Judging Jack Henry (JKHY): a Shorty

 

 - Shorties are a new type of post for me that consist primarily of a table comparing several SSGs on the same company.  They contain minimal discussion and take less time to create, but still take forever to respace and reformat as WordPress remains way, way table unfriendly.

 

- As usual, I’m most interested in understanding and analyzing SSG judgments.  After the table, I evaluate the most important judgment in this chaotic market, the Forecast Low Price by four SSGs.  According to the BI-NAIC Stock Selection Handbook (page 108), the SSG’s Low Price is an estimate of how low the stock price might drop in the next five years. [my emphasis]

 

- The stock I’m analyzing is Jack Henry & Associates (JKHY) which provides data processing software and services to banks and other financial institutions.  It currently ranks #137 on “The Best 200 Small Companies” for 2008 by Forbes magazine.

 

 

Jack Henry (JKHY)	KimB from  BI’s First Cut	ArminF	AnnC from BI’s First Cut	Take           Stock
Date	9-2-08	9-14-08	10-17-08	10-22-08
Data	S&P	S&P	S&P	Hemscott
Price	$20.04	$21.04	$17.30	$17.80
52 week High & Low Price	$29.24 &           $19.50	$29.24 &        $19.02	$29.24 &        $14.76	n/a
Project Growth From	unknown	Last Q	Last Q	unknown
Sales Growth	11.00%        (from 2008)	13.00%	09.00%             (B)	11.10%
EPS Growth	11.00%            (same as EPS)	10.00%     (A)	08.80%             (C)	04.60%
High PE	21.5	23.5	20.0	26.3
High EPS	$1.92	$1.88	$1.80	$1.49
High Price	$41.30	$44.20	$36.00	$39.23
Value Line Estimated High Price = $30-50 on 8-22-08 when JKHY’s recent price was $24.15
Low PE	13.8	15.3	11.0	16.7
Low EPS	$1.17	$1.17	$1.17	$1.17
Low Price	$16.10             (Low PE x         Low EPS)	$13.31           (70% < 52     week low)	$12.90              (Low PE x         Low EPS)	$19.54           (Low PE x       Low EPS)
Upside/Down-side Ratio	5.4	3.0	4.3	impossible to calculate
Total Return	16.6%	17.0%	16.9%	18.7%
SSG Buy Under	n/a	$21.03	n/a	$21.04
RV/PRV	74.3 & 67.1       (no outs)	84.5 & 76.8    (2004 out)	69.5 & 63.7        (2004 out)	n/a
Quality	n/a	S&P = A+	n/a	TS = 2.6,       unacceptable
PTPM – 5 yr ave	22.1%              trend up	22.7%           trend down	22.7%              trend down	22.7%            trend n/a
ROE – 5 yr ave,   End Equity	14.7%              trend up	15.4%           trend up	15.4%              trend up	n/a
ROE – 5yr ave,    Start Equity	n/a	17.1%           trend even	n/a	17.1&            trend n/a
Debt to Equity –   5 yr ave	n/a	-0-               trend even	n/a	n/a

 

DISCUSSION:

 

- The Forecast Low Price is the single-most important SSG judgment during these crazy market times:  

 

** When JKHY was selling for $21.04, I used $13.31 for my Forecast Low Price, 70% below its 52-week low which is a really low method for me, but its current price has dropped to $15.40 in little more than a month and my SSG’s Low Price no longer seems low enough; 

 

** Ann used Low PE x Low EPS which is the preferred Low Price method for growth companies as it assumes no growth.  However, Ann did not explain why she used 11.0 for her Low PE as 15.3 was the lowest in the last 5 years;

 

** JKHY’s current price, in less than two months, has already fallen below Kim’s Low Price of $16.10;

 

** Take Stock’s $19.54 Low Price made no sense when its SSG was completed as it was higher than JKHY’s current price at that time and that is a SSG no-no.  TS does not follow all the SSG rules and I think that is a

big mistake!  

 

(A) I rechecked the analysts on 10-23 and they were averaging 11.8% with S&P and FactSet Call Street via CNN Money high at 15.00% and Reuters via Morningstar low at 13.30%.  Value Line was 13.50%, First Call via Yahoo was 13.57%, and Zacks was 13.83%.  JKHY’s EPS growth was 15.3% for the last five years, 10.4% for the last three, 2.6% for the last two, and its Sustainable Growth rate is 13.0%.  I don’t remember why I selected 10.00% for my SSG, but it’s clear that the company’s EPS growth has been declining.

 

(B) Ann’s 9.00% Sales growth is not explained which is key to her Preferred Procedure; Zacks estimated 12.82% Sales growth for the next 5 years.  If Ann had used 11.0% Sales Growth, and changed nothing else, her PP would have been 10.8% (instead of 8.8%).

 

(C) Ann’s 8.8% EPS growth comes from her PP with 3 overrides (22.7% PTPM, 36.2% Tax, and 86.4 M shares).  Her PP would have resulted in 10.9% EPS if she had only used the last three-year ave for PTPM (23.3 instead of her 22.7).

 

 

- Armin

 

 

 

 

Assessing Ansys (ANSS)

Ansys, Inc. (ANSS) makes and sells engineering simulation software and services used in the aerospace, automotive, biomedical, electronics and manufacturing industries.  It currently ranks #50 on “The 200 Best Small Companies” for 2008 by Forbes magazine (#57 last year).

ANSS was the monthly Online Stock Study for October 2008 at the Better Investing website.  These studies are led by an experienced volunteer educator and complete an entire SSG in about one hour with about 100 participants deciding the important judgments by consensus.   James Hurt, from the OKI Tri-State Chapter in Ohio, led the ANSS session and thanks Jim for volunteering.

 

The studies are solid and worthwhile educational experiences, but I have one, major criticism: the Online Study uses the Online SSG feature that is much more limited than my SSG software which is Toolkit, version 5.  One critically important limitation is that the Online SSG starts the projection of future Sales and EPS growth only from the last Annual data point (and sadly doesn’t inform the user of this key judgment).  On the other hand, my software allows me to choose from 3 options and I most often start the projection from the last Quarter.

 

When I used the very same judgments as the Online Stock Study, but projected from the last Quarter instead of the last Annual, I got a SSG “BUY” instead of the Consensus’s “Don’t BUY”.  That is, with everything the same except for where we started to project future Sales and EPS growth, my SSG satisfied the NAIC-BI “Buy” criteria while the Online Stock Study did not. 

 

This is not good: outcomes should result from decisions made by the user, not from quirks in the program.  And, no matter what, users of the Online SSG should be informed that this key judgment is built into the program, that growth is always projected from the last Annual data point and can never be changed.

 

One SSG criterion to Buy any stock is an Upside/Downside Ratio of 3.0 or better and I got 3.1 while the Online Stock Study got 2.04.  Another criterion is a Compound Annual Total Return of 15.0% or greater and I got 17.6% while the Consensus got 12.85%.  Again, the only difference between both SSGs was where we began the projection of future growth as you can see from the table below.

 

Ansys, Inc (ANSS)	Consensus SSG	Consensus SSG on TK5	Armin	Take Stock
Price Date	10-1-08	same	10-3-08	10-3-08
Price	$36.60	same	$31.99	$33.38
52 week High     & Low Price	$49.90 &         $31.00	same &        same	$49.86 &            $31.00	n/a
Project Growth From	Last Annual	Last           Quarter	Last                Quarter	Last          Annual
Sales Growth	15.80%	same	15.00%	20.00%
EPS Growth	15.76%	same [rounded]	15.00%	18.20%
High PE	31.6             (PEG of 2)	same	31.0                 (2003, lowest in last 5 yrs)	19.5
High EPS	$2.12	$2.60	$2.51	$2.34
High Price	$66.99	$82.20	$77.80	$45.74
Value Line Estimated High Price = $50-75 as of 8-22-08
Low PE	21.3 (ave low PE  last 5 yrs)	same	13.7 (2003, lowest in last 5 yrs)	9.3
Low EPS	$1.02 (2007 EPS)	same	$1.25 (ttm EPS)	$1.10
Low Price	$21.73	same [rounded]	$17.10 (ave low PE x ttm low EPS)	$10.23
Upside/Down Ratio	2.04	3.1	3.1	0.53    imputed
Total Return	12.85%	17.6%	19.5%	06.5%
SSG Buy Under	n/a	$36.83	$32.28	$19.11
RV/PRV	n/a	109.4/99.2    (2 years out)	114.8/99.8 (4 yrs out)	n/a
RV/PRV	n/a	93.0/84.3   (no outs)	85.3/74.2 (no outs)	n/a
Quality	n/a	S&P = B+	S&P = B+	TS = 6.8, excellent
PTPM – 5 yr ave	31.60%            trend up	same	31.6%           trend up	30.2%     trend n/a
ROE – 5 yr ave End Equity	14.67% trend down	same [rounded]	14.7% trend down	n/a
ROE – 5 yr ave Start Equity	n/a	19.9% trend down	19.9% trend down	20.1% trend n/a
Debt to Equity    – 5 yr ave	n/a	5.7%             trend up	5.7% trend up	n/a

 DISCUSSION:

(A) Online Stock Study:

 

Completing a SSG involves making five judgments about the next 5 years: future Sales Growth, EPS Growth, High PE, Low PE, and Low Price.   What’s most interesting to me about the Online Stock Studies are the several choices offered as potential judgments well as the final decisions.

 

(1) Participants were given 5 choices to decide future Sales growth: 20.6%, the latest quarter; 21.9%, the 10 year historical growth rate; 15.8%, the rate before a recent acquisition; 15.0%, a max guideline for beginners suggested by the presenter; and none of the above.  The Consensus chose 15.8%.

 

** I’m not sure what happened with the small number of people who chose “none of the above”, but presumably they could submit their own answer.

 

(2) The group was also given 5 choices to decide future EPS growth: the same as projected Sales growth; 19.0%, the rate before a recent acquisition; 19.6%, the 10 year historical growth rate; 15.0%, a max guideline for beginners suggested by the presenter; and none of the above.  The Consensus chose 15.8%, the same as projected Sales.

 

** Instead of the last 10 years, I usually put greater weight on more recent Sales and EPS growth rates, say for the last 5 years or so.  Also, I’d treat the year of the recent acquisition as an outlier and remove it from the averages.

 

(3) Participants were given 5 choices to decide the Projected High PE in the next 5 years: 39.9, the 52 week High PE; 38.8, the 5 year average High PE; 2.0 times projected EPS growth (PEG of 2); 1.5 times projected EPS growth (PEG of 1.5); and none of the above.  The group chose a PEG of 2 or 31.6 (18.8 projected EPS growth x 2 = 31.6 Projected High PE).

 

(4) There were also 5 choices to decide the Projected Low PE: 21.3, the 5 year average Low PE; 24.6, the 52 week Low PE; 15.0, the 10 year average Low PE; and 1.0 times projected EPS growth (PEG of 1.0).  The Consensus chose 21.3.

 

** 2006 looks like an outlier year and, if removed, would lower the average Low PE from 21.3 to 18.5.  So, the average Low PE of 21.3 seems too high.

 

(5) There were no choices given to decide the Forecast Low Price because the Online SSG, unlike the SSG software, only uses one method: Low PE x Low EPS.  Moreover, the Online SSG’s default is to use the last full year EPS rather than the trailing twelve months, and you have to be a savvy user to ascertain the TTM EPS and then change the default. These are further limitations of the Online SSG.

 

(B) Armin’s SSG:

 

- When I did my SSGs, the six analysts I always check were skimpy in their long-term EPS estimates which mean that ANSS is not well covered by Wall Street.  FactSet CallStreet via CNNMoney had no estimate; only 1 analyst estimated 15.0% EPS at First Call via Yahoo; Zacks, S&P and Reuters via Morningstar were also estimating 15.0% (maybe by the same one analyst, they don’t say); and Value Line’s estimate was 20.5%. 

 

- I also did what NAIC-BI calls a Preferred Procedure which I don’t usually do when the analyst coverage is solid.  My default PP came to 4.5% and, when I used VL estimates for the next 5 years Tax Rate and Shares Outstanding, presumably more accurate than the defaults, I got 7.3%.  As usual, I found the Preferred Procedure results unhelpful as guidance for the next 5 years.

 

- ANSS’s Historical Growth Rate was 26.0% for the last five years and 25.3% for the last three.  Its Sustainable Growth Rate was 19.9%.  I also found these rates unhelpful in forecasting the future.

 

- I decided to use 15.00% as my estimated EPS growth for the next 5 years which is well below ANSS’s Historical and Sustainable Growth as well as Value Line’s estimate.

 

- The Online Stock Study used a 2.0 PEG to determine its Forecast High PE.  I’m not a fan of the PEG (PE / EPS Growth = PEG and, here, 2 x EPS Growth = Forecast High PE) because it assumes that one number fits all or most companies.  Worse, there’s little agreement as to what constitutes an acceptable PEG (1.2, 1.5, or 2.0) and even less agreement on how it is to be calculated (should it use the Historical or the Projected PE for the next 5 years, should it include dividends).

 

** I stopped using the PEG several years ago after I surveyed 17 web sites and found 11 different PEGs for the same company.  Check out “Problems With The PEG”, Parts 1 and 2:

 

http://lists.betterinvesting.net/read/messages?id=264678#264678

and

http://lists.betterinvesting.net/read/messages?id=264681#264681

 

- Instead of the PEG, I rely on not substantially exceeding or falling below Value Line’s High Price estimate.  Unlike the PEG, it is different for each company and represents a recognized authority that is not contradicted by other sources. 

 

(C) Take Stock

 

Take Stock came close to failing my Value Line test of reasonableness because it got a Forecast High Price that was nearly 9% BELOW the LOW end of VL’s High Price estimate.  It also got a measly 6.5 Total Return and an incredibly low Upside/Downside Ratio of 0.53 (imputed).

 

- Armin

 

** ADDENDUM:

 

The PDF file of the Consensus SSG at the BI website shows an Upside/Downside Ratio of 2.04.  However, after I wrote this post, the recorded presentation and its summary in the February 2009 BI magazine became available and they show a U/D of 3.05.

 

It’s immaterial which U/D is correct since Ansys was a SSG DON’T BUY when future growth was projected from the last annual data point, but was a SSG BUY when growth was projected from the last quarter.