Understanding UEIC

Universal Electronics (UEIC) is a small company that makes different types of pre-programmed remote controls primarily for home entertainment.

At the company’s web site, I learned that UEIC makes more than 20 types of wireless remotes that are pre-programmed to work with over 2400 brands, and has a library of more than 300,000 device codes. It looks like it even makes the remote we got from Dish Network, a satellite TV provider, which we love for its ease of use.

For those of you who might not know, Dish TV allows us to conveniently set timers and record everything we watch, skip all the commercials by clicking throughout the program, and play back 100 hours of recorded programs. The key to everything is the remote.

My prior post on this blog examined the SSG at length, but in general terms. Here, I discuss my SSG for a particular company, compare it to two other SSGs, and explain the reasons behind my judgments.

UNIVERSAL ELECTRONICS(UIEC)	ArminF	ChuckB	KenK
Estimated Sales Growth	22.70%	14.00%	20.00%
Estimated EPS Growth	16.00%	14.00%	17.50%
Forecast High PE	23.4	24.0	23.0
Forecast High Price	$63.90	$60.00	?
Forecast Low PE	18.1	15.0	12.0
Forecast Low Price	$15.40	$19.50	$22.10
Upside/Downside Ratio	9.2	64.3	?
Total Return	26.0%	24.4%	28.5%
Current Price	$20.12	$20.12	?
SSG Date	2-15-08	2-15-08	?
A SSG Buy up to Price	$27.49	$29.60	?
Data Source	S&P	S&P	?
Pre-Tax Profit Margin, 5 yr ave	8.3% trend even	same	?
Return on Equity, 5 yr ave	8.5% trend up	same	?

(1) Most of the analysts are estimating long-term EPS at around 20.00%: Value Line, S&P via BetterInvesting.com, FactSet CallStreet via CNN Money, and Zacks via ClearStation.com were all estimating 20.00%; Reuters.com was 20.25% and Reuters less 1 Standard Deviation, which that web site provides and what I most often use, was 19.83%; and Thomson Financial/First Call via Yahoo!Financial was the lowest at 18.33%.

The Standard Deviation at Reuters was a low .43% and indicates close agreement by the small number (4) of analysts. Only a small number of analysts follow UEIC at any of these websites making their estimates more unreliable than those followed by more analysts.

Take Stock Online, available to subscribers of StockCentral.com, was an unbelievably low .3% estimated EPS for the next 5 years and which I did not seriously consider.

With S&P data, I see that UEIC had an average annual EPS growth of 25.2% for the last 5 years, 18.8% for the last 2, and 16.0% for last year 2006. Its historical Sales growth was 22.7% for the last 5 years, 22.0% for the last 2, and 30.1% for last year.

I decided to estimate future growth at 22.7% Sales and 16.0% EPS which were the most conservative numbers I found (except for Take Stock’s unreliable .3%). The 16.0% EPS was even lower than my Preferred Procedure, with its default value or after some modest fiddles. Here, VL’s report was from its Small & Mid-Cap edition which contains no estimates to guide us: no future shares outstanding, or future tax rate, and no estimated High Price.

I don’t often use the Preferred Procedure as I prefer to survey the 6-7 different analysts mentioned above rather than rely on 3-4 estimates of my making/guessing. I use it here only to illustrate my methods. Analyst EPS estimates also tell me if my SSG growth rates are in or out of the ballpark.

(2) Historical High PEs are trending down and my Forecast High and Low PEs came from eliminating 2002-2004, the three highest of the last 5 years. My Forecast Low Price came from the Recent Severe Low which was lower than all the other options offered by my Toolkit software.

(3) The only meaningful difference between Chuck’s SSG and mine was our choice of Forecast Low Prices. He decided on $19.50 which is from the Forecast Low PE x Forecast Low EPS (15.0 X $1.30) while I used $15.40 which is from a different option, the Recent Severe Market Low. The sole reason he got such a large Up/Down Ratio is because his $19.50 Forecast Low Price is too close to UEIC’s $20.12 current price and is the reason why I choose the lowest of the 5 standard options offered by the Toolkit software. Chuck’s 64.3 Upside/Downside Ratio is actually a red flag warning to consider using a lower Low Price.

(4) Ken used a Forecast Low Price of $22.10, even higher than Chuck’s Low Price and also higher than UEIC’s current price of $20.12. That’s a SSG no-no, but I can’t tell for sure as he did not provide a complete SSG or discuss his judgments.

(5) My Forecast High Price was $63.90, but I have no VL estimate to judge its reasonableness. My typical approach is never to substantially exceed VL without a good reason, and I have no VL estimate for UEIC and no good reason as I know almost nothing about the company.

I could easily make more conservative estimates, but they would be uninformed guesses. I want my judgments to be based on reasons, not gut feelings, and I also want objective standards to evaluate the reasonableness of my decisions.

(5) Lastly, UEIC is in the Audio & Video Equipment industry at Reuters and in the Electrical Equipment industry at Money MSN. UEIC’s average Pre-Tax Profit Margin and Return on Equity for the last five years is much better than its industry averages at both websites.

- All in all, with what I think are reasonably conservative judgments, UEIC has a very good looking SSG. It more than satisfies the SSG Buy criteria of at least a 3.0 Upside/Downside ratio and a 15% Total Return.

- Armin

Figuring Out FactSet (FDS)

FactSet Research Systems (FDS) creates customized databases and other software tools for investing professionals who typically pay a subscription fee. It is considered a small company based on revenues and has an impressive record of strong and consistent growth: over 20% per year Sales and EPS growth for the last 5 and 10 years.

Its share price, however, has fallen 13% in the past six months and 19% in the last three. Presumably, the market is worried that FactSet’s sales will suffer given the current turmoil in the financial and banking sectors.

Cy Lynch, a NAIC guru and investing professional, shared his FactSet SSG in the March issue of Better Investing magazine. I thought it would be interesting to compare his SSG with mine and with Take Stock, an on-line program at Stock Central.com. Take Stock is designed to produce a conservative analysis with one-click that is based solely on historical data and allows no judgments or options by the user.

Here’s what I found:

FactSet Research (FDS)	Cy Lynch SSG	Armin Fields SSG	Take Stock
Analysis Date	1-11-08	1-17-08	2-1-08
Stock Price	$52.63	$51.80	$56.04
Sales Growth	16.00%	16.00%	18.50%
EPS Growth	15.00%	16.00%	18.50%
Forecast High PE	30.0	23.0 (see sixth comment below)	29.9
Forecast High Price	$135.60	$108.10	$149.33
…..Value Line High Price on 12-7-08 = $65-100 when FDS at $59.99…..
Forecast Low PE	17.2 (2004 & 07 out)	15.0	16.4
Forecast Low Price	$43.00 (open-ended option)	$33.60 (growth company option)	$35.57
Up/Down Ratio	8.6	3.1	4.8 (imputed)
Total Return	21.3%	16.5%	22.2%
Data	S&P	S&P	Hemscott
PTPM 5 yr ave and trend	34.6% trend even	34.6% trend even	34.6%
…….PTPM Industry Average = 23.00% at MSN; 21.56% at Reuters……
ROE 5 yr ave and trend	25.3% trend even	25.3% trend even	30.9%
……..ROE Industry Average = 04.4% at MSN; 25.50% at Reuters…….

Comments and Clarifications:

- Cy wrote that his 16.00% Sales Growth estimate appeared reasonable because it was in the middle of the 14-18% range forecast by analysts. However, he did not mention which analysts he checked nor how many, and I know of no analysts that make a 5 year sales forecast: not Reuters, not Zacks, not Value Line, not Thomson FN/First Call, not FactSet CallSreet, and not S&P. [3-10-08 addendum: I just learned that Zacks at Zacks.com does make a 5 year sales estimate.]

- While Cy relied on analysts as the basis for his Sales Growth estimate, he did not rely on them to inform his 15.00% EPS Growth rate. Instead, he used NAIC’s Preferred Procedure and made his own estimates for Profit Margin and Shares Outstanding. Cy did not consider using analyst EPS estimates at all, not even to check if his Preferred Procedure’s 15.00% was unduly conservative or overly optimistic. Ignoring analyst earnings estimates seems irrational to me, especially after checking their sales estimates.

- For his Forecast High PE, Cy reduced the 5 year average High PE from 31.6 to 30.0, without explanation and which seems like a trivial reduction, but did not eliminate any outliers. To get his Forecast Low PE, he eliminated 2004 and 2007 as outliers from the 5 year average Low PE.

- Cy’s $135.60 Forecast High Price seems way too high as it is 35.6% or $35.60 per share more than the high end of Value Line’s $65-100 estimated High Price. Take Stock’s Forecast High Price was even higher, some 49.6% or $49.57 more than VL. I’m willing to exceed VL by 10-15%, maybe even 20-25% if I know something about the company besides VL’s report, but not by 35% and never by 50%.

- My projected EPS growth rate came from the estimate by Reuters.com less one Standard Deviation which the web site provides (18.33 – 1.25 = 17.08) and which I then modestly reduced to 16%. And, I know how this EPS compares to estimates from Zacks (17.00%, 1 analyst), Value Line (17.50%, 1), Thomson FN/First Call (18.00%, 3), FactSet CallStreet (18.00%, 2), S&P (18.00%), and Take Stock (18.50%).

- I never want to substantially exceed Value Line’s High Price estimate without a good reason, and here I had none because all I had read was VL’s report and a few articles. So, I crafted a Forecast High PE which, together with my Projected EPS, brought me close to VL’s estimate.

- I used two sources for the industry data. At MSN, FDS is considered in the Information and Delivery Services sub-industry (13 companies) which is part of the Computer Software industry; at Reuters, FDS is placed in the Computer Services industry (312 companies). The different industry sizes led to very different industry averages for ROE. FactSet exceeds those industry averages for Pre-Tax Profit Margin and for Return on Equity at both web sites.

- Armin