Studying Stryker (SYK) and Mulling Over Methods

 

Stryker Corp (SYK) was recently SSGed by Mark Robertson, founder and General Manager of Manifest Investing.com, as part of Better Investing’s First Cut series.  First Cut allows BI members to submit any of their SSGs in PDF format as long as they explain their judgments on a simple three-page form.

 

Mark has a way different way of doing a SSG: he added two years of estimated Sales data in order to change the projection point of EPS growth.  He also estimated SYK’s Pre-Tax Profit Margin two years into the future in order to complete the BI-NAIC Preferred Procedure which is how he estimated EPS for the next 5 years or maybe it was 7 years. <grin>

 

In contrast to Mark, I make SSG judgments and evaluate what’s reasonable by using comparisons.  If you’re interested, see:

 

Determining What’s Reasonable and What’s Not, July 14, 2008 

 

 

Stryker Corp. is a leading manufacturer of orthopedic implant devices (60% of 2007 Sales) and medical/surgical equipment.  It has no long term debt and a remarkable record of EPS growth: over the last 30 years, Value Line says in its 5-30-08 report that Stryker’s EPS has increased by at least 20% in all but one year (1999, due to an acquisition).  I SSGed Stryker last July and it looked super to me.  See: 

Stryker Looks Strong and Solid, July 3, 2008

 

 

SYK’s stock had a tough year in 2008:  Google Finance reports that SYK’s price fell -40% in the last 12 months, -39% in the last 6, and -17% in the last 3.  I try to incorporate such a price decline into my SSGs my making relatively pessimistic judgments as I have no grounds to be rosy in our recessionary market.

 

It was interesting to compare Mark’s “radical” SSG to my conventional one and to the “ultra-conservative” Take Stock. [“my opinion”]  Maybe we will all learn something?

 

STRYKER Corp (SYK)	MarkR from   BI First Cut	Armin-1	Armin-2	Take Stock
Date	1-9-09	6-27-08	1-23-09	1-23-09
Data	S&P	same	same	Hemscott
Price	$40.96	$62.26	$39.44	$40.57
52 week High & Low Price	n/a	n/a	$70.56 & $35.33	n/a
Project Growth From	end of Next  2 Years  [See A]	end of Last Quarter	same	end of Last Annual
Sales Growth	11.00% [See B]	12.00%	same	10.90%
EPS Growth	18.00% [See C]	15.00% [See D]	same [See E]	10.9% initial 08.7% final
High PE	26.0           2008 est [See F]	27.7       from 2006	20.0	30.0
High EPS	$6.50 [See G]	n/a	$5.53	$3.64
High Price	$169.00 $24/sh > VL	$140.40	$110.60	$109.26
Value Line Estimated High Price = $105-145 at $40.83 as of 11-28-08, $110-150 at $67.20 as of 8-29-08, $110-145 at $68.54 as of 5-30-08 and 2-29-08
Low PE	14.0           2008 est	19.7        from 2006	14.1	20.6
Low EPS	$2.88	n/a	$2.75       (TTM actual)	$2.59
Low Price	$32.00 (60% of cur price)	$49.60 (low PE x low EPS)	$21.20      (60% of 52 week low)	$53.35   [See H]
Upside/Down	14.3      [See  I]	6.2	3.9	impossible to compute
Projected Annual Return	26.6%	n/a	22.3%	n/a
Total Return	33.2%	17.9%	23.3%	22.4%
SSG Buy Under	n/a	$70.53	$43.55	$55.76
RV/PRV (no outs)	60.3/52.8	n/a	49.3/43.0	n/a
Quality	n/a	S&P = A+ tops	same	TS = 6.3 good
	2005-2009	2003-2007	2003-2007	2003-2007
PTPM – 5 yr ave	23.0% trend up	20.7% trend up	same	21.0% trend n/a
ROE – 5 yr ave End Equity	19.9% trend even	20.3% trend down	20.8%  same	n/a
ROE – 5 yr ave Start Equity	n/a	26.1% trend down	same	25.8% trend n/a
Debt to Equity – 5 yr ave	n/a	01.3% trend down	same	n/a

 

DISCUSSION:

 

[A] Mark relied on YahooFinance to get Sales estimates for the next 2 years (in dollars) which he entered into his Toolkit software to “fool” the program into projecting growth from the end of those two years.  The last year of actual data was 2007, Mark added estimated data for 2008 & 2009, and projected growth for the next five years 2010-2014.

 

[B] Mark’s 11.00% Sales growth estimate was based on adding two years of estimated Sales data, eliminating the first five years as outliers, and “truncating” the remaining five year result of 11.90% to 11.00%. <Whew>

 

- The Toolkit software can act only on 10 years of data so adding two years means the earliest two years are discarded.  Then, Mark eliminated the first five years as outliers in order to ascertain more recent trends based on 3 years actual and 2 years of estimated Sales data.

 

- I think Mark’s “truncating” meant reducing, not rounding, from 11.90% to 11.00%.  But, and it’s a big “but”, why not truncate or reduce to 10.00% or less: Stryker’s historical Sales growth has been trending down, with 2007 the lowest growth in the past 10 years at 11.00%.

 [C] Mark derived his 18.00% estimated EPS by using BI-NAIC’s Preferred Procedure which involves making four estimates for the next 5 years (2010-2014 for Mark).  His PDF file did not set forth his PP estimates, but I was able to duplicate his 18.00% estimate by using: 11.00% Sales growth (which Mark decided); 29.9% estimated Pre-Tax Profit Margin (28-30% PTPM was mentioned in his write-up); 27.8% estimated Taxes (from Value Line); and 360 M estimated Shares (also from Value Line).

- Even the low end of Mark’ estimated 28-30% PTPM is much higher than Stryker’s actual PTPM and his Preferred Procedure would have dropped substantially from 18.00% to 12.20% if he had used the last year of Stryker’s actual PTPM; to 11.30% with SYK’s last two year average PTPM; or to 10.80% with SYK’s last three year average PTPM.

- Here’s my tally of Mark’s SSG so far: two years of estimated Sales data from YahooFinance, three years of actual data from S&P, two estimates from Value Line, none of which are for 2010-2014, but which is the period that Mark used to project his estimated 18.00% EPS growth.

 

[D] My method of estimating EPS for the next 5 years is much more straight-forward than Mark’s.  When I did my earlier SSG, the six analysts I check for every SSG were closely estimating long-term EPS at around 18-18.50% with Value Line low at 17.50% and FactSet CallStreet high at 20.00%.  S&P was 18.50%, Reuters via Morningstar was 18.70%, Zacks.com was 18.88%, and FirstCall via YahooFinance was 19.00%. 

- All of these EPS estimates are for the next 5 years except VL’s which is for the next 3-5 years.  Note that they are from six different sources, not just six different websites.  Only by surveying all of them can I tell which is out-of-whack and which is in the ballpark.

[E] When I updated my SSG on 1-23-09, the average of the estimates by the same six analysts had dropped to 17.75%.  FactSet and Value Line were unchanged, FirstCall via YahooFinance was now the lowest and down to 15.85% (from 19.00%), S&P was down to 18.00% (from 18.50%), Zacks was down slightly to 18.29% (from 18.88%), and Reuters was up slightly to 18.80% (from 18.70%).

 

- I usually rely on the lowest EPS estimate of the six or the average less one Standard Deviation (which Excel calculates for me) as I believe this appropriately “wrings out” any analyst over-optimism and provides a reasonably conservative result.  Here, the lowest estimate was First Call’s 15.85% and the average of the six less 1 SD was 16.35%.

- Keep in mind that Mark’s 18.00% estimated EPS, which is based in part on two years of estimated Sales data from YahooFinance, [1] ignored YahooFinance’s five year EPS estimate of 15.85% (down from 19.00%) and [2] exceeded two other estimates, from Zacks and Reuters.

- Unlike Mark, I don’t use the Preferred Procedure as it involves too many estimates and too much guesswork for me.  For example, which PP seems most appropriate for Stryker: Mark’s 18.00% based on 28-30% PTPM; 12.20% if he had used 23.2% PTPM from Stryker’s last year of actual data; 11.30% if he had used 22.3% PTPM from SYK’s last two year average; or 10.80% if he had used 21.8% PTPM from SYK’s last three year average?  If you’re still interested in the PP, you might want to check out:

Considering Kohls and Reconsidering NAIC’s Preferred Procedure

 

[F] Mark’s Forecast High PE of 26.0 is his estimate for 2008 as is his Forecast Low PE of 14.1.  He doesn’t explain how he made these estimates, but I’m guessing he “interpolated” them from the latest Value Line report.

[G] Mark’s $6.50 estimated High EPS is central to his SSG.  He wrote: “The EPS growth rate is “force calculated” and will display as 14% based on erroneous handling.  What is important for the [High] price forecast is the 5-year EPS forecast ($6.50, from interpolation) and the PE selections in [SSG] Section 4.” [my emphasis and insertion]

- Sadly, I do not know what Mark meant by “force calculated”, or “interpolate”, and he did not clarify.  When I use his 18.00% estimated EPS, after adding two years of estimated data like he did, my Toolkit software calculates $7.68 as the High EPS (not $6.50).  And when I work backwards using his $6.50 High EPS, my TK software calculates 14.2% EPS which is erroneous according to Mark.  How he “force calculated” 18.00% to produce $6.50 High EPS is a mystery.

- Of fundamental importance is that a conventional SSG with 18.80% EPS (virtually the same as Mark’s 18.00%) results in $6.50 High EPS (exactly the same as Mark’s $6.50) without adding two years of estimated Sales data for 2008-2009, without estimating PTPM at 28-30% and thereby substantially exceeding actual trends, without projecting growth from 2010-2014 when 2007 is the last year of actual data, and without any “force calculation”, interpolation, slight-of-hand, or hocus pocus.

 [H] Take Stock is not programmed to recognize when it exceeds or is very close to the current price.  Its Forecast Low Price of $53.51 in the next five years is way over Stryker’s current price of $40.57. That’s another SSG no-no and explains why it is impossible to calculate Take Stock’s Upside/Downside Ratio.  That’s not an inadvertent flaw, but a deliberate design feature, and Take Stock produces an-almost-but-not-quite SSG.

On the other hand, Mark’s Forecast Low Price was based on 60% of SYK’s current price while mine was based on 60% of SYK’s 52 week low price because Stryker’s price has fallen so much this past year.  

[I] The SSG criteria to consider buying any stock are a minimum 3.0 Upside/Downside Ratio and a 15.0% Total Compound Annual Return each year for the next 5 years.  Mark’s SSG with a 14.3 U/D and 33.2% TR does not indicate a better “Buy” than my 4.1 U/D and 23.3% as both of our SSGs satisfy the minimum requirements.

- I’m always wary of double digit U/Ds or sky-high TRs as overly-optimistic, and especially suspicious when both occur in the same SSG.  The BI-NAIC Stock Selection Handbook warns: “When you see a large upside-downside ratio, revisit your judgment in [SSG] Section 3 and the forecast low price” (page 112, 2003).

CONCLUSIONS:

(1) A conventional SSG is preferable, I think, to analyze Stryker and most growth stocks, and it seems unnecessary as well as bewildering to add two years (or even one) of estimated data, to project growth from 2010 to 2014 (when the last year of actual data is 2007), and to rely on a Pre-Tax Profit Margin estimated seven years into the future that substantially exceeds the stock’s recent trends.

(2) When I SSGed Stryker last June, it satisfied the SSG Buy criteria.  Seven months laster, when I SSGed SYK again, it continues to look strong and solid.

Let me know what you think by leaving a comment here and I’m going to invite Mark to share his thoughts.

 

- Armin

 

Grappling With Grainger (GWW)

 

 

 

W. W. Grainger (GWW) was this month’s Online Stock Study at the Better Investing website.  More than ever before, some 600 participants completed a SSG by consensus as Brian Altschul led the one hour discussion. Brian is a volunteer educator and a director at the New Jersey BI chapter.  Thanks Brian for a solid presentation.

 

The Power Point slides and completed SSG can be downloaded from the BI website and, several weeks after I wrote this, the recorded presentation also became available for downloading.

 

I’m a big fan of these monthly stock studies and the part I like best is learning the SSG methods of the different presenters.  The SSG involves five judgment calls and I especially like learning the 4 or 5 alternative choices for each judgment that the different presenters prepare for the participants.

 

Value Line says that Grainger is the leading provider of maintenance, repair, and operating supplies and services to businesses in the U.S. with almost 600 branches in all 50 states and 17 distribution centers. It sells to businesses and institutions, not retail to the general public.  Grainger’s 2007 catalog offered nearly 139,000 facility maintenance products and more than 300,000 are available online.  Its products range from janitorial and painting to pneumatics and hydraulics, from adhesives to test instruments.

 

Unlike most stocks last year, Grainger’s stock price fell only a small amount in 2008: – 6% for the last 12 months, – 5% for the last six, +7 for the last three, and + 12% for the last month.

 

Here is a comparison of the Consensus SSG with three others: by Take Stock, DannyM, and myself.  Take Stock is a one-click, computerized program at StockCentral.com that involves no judgment by the user.

 

Grainger, W.W. (GWW)	BI Online   Stock Study	Armin	DannyM	Take   Stock
Date	1-7-09	1-8-09	1-2-09	1-7-09
Data	S&P	same	Hemscott	same
Price	$78.81	$77.44	$80.59	$78.51
52 week High & Low Price	$93.99 & $58.86	same &   same	same &  same	n/a
Project     Growth From	Last Quarter   [see A]	Last Quarter	Last Quarter	Last Annual
Sales Growth	8.20%   [see B]	7.00%	4.00%	3.30%
EPS Growth	8.20%  (Preferred Procedure)        [see C]	7.00%         [see D]	10.00%	3.30% initial & 1.00% final                                  [see E]
High PE	20.0   [see F]	16.0	19.8	19.8
High EPS	$8.87	$8.39	$9.46	$5.20
High Price	$177.40 ($27/sh >       latest VL)	$134.20	$187.30 ($37/sh >    latest VL)	$103.02 ($17/sh <  latest VL)
Value Line Estimated High Price = $120-150 on 1-9-09 and $130-160 on 10-10-08
Low PE	13.7   [see G]	10.8	14.7	13.6
Low EPS	$5.98	$5.98	$4.94	$5.06
Low Price	$58.90 (recent severe low)	$58.90 (recent  severe low)	$58.90 (recent        severe low	$68.82
Upside/ Downside	4.9	3.1	4.9	2.5            (imputed)
Total Return	19.0%	13.3%	19.7%	7.3%
SSG Buy Under	n/a	$71.78	$90.97	$55.50
RV & PRV (no outliers)	75.4 &            69.6	73.7 &         69.2	79.7 &        72.6	n/a
Quality	n/a	S&P = A	Not Rated	TS = 3.2 unaccep-table
PTPM – 5 yr ave	09.5% trend up	same     [see H]	9.5% trend up   [see I]	same trend n/a
ROE – 5 yr ave End Equity	15.0% trend up	same        [see H]	15.1% trend up       [see I]	n/a
ROE – 5 yr ave Start Equity	n/a	16.1% trend up	16.2% trend up	same trend n/a
Debt to Equity –   5 yr ave	n/a	0.2% trend even	-0- trend even	n/a

 

 

[A] The Granger study used the Toolkit software, not the Online SSG at the BI website, and was therefore able to project future growth from the last quarter which the Online SSG does not allow.

 

I like the monthly Online Stock Studies, but dislike the Online SSG because it has substantial limitations.  See my prior critique, Assessing Ansys (ANSS), October 6, 2008 at

 

http://arminfields.wordpress.com/2008/10/06/assessing-ansys-anss

 

[B] The Online Study participants chose 8.20% as GWW’s estimated Sales growth for the next 5 years which reflected the company’s historic sales growth for the past 5 years.  They were given three other choices: 3.7%, 10 year historic growth; 9.6%, last 4 quarters; and 11.7%, the consensus estimate from YahooFinance.

 

When I checked YahooFinance, I found that the 11.7% was for estimated EPS growth (not Sales growth) and that Yahoo makes no estimate for 5 year Sales growth.  However, Zacks.com is currently estimating 8.29% Sales growth for the next 5 years.

 

[C] The Consensus used the NAIC-BI Preferred Procedure (PP) to estimate 8.2% as GWW’s future EPS growth.  The PP involves making four estimates for the next 5 years: Sales growth (previously decided at 8.2%), Pre-Tax Profit Margin, Tax Rate, and Shares Outstanding.

 

Participants chose 9.9% as the PTPM, a weighted average offered by Brian and up from the simple 5 year average of 9.5%.  Granger’s PTPM has been increasing and I get 10.1% as the last three year and 10.4% as the last two year average, neither of which were proposed to the group.

 

The two remaining PP factors were decided by Brian: 38.4% Tax Rate (Toolkit’s default and essentially the same as VL’s estimate) and 70.0 M Shares Outstanding (from VL’s estimate on 10-10 overriding the TK default of 76.1M shares).

 

If 10.4% had been used for the PTPM (instead of 9.9%), the Preferred Procedure would have resulted in 9.3% EPS (instead of 8.2%).  That is one reason I don’t use the PP: too many estimates and too much guesswork for me.  Should SSGers use 5.5% estimated EPS for Grainger (the TK default PP), 8.2% (the Consensus decision), or 10.1% (my optimistic result)?

 

[D] When I did my SSG, the six analysts I always check were closely estimating long-term EPS at an average of 11.55% with S&P and FactSet CallStreet via CNN Money high at 12.00% and Zacks.com low at 10.85%.  Value Line was 11.00% on 1-9 (down from 12.5% on 10-10); Reuters via Morningstar was 11.70%; and First Call via YahooFinance was 11.73%.

 

FactSet’s estimate was from 6 analysts who ranged from a low of 7.00% to a high of 15.00%. 

 

I used 7.00% which was from FactSet and the very lowest estimate from all the analysts.

 

[E] Take Stock’s 3.30% initial and 1.00% final EPS estimate are way, way low and I consider them unreasonably low and untrustworthy by comparison to the other SSGs and to the six analysts.  Take Stock’s low-ball estimate is why it got such a low Forecast High Price and Total Return.

 

[F] To decide the Forecast High PE, Brian proposed 5 choices: 20% expansion of the current High PE (24.0); 10% expansion (22.0); High PE from most recent year (20.0); average of High and Low PEs for last 5 years (17.5); and a 20% decline of current High PE (16.0).  The Consensus chose 20.0, the High PE from the most recent year.

 

I thought these were innovative choices although I wish we had some factual basis to support the choice of a percentage increase or decrease.  Still, the idea can be useful if SSGers want to be optimistic or pessimistic, but (at least  for me) always in combination with VL’s High Price estimate as a target that I never want to substantially exceed or fall under.

 

[G] To decide the Forecast Low PE, Brian offered 4 choices: the 5 year average Low PE (14.7); the lowest Low PE in the last 5 years (13.7); the current PE (12.5 or maybe 13.2); and a 20% decline of the current Low PE (10.0).  The Consensus chose 13.7, the lowest Low PE in the last 5 years.

 

[H] S&P places Grainger in the Wholesale Trade industry and GWW is better than its industry averages in terms of Pre-Tax Profit Margin (9.50% vs 8.40%) as well as Return on Equity (15.00% vs 12.75%).  Direct competitors according to YahooFinance and Hoovers.com are Applied Industrial Technologies (AIT), Wesco International (WCC), and Graybar Electric (private).  AIT and WCC are also in this S&P Wholesale Trade industry.

 

[I] Hemscott places Grainger in a different industry, Electronics Wholesale, and GWW is also better than its industry average in terms of PTPM (9.50% vs 7.00%) but worse in terms of ROE (15.10% vs 16.40%).  Competitor WCC is also in this Hemscott Electronics Wholesale industry, but AIT is not.

 

- Armin

 

Zeroing-in on Zebra (ZBRA)

 

 

Zebra Technologies (ZBRA) is a leading manufacturer of bar code and radio frequency identification or RFID technologies that are used to encode data at the point of sale (by retailers, for example) or the point of issuance (such as by libraries).  ZBRA makes the printers, software and related supplies.

 

Like many stocks in 2008, ZBRA’s price has declined significantly this past year: -35% in the last 12 months, -34% in the last six, and -12% in the last three.

 

Here is a comparison of RobertG’s SSG from Better Investing’s First Cut with mine and with Take Stock.

 

Zebra Tech (ZBRA)	RobertG	ArminF	Take Stock
Date	11-19-08	12-26-08	12-26-08
Data	S&P	S&P	Hemscott
Price	$18.64	$19.17	$19.17
52 week High & Low Price	$38.47 & $16.18	$38.97 & $16.56	n/a
Project Growth From	Last Annual	Last Quarter	Last Annual
Sales Growth	09.10%	10.00%	09.10%
EPS Growth	10.20% (see A)	10.00% (see B)	-0.60% (see C)
High PE	29.9 (see D)	20.0	24.8
High EPS	$2.71	$2.72	$1.58
High Price	$81.00 (16% > VL’s Est High End)	$54.40	$39.22 (22% < VL’s Est Low End)
Value Line Estimated High Price = $50-70 at $19.59 as of 12-12-08
Low PE	18.8	12.1	14.3
Low EPS	$1.62	$1.69	$1.62
Low Price	$16.60 (recent severe low)	$09.70 (60% x 52 week low)	$39.22
Upside- Down Ratio	30.0 (see D)	3.7	impossible to calculate
Total Return	34.2%	23.2%	14.3%
SSG Buy Under	n/a	$20.88
RV/PRV	45.3/ 41.2 (2 yrs out)	46.5/42.4 (2 yrs out)	n/a
Quality	n/a	S&P = B	TS = 1.10 unacceptable
PTPM – 5 yr ave	24.0% trend down (see E)	same	24.0% trend n/a
ROE – 5 yr ave End Equity	13.4% trend down (see E)	same	n/a
ROE – 5 yr ave Start Equity	n/a	15.2% trend down	15.1% trend n/a
Debt to Equity – 5 yr ave	n/a	-0- trend even	n/a

 

(A) Robert’s SSG from BI’s First Call mentions that ZBRA has made four acquisitions in the last 2 years, but does not explain how or why he estimated future growth at 9.1% Sales and 10.2% EPS.

 

(B) When I did my SSG, the six analysts I always check were estimating long-term EPS at around an average of 13.55% with VL low at 7.50% and FactSet CallStreet via CNN Money and S&P both high at 15.00%; First Call via Yahoo Finance was 14.40%, Zacks was 14.67%, and Reuters via Morningstar was 14.80%.

 

FactSet’s estimate was from four analysts who ranged from a low of 12.00% to a high of 15.00%.

 

The analyst estimates were anticipating future EPS to increase substantially as ZBRA’s historic EPS averaged only 5.0% during the last 5 years and sunk to 3.0% in the past 2 and 3 years.

 

I estimated 10.00% EPS growth, lower than all the estimates but much more than ZBRA’s historical growth.  Because of our recessionary market, I think it is sensible for my estimates of future EPS and High PE to result in a Forecast High Price ($54.40) that is at the low end of VL’s estimate ($50-70).

 

(C) Take Stock estimated EPS growth at an untrasonably low -0.6% which meant that its Forecast High Price was also unreasonably low.

 

(D) Robert removed 2 years of outliers from ZBRA’s High PE which then became his Forecast High PE of 29.9.  However, PEs have been trending down and it looks like he didn’t realize that his average was higher than 2007’s 25.4.  That’s why his Forecast High Price is way higher than VL’s estimate and why he got an unreliable 30.0 Upside-Downside Ratio.

 

BI’s Stock Selection Handbook states: “When you see a large upside-downside ratio, revisit your judgment in [SSG] Section 3 and the forecast low price.  You should probably reduce your forecast low price even further.” [page 112, 2003 edition]. Although the Handbook does not define a large U/D, it does say that 3.0 is the minimum needed for a SSG Buy and I consider any double digit U/D as untrustworthy.

 

(E) Two red-flag warning signs are that ZBRA’s Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE) are trending down.  Trending up is desired, trending even is OK, but down is not good, so bad that some BI/NAIC gurus would not complete any SSG with even one downtrend.  However, keep in mind that ZBRA’s 5 yr average PTPM is much better than its industry average (24.0% vs 16.1%) while its ROE is only slightly worse (13.4% vs 14.2%).

 

Would you Buy Zebra or not Buy based on what you see here and how important are the downtrends?

 

- Armin