downside Ratio and a 17.7% Total Return.  The NAIC/BI Buy criteria are a minimum 3.0 U/D and a 15.0% TR.

- Both Armin-1 and Armin-2 also satisfied the SSG Buy criteria.  Armin-1 with its 13.00% EPS estimate is a conservative SSG while Armin-2 is more optimistic.

- Armin

Measuring Medtronic (MDT)

[AF addendum:  Jay P's SSG and First Cut write-up of Medtronic, discussed below, are also summarized in the December 2009 issue of Better Investing magazine]

- Medtronic is the world’s largest medical technology company with FY 2009 revenues of $14,599 B, up a satisfying 8%.  MDT operates in seven segments: Cardiac Rhythm Disease Management (34% of FY 09 revenues: pace-makers and implantable defibrillators); Spinal (23%: artificial spinal discs); Cardiovascular (17%: heart valves, stents); Neuromodulation, (10%: implantable stimulation devices); Diabetes (8%: insulin pumps), Surgical Technologies (6%); and Physio-Control (2%: defibrillators for hospitals and public access).

 Company Background:

- MDT is a global company that manufactures and sells its devices in more than 120 countries. Its primary products include those for cardiac rhythm disorders, cardiovascular disease, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, diabetes, and ear, nose and throat conditions.

- Morningstar reports that Medtronic has successfully expanded its business away from MDT’s traditional reliance on heart disease and is now developing products for a wide variety of chronic diseases.   Revenues from investments in neuromodulation, diabetes, and spinal products have increased from 25% of total sales in FY 2000 to 41% in FY 2009.

- Significant future growth is expected in three areas: MDT’s spinal bone graft product, one-of-a-kind in its market, and from atrial fibrillation and transcatheter heart valves.

- The one-click Annual Report spreadsheet by Bob Adams gives MDT’s 2009 A.R. a 55 out of 100 with 16 green flags, 2 red flags, 10 Bullish results and 8 Bearish results. 

** The Bullish-good things include increasing sales that are also increasing faster than related costs; growing gross profit margin; good free cash flow.  The Bearish-not so goods include increasing inventories and shares outstanding; and high debt to equity which is also one of the red flags.

** You can get this super-duper spreadsheet and an explanation of its many features by going to my Favorite Links page and scrolling down: click here.

- Legal matters:

** MDT just paid $442 M to settle a long-standing patent lawsuit involving drug coated stents that substantially reduced its 1Q earnings;

** The FDA, in July 2008, issued a warning letter to doctors regarding MDT’s Infuse Bone Graft product and reports of life-threatening complications from unapproved use;

** MDT’s latest Annual Report mentions that it incurred four litigation charges in 2009 totaling $714 M, all of which involved patent or royalty disputes.

** MDT’s A.R. also mentions that some 1250 personal injury lawsuits are pending, including 37 class actions, involving the company’s Sprint Fidelis defibrillator leads which it recalled in 2007.  Wikipedia explained these leads sometimes malfunctioned and were implicated in several deaths.

Discussion:

- The following table compares the SSG by JayP, which I got from Better Investing’s First Cut page, with two of mine and with Take Stock.  Armin-1 uses S&P data from the Better Investing while Armin-2 uses the same judgments, but with Hemscott-Morningstar data from Stock Central.

Medtronic (MDT)	JayP	Armin-1	Armin-2	Take Stock
Date	9-21-09	9-23-09	Same	Same
Data	S&P	S&P	Hemscott-Morningstar	Same
Price	$37.48	$37.04	Same	$37.35
52 week High & Low Price	$54.02 &          $24.86	$52.97 &            Same	Same	Not                       Included
Last Q of Reported Data	Q1 ending           7-31-09	Same	Same	Same
Software Used	TK 5	Same	Same	TS Online
Project Growth From End of	Last Q	Same	Same	Last FY
Sales Growth	08.00%	10.00%	Same	07.90%
EPS Growth	09.00%	10.00%	Same	07.90%
High PE	21.8                    (last 3 yr ave)	20.4                  (2008)	17.8                   (2008)	23.1
High EPS	$4.31	$4.56	$5.12	$4.65
High Price	$94.00	$93.00	$91.10	$107.19
Value Line Estimated High Price = $80-100 as of 8-24-09
Low PE	14.4                     (last 3 yr ave)	08.6                (2008)	07.7                  (2008)	17.3
Low EPS	$2.80                (last FY)	$2.83                  (TTM)	$3.22                 (TTM)	$3.22
Low Price	$24.10              (recent severe low)	$22.20                (60% x              current price)	Same	$55.71                 (higher than current price)
Upside/Down	4.2	3.8	3.6	impossible to calculate
Total Return	21.1%	21.1%	20.8%	25.5%
SSG Buy Under	N/A	$39.92	$39.43	$58.51
RV/PRV	72.9/67.1         (2004 &             2005 out)	72.4/65.7        (Same)	56.7/51.5	Not                      Included
Quality	N/A	A-	Not Included	3.2 (unacceptable)
PTPM – 5 yr ave	30.0%                Trend down	Same                 Same	30.5                  Same	Same                Trend N/I
ROE – 5 yr ave   End Equity	24.7%                Trend even	Same                Same	26.2%              Trend up	Not                 Included
ROE – 5 yr ave  Start Equity	N/A	26.9%               Trend even	28.5%                 Trend up	Same                 Trend N/I
Debt to Equity –  5 yr ave	N/A	46.1%              Trend up	45.2%              Trend up	Not                     Included

Estimating EPS:

- Jay estimated 9.00% EPS and his First Cut write-up says that it was “in line” with Value Line and with 25 analysts who follow MDT.

** VL was actually estimating 10.00% and the 25 analysts were not identified nor were there estimates revealed.  The MDT website lists 18 analysts who follow the company, but no estimates are set forth.

- When I did my SSG on 9-23-09, the six analysts I always check were closely estimating long-term EPS at an average of 10.43% with FactSet CallStreet via CNNMoney.com high at 11.00% and Value Line low at 10.00%.  Thomson-Reuters via YahooFinance.com was 10.23%, Zacks.com was 10.31%, S&P was 10.40%, and Reuters.com was 10.62%.

** I had SSGed MDT on 8-24 and only FactSet and Value Line remained the same.  The average then was 11.04% with S&P the largest reduction from 13.40 to 10.40% and the others going down only slightly.

 ** I continued to estimate 10.00% EPS which was the lowest estimate of the six by VL.

 Forecast High PE:

- Jay eliminated 2004 & 2005 as outliers and used the resulting three-year average of 21.8 as his Forecast High PE.

- I also eliminated those two outliers, but saw that the trend was downward so I used 2008 (20.4, the lowest in the last 5 years) as my Forecast High PE.

- Take Stock is not programmed to look for trends and always eliminates the five highest High PEs in the last 10 years and uses the resulting average (23.1) as its Forecast High PE.  This is equivalent to the Alt-M command in TK 5 and TK 6.

 Forecast High Price:

- Take Stock at $107.19 was the only analysis to exceed Value Line’s estimated High Price of $80-100. 

- I never want to substantially exceed VL and Take Stock’s 7% excess doesn’t seem unreasonably high to me.  For how I determine if SSG judgments are reasonable, see: Determining What’s Reasonable and What’s Not: An Update

Forecast Low Price:

- Jay used MDT’s recent severe low price of $24.10 while I used $22.20, 60% of MDT’s current price. 

- Take Stock, on the other hand, got a much, much higher Forecast Low Price of $55.71 which substantially exceeded MDT’s current price of $37.35.

** While this is a SSG NO-NO according to the BI/NAIC SSG Manual, this is one of several issues where Take Stock is deliberately designed to be different.

** I think it’s absurd to have a Low Price that’s high, especially when it exceeds the stock’s current price, and constitutes a serious defect in my judgment. 

Pre-Tax Profit Margin:

- MDT’s Pre-Tax Profit Margin is trending down, which Jay did not mention, and which is usually a red-flag warning sign to consider abandoning the SSG.

- However, using S&P data, MDT is way better than its industry average (30.0% vs 16.4%, Health Care Equipment industry) and also way better with Hemscott data (30.5% vs 16.6%, Medical Appliances & Equipment industry).  Moreover, MDT ranks 8 out of 118 companies with Hemscott data.  Soooooo, I would not cease any analysis because of MDT’s PTPM trend.

- To learn more about using Industry Info, see: Investigating Industry Info

Quality:

- S&P gave MDT an A- for quality (which doesn’t show on Jay’s PDF copy) while Hemscott has no quality rating.  S&P uses an eight-point scale with A+ the highest score.

- Take Stock rated MDT a 3.2 which is unacceptable as 3.4 is the minimum required to pass muster and 6.7 is desired.

Final Results:

- Jay and my two SSGs are very close: all got a Total Return of around 21% as well as an Upside/Downside Ratio of between 3.6 and 4.2.  A TR > 15% and a U/D >3.0  means that MDT is a SSG Buy.

- Take Stock’s Forecast Low Price exceeded MDT’s current price which meant that it was impossible to calculate and compare our U/Ds.  Take Stock also gave MDT an unacceptable quality rating while S&P gave it an A-.

Final Thoughts: [Addendum]

- While the SSG does not ask about legal issues, they can influence whether we make optimistic or pessimistic judgments, and also whether we Buy, Hold or even Sell the stock.

- Medtronic and other medical equipment makers (like Stryker and Zimmer) are in a risky business: bad news about patient injuries, governmental investigations, and/or new class actions can cause the stock price to plummet.

- Armin

 [Please let me know what you think about this post by leaving a comment below and/or using the easy-to-use mouse-over star rating at the top.

*** By the way, I've added links to my Table of Contents located in the Blog's "Home" page  in order to make navigation easier.]

Monitoring Microsoft (MSFT)

[AF Addendum: The Online Stock Study of Microsoft, discussed below, is also summarized in the January 2010 issue of Better Investing magazine.]

Microsoft is the world’s largest software company (based on revenues) and about 80% of its revenue comes from sales of its Windows, Office and Server & Tools software.  However, cloud computing, sometimes called “Software as a Service” (SaaS) is a direct and serious challenge.  As a response, Microsoft’s newest version of Office, now in early testing, will offer online versions of Word, Excel, and PowerPoint that can be used on a computer, Web browser, or mobile phone.

MSFT was the Online Stock Study at the Better Investing website for September that was led by Jim Thomas.  Jim is a director and volunteer educator with the Puget Sound chapter, a software engineer who used to work for Microsoft, and was recently appointed to the board of IClubCentral. Thanks Jim for volunteering.

Each month, the Online Stock Study completes a SSG in about one hour with the judgments made by the online participants using consensus decision-making.  The Consensus SSG, Jim’s presentation slides, and the Value Line report are all available to BI members for downloading.  The recorded session should be available sometime soon.  [AF: it took one month, but the recording finally became available for downloading on 10-6-09]

Jim used the Online SSG which is much more limited than our SSG software.  Among its many limitations, the Online SSG projects future growth only from the last Fiscal Year, ignores Relative Value & Projected Relative Value and provides only one method to decide the Forecast Low Price in the next 5 years.  

 COMPANY BACKGROUND:

- Jim gave a very thorough report on Microsoft’s operations: 95,000 FT employees, 60% in U.S.; 5,000 to be let go by FY 2010; new products include Windows 7 and Office 2010.

- 32% of FY 2009 revenue generated by MSFT’s Business division, 90% from sales of MS Office and 80% of that from sales to business; 25% of revenue from its Client division, 80% from Windows Vista pre-installed on PCs; 24% of revenue from its Service and Tools division, 50% from multi-year licensing agreements; 13% from its Entertainment & Devices division (Xbox, Zune, mice & keyboards); and 5% from its On-Line Services (BING, MSN, Windows Live).

- R&D spending 15% of FY 09 revenue, up from 14% in each of prior two years; revenue down 3% in FY 09, EPS down 13%.

- Jim also reported on: revenue by operating unit and by geographic area; long-term debt; share buy-backs; and dividends.

DISCUSSION:

- I analyzed MSFT previously (on 9-30-08 and 11-21-08) and compared my two SSGs to AnnC’s and to Take Stock;  if you’re interested, see: Monitoring Microsoft

- In the table below, I compare the Consensus SSG to two of mine and to Take Stock.  Armin-1 is my SSG as of 8-18-09, before the Online Stock Study, while Armin-2 reflects my updated SSG.  Following the table, I discuss issues highlighted by the comparison.

MICROSOFT          (MSFT)	Consensus      SSG	Armin-1	Armin-2	Take Stock
Date	9-8-09	8-18-09	9-17-09	9-17-09
Data	S&P Online	S&P	Same	Hemscott- Mstar
Price	$24.80	$23.58	$27.66	$25.30
52 week High &     Low Price	$29.74 &        $14.87	$28.01 &           Same	$27.66 & Same	Not Included
Last Q of                  Reported Data	Q ending          6-09	Same	Same	Same
Software Used	Online SSG	TK 5	Same	TS Online
Project Growth      From End of	Last FY	Last Q	Same	Last FY
Sales Growth	07.80%	09.00%	Same	-03.2
EPS Growth	10.07%	10.00%	Same	-11.0
High PE	17.4	20.5               (four year ave with 2005 out)	Same	22.0
High EPS	$2.65	$2.41	Same	$0.90
High Price	$46.11	$49.40	Same	$19.79                (55% < VL’s        low end)
Value Line Estimated High Price = $45-50 as of 8-21-09
Low PE	09.1	14.0                  (four year ave with 2005 out)	Same	15.8
Low EPS	$1.64                (last FY EPS)	$1.65                   (ttm EPS)	Same	$1.62
Low Price	$14.92                 (low PE x low EPS)	$17.70               (70% of current price)	Same	$25.60                (higher than current price)
Ave % Payout	27.00%(reduced from 78.7%)	26.9%           (four year ave with 2005 out)	Same	Not  Considered
Upside/Down	2.15	4.4	3.1	Impossible to Calculate
Total Return	14.74%	17.3%	15.6%	05.4%
SSG Buy Under	Not Included	$25.63	Same	$10.80
RV/PRV	Not Included	82.7/76.5         (2005 out)	89.0/82.2(Same)	Not Included
Quality	Not Printed	B+	Same	.50(unacceptable)
PTPM – 5 yr ave	41.30%           Trend N/A	Same              Trend down	Same	39.1%                  Trend N/A
ROE – 5 yr ave       End Equity	36.97%            Trend N/A	37.00%            Trend even	Same	Not Included
ROE – 5 yr ave      Start Equity	Not Included	35.7%              Trend up	Same	35.1%                    Trend N/A
Debt to Equity –        5 yr ave	Not Included	01.9%              Trend up	Same	Not Included

(A) THE CONSENSUS SSG:

(1) Quality

- Jim evaluated four aspects of MSFT’s quality and found that 3 were satisfactory: Sales growth at 11.9% over the past 10 years; EPS growth at 11.4%; and Pre-Tax Profit Margin stable at 34-38% [presentation slide 27, PDF page 14].

- Return on Equity merited further study, Jim concluded, but presumably was satisfactory as it was not considered a red-flag or barbed-wire fence not to cross.

- The Online SSG does not explicitly report the PTPM and ROE trends like our SSG software and Jim missed that PTPM was trending down which is typically considered a red-flag warning sign. 

** However, MSFT’s 5 year average PTPM is 40.30%, some 300% better than its industry average of 13.6% using S&P data, so I’m not worried.  To make this type of comparison, see: Investigating Industry Info.

(2) Estimating Sales Growth

- Jim gave the group three specific choices to estimate Microsoft’s future Sales growth: 11.9%, last 10 year historical growth; 10.0%, Value Line’s Sales per share estimate; and 7.8%, a composite rate that Jim devised (6 year historical + Yahoo Finance FY 2010 & 2011 estimates + VL FY 2012-2014 estimate) [slide 36, PDF page 18].

- He also offered two other choices that seem pointless: higher and lower.

- Jim did not consider MSFT’s more recent historical Sales Growth (6.9% and 11.4% last 3 and 5 years) and did not mention other analyst estimates for Sales growth (not Sales per share growth): Zacks at 10.62% estimated Sales growth for the next 5 years.

- The Consensus chose 7.8% which is no surprise since that seems to be the only realistic option out of the 5 choices offered.

(3) Estimating EPS Growth

- Because Jim used BI’s Online SSG, all projections were from the end of the last FY (2009, $1.64 EPS) unlike our SSG software which has options to project from the end of the last quarter or from the trend line.  This had no impact on MSFT because the end of its FY was also the end of its last Q.

- Jim also gave participants three choices to determine MSFT’s future EPS growth: $2.89 or 12.0% from S&P’s estimate; $2.73 or 10.7%, another composite rate Jim derived from Yahoo Finance’s FY 2010 & 2011 estimates and VL 2012-2014 estimate; and $2.65 (no rate mentioned), next 3-5 year estimate by Value Line [slide 44, PDF page 22].

-  He also offered the same two other choices: higher and lower.

- Surprisingly, Jim did not consider Yahoo Finance’s EPS estimate for the next 5 years (10.17%) which seems way more appropriate than relying on its EPS estimates for the next two years.  And, while he mentioned MSFT’s historical EPS growth (11.40%), he did not offer it as an option to the group.

- Perhaps most importantly, Jim did not consider the long-term EPS estimates from other analysts which I discuss under Armin’s SSGs.

- The Consensus chose 10.7%, Jim’s composite rate.

(4) Forecasting High & Low PEs

- Jim offered three choices to Forecast MSFT’s High and Low PEs for the next 5 years: 20x & 16x, from 10% plus or minus VL’s forecast of 18x; 17.4 & 9.1, from 2009 actual; and 15x & 10x, from Jim’s “visual” inspection of the range over the last year.

- Again, he also offered the same two other choices: higher and lower.

- The Consensus chose 17.4 & 9.1, from 2009 actual.

(5) Estimating Average % Payout

- Microsoft paid a special dividend in 2005 that distorted the five-year average. So Jim reduced the 78.70% average to 27.00% in order to estimate the average % payout for the next 5 years.  That is equivalent to treating 2005 as an outlier and averaging the last four years.  This issue was not mentioned in the Presentation Slides.

(6) Forecast High & Low Prices, Upside/Downside Ratio and Total Return

- These also were not mentioned in the Presentation Slides.

- The Consensus did not get a SSG Buy with an Upside/Downside Ratio of 2.15 (under the 3.0 minimum criteria) and a 14.74% Total Return (under the 15.00% minimum criteria).

 

(B) ARMIN’S SSGs:

(1) Estimating EPS Growth

- When I did my SSG on 8-18-09, the six analysts I always check were estimating long-term EPS at an average of 10.73% with S&P high at 12.00% and Value Line low at 10.00%.  At FactSet CallStreet via CNN Money.com, the Consensus was 11.00% (from 8 analysts who ranged from 13.0 to 5.0%); Zacks.com was 10.62%; Reuters.com was 10.61% (from 11 analysts who ranged from 13.0% to 7.00%); and FirstCall/Reuters via YahooFinance.com was 10.17%.

- When I updated my SSG on 9-17, only S&P had changed its estimate to 10.00% (down from 12.00%).

- I estimated 8.00% EPS both times, well under all the consensus estimates.

- Estimating EPS explains how I estimate EPS for all my SSGs.

(2) Forecasting High & Low PEs

- I eliminated 2005 as an atypical outlier and used the four-year historical average as my Forecast High & Low PEs.

- This was the major difference between my SSGs and the Consensus, and explains why both times I got a SSG Buy with Upside/Downside Ratio > 3.0 and a Total Return > than 15.00% while the Consensus did not.

 

(C) TAKE STOCK:

- Take Stock is a computerized, one-click program at the StockCentral website that produces an almost-SSG and is designed to generate a conservative result.

- Its EPS estimate for the next 5 years was –11.00% (that’s a minus eleven percent) which seems patently unreasonable and irrational compared to the six analysts I checked who averaged 10.72% and even to the very lowest estimate of 5.00% by one analyst at CNNMoney.

- Because of its low-ball EPS estimate, Take Stock’s Forecast High Price was $19.79, also unreasonably low and a whopping 55% below the low end of Value Line’s $45-50 High Price estimate.  If you’re interested in learning how to judge the reasonableness of SSG judgments, see: Determining What’s Reasonable and What’s Not: An Update.

- Take Stock gave Microsoft a quality rating of .50 on a ten-point scale where a minimum of 3.4 is required to pass muster and 6.7 is desired.  On the other hand, S&P gave MSFT a B+ quality rating.

- Armin