Observing O’Reilly (ORLY)
November 25, 2011
O’Reilly Automotive (ORLY) is a large chain of retail stores in the U.S. that sell auto parts and after-market accessories. As of June 30th, ORLY had just over 3600 stores.
O’Reilly was the subject of the monthly Online Stock Study at the BI website for November 2011 and was led by Adam Ritt, editor of the Better Investing magazine. ORLY’s Value Line and Morningstar reports are available to BI members as are Adam’s Presentation Slides, an audio recording of the online study, and an earlier SSG and report by the Investment Advisory Service (IAS).
The Online Stock Study uses consensus decision-making to complete a SSG in about one hour. Happily, and for the first time in almost a year, the Consensus SSG is also available as a handout. Hooray!!
Company Background:
– O’Reilly’s Sales & EPS growth has been impressive: 19.3% & 16.5% for the past 10 years; up to 26.8% & 17.1% over the last 5; and up again to 22.8% & 41.5% for the last 3 years.
– The company’s acquisition of CSK Auto in 2008 increased its store base by 70% as well as its geographical presence in the West, especially California.
– ORLY’s sales reflected 59% Do-It-Yourself (walk-in customers) and 48% Do-It-For-Me (repair shops) as of June 2011; before the CSK acquisition, 52% were Do-It-Yourselfers.
– The company began in 1957 with one store and Wikipedia as well as IAS reported that much of ORLY’s growth has been fueled by acquisition:
** In 1998, it merged with Hi/Lo Auto Supply adding 190 stores; in 2000, it bought KarPro Auto Parts and its 14 stores; in 2001, it purchased Mid-State Auto Distributors adding 85 stores; and in 2008, it bought CSK with 1342 stores, its largest acquisition.
– ORLY’s 2010 Annual Report explained that the company opened 149 net new stores last year, counting openings and closings, and plans to open 170 in 2011.
** Same Store Sales increased from 4.6% to 8.8% in 2010.
** The company also opened three new distribution centers last year, relocated one, and converted another.
** ORLY anticipates “significant market share gains in the Western U.S.” in the next several years and expects to make some $50M capital investment in the acquired CSK stores.
– ORLY’s direct competitors are Auto Zone (AZO), Advance Auto Parts (AAP), and Genuine Parts (GPC) according to YahooFinance.
** Among these competitors over the last 5 years, ORLY had the highest average Sales growth, AAP had the highest EPS growth, and AZO had the highest Pre-Tax Profit Margin;
** Morningstar reported that ORLY faced stiff competition from AZO and AAP which also have been aggressively expanding;
** Because there is little product differentiation among its competitors and low barriers to entry, Mstar assigned no economic moat to ORLY (no competitive advantage).
SSG Discussion:
– The following table compares the Consensus SSG with recent SSGs by Adam (from BI’s First Cut), myself, and Take Stock.
– After the table, I discuss key judgment issues, ORLY’s Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE), and its Financial Condition.
| O’Reilly Auto- motive (ORLY) | Consensus SSG | AdamR (from BI’s First Cut) | ArminF | Take Stock |
| Date | 11-1-11 | Same | 10-28-11 | 10-31-11 |
| Data | Mstar via BI | Same | Same | Mstar via SC |
| Price | $76.45 | $78.79 | $76.07 | Same |
| 52 week High & Low Price | $77.35 & $53.33 | $78.77 & Same | Same & Same | Not Used |
| Last Quarter of Reported Data | Q3 ending 9-30-11 | Same | Same | Same |
| Software Used | Online SSG | Same | TK 6 | TS Online |
| Project Growth From End of | Last Q | Same | Same | Last FY |
| Sales Growth | 7.00% | 8.00% | 15.00% | 11.00% |
| EPS Growth | 8.00% | 8.00% | 15.00% | 11.40% start 06.69% end |
| High PE | 18.4 | 22.0 | 20.3 | 21.5 |
| High EPS | $5.39 | $5.14 | $7.04 | $4.45 |
| High Price | $99.18 | $113.00 | $142.90 (10% > VL) | $95.75 |
|
VL Estimated High Price = $95-130 as of 9-5-11 and 11-14-11 |
||||
| Low PE | 14.81 | Same | 12.3 | 12.6 |
| Low EPS | $3.50 | Same | Same | $3.20 |
| Low Price | $51.84 | Same | $43.10 | $40.32 |
| Upside/Downside Ratio | 0.92 | 1.28 | 2.0 | Impossible to Calculate |
| Total Return | 3.2% | 3.75 | 13.4% | 4.7% |
| SSG Buy Under | Not Available | Same | $68.05 | $47.87 |
| RV/PRV | Not Available | Same | Not Used | Not Available |
| RV/PRV (no outs) | Not Available | Same | 117.9/102.7 | Not Available |
| Quality | Not Used | Same | S&P = B+ (4th of 8 grades) | TS = 3.2 unacceptable |
| PTPM – 5 yr ave | 11.21% Trend N/A | Same Same | 11.20% Trend up | Same Trend N/A |
| ROE – 5 yr ave End Year Equity | 11.62% Trend N/A | Same Same | 11.60% Trend up | Not Used |
| ROE – 5 yr ave Begin Year Equity | Not Available | Same | 13.6% Trend up | 14.0% Trend N/A |
| Debt to Equity – 5 yr ave | Not Available | Same | 16.8% Trend down | Not Used |
The Consensus SSG:
(A) Estimating Future Sales Growth for the next 5 years
– Adam gave the participants four options to estimate ORLY’s future Sales growth: 7.00%, analyst estimates (unnamed) for this year and next; 8.00%, estimate by Morningstar and Value Line, and 3Q actual; 12.00%, Investor’s Advisory Service estimate in January 2011; and 19.00%, ORLY’s long-term historic growth.
** The only website I know of that makes a Sales growth estimate for the next 5 years is Zacks.com;
** Value Line’s 7.00% estimate was for Sales per Share, not Sales, and VL makes no estimate of future Sales;
** ORLY’s historic Sales growth of 19.00% was for the last 10 years and its Sales growth for the last 5 years increased to 23.80%.
– The Consensus (60% of the votes) chose 8.00%; the next highest vote (22%) was for 7.00%.
(B) Estimating Future EPS Growth
– The participants were given four choices to estimate the company’s future EPS growth: Same as their estimated Sales growth; 8.00%, imputed rate from VL’s dollar estimate from 2011 to 2014-2016; 13.50%, VL’s estimated rate from its Annual Rates box; 15.00%, IAS estimate in January 2011; and 16.50%, ORLY’s long-term historic EPS growth.
** ORLY’s historic EPS growth of 16.50% was for the last 10 years; its EPS growth for the last 5 years increased slightly to 17.1%.
** It’s a mistake, I believe, to impute a rate from VL dollar amounts that’s different from its Annual Rates box as VL uses a unique method to calculate its rates which is explained in a new page [click here].
– The Consensus (52%) chose 9.00%, Adam’s imputed VL rate; the next highest vote (28%) was for 13.5%, VL’s estimate for the next 3-5 years from its Annual Rates box.
Adam‘s SSG:
Estimating Future EPS Growth:
– Adam limited his EPS growth to 8.00%, the same as his Sales growth estimate.
– He then used the NAIC/BI Preferred Procedure to double check his judgment and used these four inputs: Sales growth = 8.00%; PTPM = 12.5% (average of 2006, 07 & 10); 37.5% Tax Rate (from VL); and 133M Shares Outstanding.
– His PP reslted in 7% EPS growth for the next 5 years which Adam thought was a “little low” so he used 8.00% even though he mentioned that unnamed analysts were estimating 16.5%-17.0%.
Armin’s SSG:
Estimating Future EPS Growth:
– When I did my SSG, the seven long-term EPS estimates I ALWAYS check were averaging 16.4% with CNNMoney via FactSet CallStreet high at 18.00% and VL low at 13.50%.
** Relying on VL without checking other estimates is unwise, as demonstrated by the Online Stock Study, since it may be atypically low;
** Morningstar.com and Zacks via BI were both 17.00%; Yahoo Finance via Thomson/FirstCall was 16.50%; Reuters.com was 16.49%; and Zacks.com was 16.05%;
** For how I estimate EPS growth for all my SSGs, see: Estimating EPS [click here].
– I decided to estimate 15.00% EPS growth which, together with my Estimated High PE, gave me a Forecast High Price that was 10% greater than VL’s estimate as I try to never exceed VL by a substantial amount.
Final Results:
– None of the four analyses resulted in a SSG Buy, maybe because ORLY’s price was close to its 52 week high.
| FINAL RESULTS | Consensus SSG | AdamR | ArminF | Take Stock |
| SSG Date | 11-1-11 | 11-10-11 | 10-28-11 | 10-31-11 |
| Price when SSG was done | $76.45 | $78.79 | $76.07 | Same |
| 52 week High & Low Price | $77.35 & $53.33 | $78.99 & Same | Same & Same | Not Used |
| EPS Growth | 9.00% | 8.00% | 15.00% | 6.49% |
| Forecast High PE | 18.4 | 22.0 | 20.3 | 21.5 |
| Forecast High Price | $99.18 | $113.08 | $142.90 (10% >VL) | $95.75 |
| Upside-Downside Ratio (need 3.0 min to Buy) | 0.92 | 1.28 | 2.0 | Impossible to Calculate |
| Expected Total Return (need 15% min to Buy) | 3.2% | 3.75% | 13.4% | 4.7% |
| FINAL RESULTS | DON’T BUY | DON’T BUY | DON’T BUY | DON’T BUY |
– The Consensus SSG began with a low EPS estimate as well as a low Forecast High PE and resulted in the lowest Total Return;
– My SSG began with a substantially higher EPS estimate but still failed to satisfy the BUY criteria (3.0 U/D and 15% TR).
Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE):
– PTPM and ROE 5 year averages are both trending up which are good signs and what we want to see from all our SSGs.
– Morningstar places ORLY in the Specialty Retail Industry which is a hodge-podge of companies that sell different things.
– ORLY’s PTPM is substantially better than its Industry Average (11.2% vs 5.79%) and its ROE is also better (11.6% vs 9.87%);
** I no longer pay for a subscription to Stock Central because the only thing I used was its Industry Data (which is the best on the web).
** Now, I use the meagre Industry data at the BI webite which does not provide a company-by-company breakdown so I can no longer identify and eliminate atypical amounts, and recalulate the adjusted average.
Financial Condition:
– Value Line gave ORLY an “A” for Financial Strength, its third highest of nine ratings:
** VL also reported that the company’s cash had increased from $29.7 M in 2010 to $268.8 M eighteen months later.
– Morningstar found that ORLY was in “good financial health”:
** Moreover, the company can “easily service its debt” using internally generated cash flows; and
** Earnings before Interest and Taxes were a comfortable 10 times Interest expenses over the past 5 years and Mstar expects that rate to improve in the future.
– The Annual Report Spreadsheet by Bob Adams gave ORLY’s 2010 A.R. a 73 out of 100 with 9 Bullish results (good things) and 9 Bearish (not-so-goods):
** The Bullish results included: sales are increasing and increasing faster than related costs; debt is decreasing and interest coverage is reasonable; debt to equity at 11.1% is reasonable.
** The Bearish results included: ROE at 13.1% is inadequate and gets a yellow caution flag; Accounts Receivable, Inventories, and Shares outstanding are all increasing and all get a yellow caution flag.
– My SSG shows that ORLY’s Long-Term Debt went from a low of $75.1 M in 2007 to a high of $724.6 M in 2008 and then down to $357.3 M in 2010, the last full year of available data.
** Currently, ORLY’s Total Debt is $797.8 M, its Debt to Total Capital is 20.7%, and its Cash Flow per Share is $2.38 (after being negative three of the last 5 years).
Armin
**** ORLY is my 85th post to this SSG Blog which I expect to end soon after 5 years. It’s a lot of work with very little reward (feedback).
CONTENTS
November 25, 2011
** TO READ ANY POST FROM 2011 BACK THROUGH 2008,
JUST CLICK ON THE BLUE TITLE **
2011:
– Observing O’Reilly (ORLY), November 25, 2011
– Contemplating Cognizant (CTSH), October 13, 2011
– Puzzling Over PG (Procter & Gamble), June 14, 2011 – Learning About LKQ Corp (LKQX), May 18, 2011
– Gauging GE (General Electric), April 10, 2011
– Mulling Over Mednax (MD), February 19, 2011
– Musing about Medco (MHS), January 27, 2011
*
*
*
*
2010:
– Guessing about GameStop (GME), December 24, 2010
– Tempted by TEVA (TEVA Pharma), November 26, 2010
– Evaluating EPS Estimates, October 19, 2010
– Counting on Coach (COH), August 1, 2010
– Auditing Abbott Labs (ABT), June 25, 2010
– Admiring Apple (APPL), June 5, 2010
– Reporting On RIMM (Research In Motion), May 23, 2010
– Savoring Sysco (SYY), April 21, 2010
– Appraising Aeropostle (ARO), April 9, 2010
– Connecting with Cisco (CSCO), March 21, 2010
– Checking Up on Church & Dwight, March 4, 2010
– Probing Paychex (PAYX): A Follow-up, February 14, 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
Puzzling Over PG (Procter & Gamble)
June 14, 2011
Procter & Gamble (PG) is the world’s largest manufacturer of consumer products with an impressive line-up of famous brands, 23 of which had sales of over $1 billion each in 2010.
PG was the Online Stock Study at the Better Investing website for June 2011 and was led by Ken Kavula and Eve Lewis. Ken is the Chairman of the Better Investing Volunteer Advisory Board and Eve is a Trustee of the NAIC Board of Directors.
The webinar recording is available to BI members as are the presentation slides and other handout materials. Sadly, and once again, no SSG has been made available, even though a completed SSG is the stated purpose of the Online Study.
Company Background:
– Procter & Gamble’s 2010 sales were $78.9 B, according to Morningstar SSG data, down –0.1% from 2009; sales growth has been trending down for the last ten years and was negative for the last two.
– EPS growth has follwed the same trend: down -1.4% last year, trending down for the last ten, and negative for the last two.
– Value Line reported that sales in the U.S. accounted for 38% of total sales and sales to Wal-Mart represented 16% of the total.
– PG is organized into three Global Buisness Units (GBUs): Beauty & Grooming (34% of 2010 sales); Health and Well-Being (18%); and Household Care (48%).
– The 23 Billion Dollar Brands by GBU and segment, according to PG’s 2010 10K Annual Report, are:
** Beauty and Grooming:
- Beauty ($19.5B & 24% of 2010 sales): Head & Shoulders, Olay, Pantene, Wella;
- Grooming ($7.6B & 10%): Braun, Fusion, Gillette, Mach3;
** Health and Well-Being:
- Health ($11.5B & 14%): Always, Crest, Oral-B
- Snacks and Pet Care ($3.1B & 4%): Iams, Pringles;
** Household Care:
- Fabric and Home Care ($23.8B & 38%): Ace, Ariel, Dawn, Downy, Duracell, Gain, Tide;
- Baby and Family Care ($14.7B & 18%): Bounty, Charmin, Pampers
– PG sells its products in more than 180 countries with sales in the U.S by far accounting for the largest geographic segment. North America accounted for 42% of sales; Western Europe, 21%; Asia, 15%; and Latin America, 9%.
SSG Discussion :
– After the following comparative table, I discuss several key SSG issues, PG’s competitors, its Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE), and its Financial Condition as well as some Final Thoughts about PG.
| Procter & Gamble (PG) | Consensus/ Ken SSG | Armin-1 | Armin-2 (optimistic) | Take Stock |
| Date | 6/1/11 | Same | Same | Same |
| Data | Mstar via BI | Same | Same | Same |
| Price | $65.14 | $66.40 | Same | Same |
| 52 week High & Low Price | N/A | $67.72 & $58.52 | Same & Same | N/A |
| Last Quarter of Reported Data | Q3 ending 3/31/11 | Same | Same | Same |
| Software Used | BI Online SSG | TK 6 | Same | TS Online |
| Project Growth From End of | Last Q | Same | Same | Last FY |
| Sales Growth | 5.00% | 8.00% | Same | -2.20% |
| EPS Growth | 7.00% | 8.00% | 10.00% | -1.30% |
| High PE | 20.0 | 18.3 (from 2010) | 19.4 (ave 09-10) | 20.6 |
| High EPS | $5.33 | $5.58 | $6.12 | $3.30 |
| High Price | $106.60 | $102.10 | $118.78 (8% > VL) | $67.90 (25% < VL) |
|
Value Line Estimated High Price = $90-110 |
||||
| Low PE | 12.0 | 11.2 (from 2010) | 11.7 (ave 09-10) |
15.4 |
| Low EPS | $3.80 | Same | Same | $3.49 |
| Low Price | $45.60 (Low PE x Low EPS) | $50.20 (ave Low Price last 5 years) | Same | $66.40 (Yield Supp’ted Low Price) |
| Upside/Down | 2.12 | 2.2 | 3.2 | Not Used |
| Total Return | 12.58% | 11.4% | 14.6% | 3.10% |
| SSG Buy Under | N/A | $56.49 | $66.27 | $38.40 |
| RV/PRV (no outliers) | N/A | 95.2/88.4 | Same/86.8 | Not Used |
| RV/PRV | N/A | Not Used | Not Used | Not Used |
| Quality | N/A | Not Used | Not Used | TS = 1.6 unacceptable |
| PTPM – 5 yr ave | N/A | 19.00% Trend even | Same Same | Same Trend N/A |
| ROE – 5 yr ave End Yr Equity | N/A | 15.70% Trend up | Same Same | Not Used |
| ROE – 5 yr ave Begin Yr Equity | N/A | 21.5% Trend down | Same Same | Same Trend N/A |
| Debt to Equity –5 yr ave | N/A | 40.20% Trend down | Same Same | Not Used |
Estimating Future Sales Growth for the next 5 years:
– Ken gave the participants 4 choices to estimate Procter & Gamble’s future Sales growth: 10.00%, PG’s 10 year historical growth rate; 3.30%, its last 5 year growth rate; 13.50%, its pre-recession 5 year trend; and 4.5% to 5.00%, long-term estimates by Morningstar and Value Line.
** He also offered ‘Something Else’ which is a meaningless choice that I will disregard.
** VL’s 5.00% estimate was for Sales per Share, not Sales.
** The only long-term Sales estimate I know of is from Zacks.com which was 1.97% for the next 5 years.
** The Consensus [71%] voted for 4.5% to 5.00% and Ken made the final choice at 5.00%, VL’s long-term estimate for Sales per Share.
Estimating Future EPS Growth for the next 5 years:
– Ken offered 4 (meaningful) options to estimate PG’s future EPS growth: 13.70%, its 10 year historical growth rate; 7.70% – 8.00%, its last 5 year rate as well as VL’s long-term EPS estimate; 10.00%, its pre-recession 5 year trend as well as Zacks via BI estimate (what Ken called an Analyst’s Consensus Estimate or ACE), and 6.10%, from Ken’s Preferred Procedure.
** The PP involves 4 estimates for the next 5 years, only one of which Ken changed from the standard, pre-set default values: he increased the Pre-Tax Profit Margin from 19.0% to 19.4% without explaning any reason(s) for his change.
** Sales growth already had been decided by Ken at 5.00% and he made no change in the default value for Preferred Dividends ($219 M) or the Tax Rate (27.3%) even though VL was estimating an increase to 28.0%.
** Although his PP resulted in 6.10% and the Consensus [45%] voted for 6.10%, Ken chose 7.00% EPS which he did not explain and which was not offered as one of the choices.
– The seven different long-term EPS estimates I ALWAYS check for every SSG I do averaged 9.20% with CNNMoney and Zacks via BI high at 10.00% and VL low at 8.00%.
** I chose 8.00%, VL’s estimate and the lowest of the seven I checked.
** To learn how I estimate future EPS and the names of the seven estimates I ALWAYS check, see: Estimating EPS [click here].
Forcasting the High PE:
– Unlike the prior two decisions, Ken offered no choices to the participants and decided to use 20.00 as his Forecast High PE which he did not explain.
** Looking at PG’s historical data, we can see that 21.00 was its average High PE for the last 5 years, 18.29 was its 2010 High PE, and 19.42 was its average High PE for 2010 and 2009.
** Anything between 18.00 and 20.00 seems reasonable to me
– I decided to use 18.30 because High PEs have been consistently trending down for the last 5 years and 18.30 in 2010 was the lowest and most recent.
Final Results:
– The Ken/Consensus SSG began with a 7.00% EPS estimate and a 20.00 Forecast High PE, and got a Forecast High Price of $106.60 which was well within VL’s estimated High Price range of $90-110.
** These decisions resulted in a 2.12 Upside/Down side Ratio and a 12.58% Total Return, and did not satisfy the SSG Buy Criteria of a minimum 3.0 U/D and a 15.00% TR.
– Armin-1 began with an 8.00% EPS estimate, the lowest of the seven I checked, along with an 18.30 Forecast High PE, and got a Forecast High Price of $102.10 which was comfortably within VL’s estimated range.
** My SSG also did not satisfy the Buy Criteria as I got a 2.2 U/D and a 11.40% TR.
– Armin-2 is my optimistic SSG and differs from Armin-1 in two respects: I increased EPS to 10.00%, the highest estimate of the seven I checked, and increased the Forescast High PE to 19.4, the average from the last two years.
** Armin-2 got a Forecast High Price of $118.70 which is only slightly, but not substantially, higher than the high end of VL’s $90-110 High Price estimate.
** Here, I almost satisfied the SSG Buy Criteria and got a 3.2 U/D and a 14.6% TR. However, I am unwilling to increase my EPS any higher because none of the seven estimates I checked were willing to exceed 10.00%.
– Take Stock began with an irrationally low –1.3% EPS estimate (that’s a negative – 1.3%) and a 20.6 Forecast High PE, and got a Forecast High Price of $67.90, some 25% below the low end of VL’s High Price estimate.
** I use Value Line as a test of the reasonableness of my judgments as I never want to be substantially above or below VL’s High Price estimate. Here, 25% below VL’s low end seems foolish and patently unreasonable to me.
** See: Determining What’s Reasonable and What’s Not [click here]
Competitors:
– Morningstar identified four close competitors, two of which are publically traded: Colgate-Palmolive (CP) and Kimberly-Clark (KMB). The two privately held competitors are Unilever and L’Oreal.
– Yahoo-Finance also identified KMB as a direct competitor as well as Johnson and Johnson (JNJ) which Morningstar categorizes in a totally different industry, Drug Manufacturers-Major.
Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE):
– Morningstar places Proctor & Gamble in the Household and Personal Products Industry which consists of 36 companies.
– PG’s 5 year average PTPM is much better than its industry average (19.00% vs 10.40% industry) and ranks 3nd out of 36.
** Colgate-Palmolve, a close competitor, ranks 2nd with a PTPM of 20.1%; Kimberly-Clark, another close competitor, ranks 12th with a PTPM of 12.40%.
– However, in terms of ROE, several companies substantially distort the industry average and I eliminated 5 as outliers that had a ROE of 50.00% or greater.
– As a result, PG’s 5 year average ROE is almost identical to its adjusted industry average (15.70% vs 16.00% industry with 31 companies).
** Colgate-Palmolive had the best ROE at 88.70% in the industry and Kimberly-Clark was 33.20%, both of which were much better than PG’s 15.70%.
** When Ending Equity is used, PG’s ROE (15.70%) is trending up and is even higher and better with Beginning Equity (21.50%), but that ROE is trending down. ROE or PTPM downtrends are never good.
### The downtrend disappears if 2006 (41.20%) is eliminated as an obvious outlier.
### No Beginning Equity comparisons are possible as the Morningstar industry stats are only for ROE with Ending Equity.
Financial Condition:
– Value Line gave PG an A++ for Financial Strength, its highest rating. VL also reported that the company had $32.5B total debt, $21.3B long-term debt, and a 16.9x interest coverage as well as
$.33B in Cash Assets as of 12/31/2010, up 11% for the year.
– Morningstar found that PG has a “rock-solid” balance sheet and reported that it generated $16B in cash from 2010 operations, had an interest coverage ratio of more than 17 times earnings before interest and taxes, and gave it an A++ credit rating.
– SSG data for PG shows that it has a debt to equity ratio that declined from 62.9% to 35.0% in the last five years; free cash flow per share that increased from $2.65 to $4.20 during the same period; and $31.4B in total debt as well as a 34.3% debt to total capital ratio.
– The Analyzing the Annual Report spreadsheet by Bob Adams got a 59 out of 100 after analyzing PG’s 2010 A.R. with 12 Bullish findings (good things) and 6 Bearish (not-so-goods):
** The Bullish results included: return on free cash flow was very good and got a green flag; interest coverage (16.9x) was also very good and also got a green flag; sales were increasing and increasing faster than related costs; and accounts receivable, inventories, and shares outstanding were all decreasing.
** The Bearish results included: debt to equity (35.0%) is high and may be excessive as Bob says less than 25% is normal; sales are growing slower than cash flow; and free cash flow margin at 10.0% should be higher as anything less than 10 is bad news according to Bob.
– You can get a link to this free and easy-to-use spreadsheet and a description of its many features by going to my Favorite Links page. [click here]
Final Thoughts:
– PG is not a growth company: its sales and EPS growth has been declining for the past ten years and has been negative for the past two.
– PG is not a SSG Buy at its current price, not at an estimated EPS growth of 7.00%, or 8.00%, or even 10.00% for the next five years.
– PG is popular with Better Investing members and ranks #8 out of the top 100 stocks as of the April 2011 issue of BI magazine.
Armin
Mulling Over Mednax (MD)
February 19, 2011
Mednax (MD) is a national medical practice that provides specialty and sub-specialty care in two areas: neonatal-pediatric and anesthesia.
MD operates in 33 states and Puerto Rico, and its network of doctors includes 1625 physicians, 925 of which are neonatal specialists.
Company Background:
– Mednax is organized into two units: Pediatrix Medical Group and American Anesthesiology, according to a November 2010 Investor Presentation available at the company’s website.
** The Pediatrix Group consists of over 1325 physicians and 575 nurse practitioners who staff 275 NICUs (Neonatal Intensive Care Units). Medical specialties include neonatal, maternal fetal, pediatric cardiology, and pediatric critical care.
** American Anesthesiology, begun in 2007, has over 300 physicians and 350 nurse anesthetists serving 22 hospitals and 38 surgery and pain management centers.
– The Pediatrix Group has made more than 150 acquisitions in the last 15 years with eight in 2010.
– American Anesthesiology has made six acquisitions since 2007 with two in 2010.
– Mednax’s latest 10K report stated that it had acquired 11 group practices in 2009 for $145.5M, seven of which were neonatal groups. In 2008, MD acquired 13 groups for $260.9M.
** In 2007-2009, 56% of patient revenues were generated in 5 states with Texas accounting for 26% on average during those three years.
– Value Line reported that MD’s cash flow in the 3rd Q of 2010 remained strong and allowed it to acquire one pediatric group practice in Texas and two anesthesia practices in North Carolina.
** VL thought anesthesia would be the company’s primary growth engine as there are 47,000 practicing anesthesiologists in the U.S. while only 300 work for MD.
** VL expects that this year’s spending on acquisitions (around $300M) will be maintained annually for the foreseeable future.
– Mednax’s historic Sales & EPS growth have been robust, based on Morningstar data via BI, with no disturbing dips or downturns: 18.1 & 25.5% growth last ten years; 16.2 & 17.7% last five; and 18.5 & 16.8% last three years.
SSG Discussion:
– I compared the recent SSG by CarolT, available from BI’s First Cut page, with mine, Take Stock, and the Investment Advisory Service (which was attached to Carol’s SSG). IAS is a well-respected pay service that uses the SSG.
– After the following comparison table, I discuss several key SSG issues and dig a little deeper into MD’s down trending Pre-Tax Profit Margin and its Financial Condition.
MEDNAX (MD) |
CarolT | Armin | Take Stock | Investment Advisory Service |
| Date | 2/4/11 | 2/9/11 | 2/8/11 | 1/14/11 |
| Data | Mstar via BI | Same | Mstar via SC | Mstar via BI |
| Share Price | $61.23 | $62.58 | $65.00 | $68.11 |
| 52 week High & Low Price | $70.17 & $44.83 | Same & Same | Not Used | $70.14 & Same |
| Last Quarter of Reported Data | Q3 ending 9/30/10 | Same | Same | Same |
| Project Future Growth From | Last FY | Last Q | Last FY | Last Q |
| Software Used | TK 6 | Same | SC Online | TK 6 |
| Est Sales Growth | 10.00% | Same | 15.50% | 14.00% |
| Est EPS Growth | 10.00% | Same | 13.30% | 14.00% |
| Forecast High PE | 20.0 | 18.1 (from Alt-M) | 18.1 | 22.0 |
| Forecast Hi EPS | $6.09 | $6.78 | $7.06 | $8.11 |
| Forecast Hi Price | $121.80 (16% > VL) | $122.70 | $127.82 | $178.40 (70% > VL) |
|
Value Line Estimated High Price = $70–105 as of 12/17/10 |
||||
| Forecast Low PE | 10.0 | 6.5 (from Alt-M) | 7.6 | 12.0 |
| Forecast Lo EPS | $4.21 (ttm) | Same | $4.15 | $3.78 (last FY) |
| Forecast Lo Price | $42.10 | $32.00 | $31.54 | $45.40 |
| Upside/Down | 3.2 | 2.0 | 2.0 (imputed) | 4.6 |
| Total Return | 14.7% | 14.4% | 15.2% | 20.9% |
| Buy Under | Not Used | $54.68 | $55.74 | Not Used |
| Quality | Not Used | Not Used | TS = 6.3 | Not Used |
| RV/PRV | 97.3/88.7(2005 & 2007 out) | 100.0/90.7 (Same) | Not Used | Not Used |
| RV/PRV (no outs) | Not Used | 86.6/78.6 | Not Used | 95.3/95.4 (TK 6 error) |
| PTPM – 5 yr ave | 23.1% Trend down | Same Same | Same Trend NA | Same Trend down |
| ROE – 5 yr ave Ending Equity | 14.3% Trend up | Same Same | Not Used | Not Used |
| ROE – 5 yr ave Beginning Equity | Not Used | 16.4% Trend up | Same Trend NA | Same Trend up |
| Debt to Equity | 3.8% Trend up | Same Same | Not Used | 3.8% Trend up |
Estimating MD’s Future EPS Growth for the Next 5 Years:
Carol’s SSG:
– Carol wrote that she projected 10.00% EPS growth by plotting 2011 and 2012 estimates from YahooFinance and Value Line’s 3-5 year estimate.
** She ignored the YahooFinance’s 5 year EPS estimate of 14.50% which seems bizarre since that is much more relevant to our SSGs than short-term estimates for this year and next year.
** Moreover, by not checking other long-term EPS estimates, she did not realize that VL’s estimate was the lowest nor did she learn what was high.
Armin’s SSG:
– When I did my SSG, the 7 long-term EPS estimates I ALWAYS check averaged 13.40% and ranged from 10.50 % low (Value Line) to 15.00% high (Zacks via BI);
** Morningstar.com via FactSet was 13.20%, CNNMoney via FactSet CallStreet was 13.50%, Zacks.com and Reuters.com were both 13.79%, and YahooFinance via Thomson Reuters was 14.50%.
** I chose 10.00%, the very lowest estimate by one of the 7 analysts at Reuters.com who ranged from 17.50% high to 10.00% low.
** For how I estimate EPS for all my SSGs, see: Estimating EPS [click here].
Projection Point for Future Growth:
– Every SSG except Take Stock has the option of projecting future growth from the end of: the last Quarter, the last Fiscal Year, or from the Historical Trend Line.
– Carol chose to project growth from the end of the last FY. Using the same identical judgments she used and changing only the projection point, her SSG would have improved significantly:
- High EPS would increase from $6.09 to $6.78
- High Price would go from $121.80 to $135.60
- Total Return would increase from 14.7% to 16.7%
– Take Stock always projects growth from the end of the last FY as part of its ultra-conservative design.
Estimating the Forecast High PE for the Next 5 Years:
– Carol eliminated 2005 and 2007 as outliers and used the resulting average (20.0) as her Forecast High PE.
– I used Toolkit’s Alt-M option which eliminates the five highest PEs in the last 10 years and averages the rest (18.1).
** Alt-M is usually the most conservative option and I tend to use it when trends are not obvious and/or I know next-to-nothing about the company.
Final Results:
– Carol started with a 10% estimate for future EPS growth, and got a Forecast High Price of $121.80, a 3.2 Upside/Downside Ratio, and a 14.7% Total Return.
– I also used a 10.00% EPS estimate (for different reasons), and got nearly the same Forecast High Price ($122.70) and TR (14.45%), but only a 2.0 U/D.
** The main reason for our difference was that Carol decided to use 20.0 & 10.0 for her Forecast High & Low PEs while I used 18.1 & 6.5 from Alt-M.
– IAS started with a 14% EPS estimate (not explained), and got a $178.40 Forecast High Price, a 4.6 U/D, and a 20.9% TR.
** IAS’s $178.40 High Price was a whopping 70% greater than the high end of VL’s $70-105 estimated High Price which seems unreasonable and unbelievable to me. See: Determining What’s Reasonable and What’s Not: An Update [click here].
Pre-Tax Profit Margin (PTPM) & Return on Equity (ROE):
– Carol considered MD to be a marginal BUY and was concerned about its downtrend in Pre-Tax Profit Margin which can be a red-flag warning sign. She would postpone buying the stock until she learned more about its PTPM.
** Carol did, however, identify TMH as a direct competitor that had a much lower Profit Margin, but that was not sufficient to satisfy her.
– Morningstar via BI placed MD in the Medical Care Industry which, according to the Stock Central website, has a total of 55 companies:
** MD’s PTPM was much, much better than its industry average and ranked 2nd (23.1% vs 9.7%) while TMH ranked 24th with a PTPM of 5.6%.
** I am not bothered by MD’s downtrend and conclude that it represents an unsustainable high level rather than a red-flag warning flag.
– Even though MD’s Return on Equity is trending up, which is always a good sign, I still want to know if it was better or worse than its industry average:
** MD’s ROE was substantially worse than its industry average and ranked 14th out of 55 companies (14.3% vs 23.5%); by comparison, TMH was terrible and ranked 49th (-55.4%).
Financial Condition:
– Value Line rated MD a B++ for Financial Strength and reported that it had $75.6M in cash (up from $31.9M in 2009) and only $0.2M in debt.
– There was no Morningstar analyst report.
– The one-click Annual Report spreadsheet by Bob Adams gave the company 56 out of 100 with 4 Bullish results (good things) and 11 Bearish (not-so-goods):
** The 11 Bearish results included: ROE is inadequate and Long-Term Debt is increasing, and both got a yellow, caution flag; cost of sales is increasing faster than sales.
** The 4 Bullish results included: Debt to Equity and Interest Coverage are both very good, and got a green flag.
### You can get a copy of this free, easy-to-use spreadsheet and a description of its many nifty features by going to my Favorite Links page [click here] .
– My SSG data showed that MD’s Debt to Equity was 4.3% in 2009, down from 14.3% in 2008, and that Cash Flow/Share has been steadily increasing for the last 5 years, from $3.23 in 2005 to $4.87 in 2009.
Armin
Musing About Medco (MHS)
January 27, 2011
Medco Health Solutions (MHS) manages the pharmacy benefits for over 65 million people in employee groups, government agencies, and unions as well as for participants in Medicare PartD, and is the nation’s largest Pharmacy Benefit Manager. Through its mail-order pharmacy and network of retail pharmacies, MHS filled some 900 million prescriptions in 2009.
MHS was the monthly Online Stock Study for January 2011 at the Better Investing website. It was led by Avi Horwitz, a director of the BI Volunteer Advisory Board and a Director of the BI New York Chapter. Avi’s handouts, Presentation Slides, Follow-up Q and As, the Consensus SSG, and the recording of the online session are all available to BI members.
Company Background:
– Medco Health Solutions (MHS) went public seven years ago as a spin-off from Merck and was recently featured as the Stock To Study in the November 2010 issue of Better Investing magazine. According to BI’s thorough article:
– Medco is organized into two reporting sections: Pharmacy Benefit Management (PBM), 84.1% of 2009 revenues, up 16.2% from 2008 and Specialty Pharmacy (SP), 15.9% of 2009 revenues, up 19.5%.
** PBM contracts with retail pharmacies to fill prescriptions at discounted prices to patients covered by drug plans that Medco administers. In 2009, MHS contracted with some 60,000 pharmacies.
** PBM also operates Medco Pharmacy, its mail-order division and the largest in the industry, which filled 103 M prescriptions in 2009.
** SP operated three mail-order and 78 specialty pharmacies in 2008 which provided higher margin drugs for patients with chronic or complex diseases.
** SP also provides services such as in-home nursing, special packaging, and benefits administration.
– Medco filled a total of 694 M prescriptions in 2009, up 18.5% from 2008. Mail-order products accounted for 37.4% and retail products 61.2% of MHS’s revenue.
– According to the Morningstar analyst report, MHS earns most of its margins on generic drugs and an unprecedented number of brand-name drugs are about to lose their patent protection.
** In 2012, generic Lipitor may add 8.00% to Medco’s EPS. Other blockbuster drugs losing patent protection around the same time as Lipitor are Plavix, Seroquel, Singulair, and Cymbalta.
– And, in the past 5 years, MHS has spent a whopping $10 B on share repurchases, some 40% of its current market cap.
** Shares outstanding have gone down 20% in the last five years, from 576.20 to 481.1 M in 2009.
** As shares go down, EPS goes up (but this is an artificial increase as it is not derived from operations).
Recent Acquisitions and Joint Ventures:
– Acquisitions have been a major part of Medco’s growth:
- In October 2007, Medco acquired PolyMedica, a diabetes care provider and its Liberty Medical Supply brand, for $1.3 B in cash;
- In November 2007, Accredo Health Group (Medco’s specialty pharmacy) acquired Critical Care, a large provider of specialty infusion services, for $220 M;
- In April 2008, Medco acquired a majority interest in Europa Apotheek, a mail order pharmacy serving Netherlands and Germany, for $126.8 M in cash and a $24.1 M purchase obligation;
- In 2009, Medco formed a joint venture with United Drug plc to provide home based pharmacy care to patients covered by the U.K.’s National Health Service;
- In January 2010, Medco bought DNA Direct, a small, privately held fiem that provides utilization review and counseling by telephone for genetic testing (terms were not released); and
- In September 2010, Medco acquired United BioSource, a company that evaluates newly approved drugs and medical devices, for $730 M.
– These acquisitions have meant a high debt burden for Medco: 46.5% Debt to Total Capital when I did my SSG with long-term debt increasing from $944 M to $4,000 M in the last five years, an increase of 320%.
– Debt to Equity has also increased, from 15.0% in 2005 to 61.8% in 2009.
SSG Discussion:
– The following table compares the Consensus & Avi SSG with mine, Take Stock, and Avi’s 45-day earlier SSG. After the table, I discuss several key SSG issues and dig a little deeper into MHS’s Pretax-Profit Margin and Return on Equity, and its Financial Condition.
| Medco Health Solutions (MHS) | Consensus & AviH | Armin | Take Stock | AviH from BI’s First Cut |
| Date | 12-30-10 | 12-22 Data 12-30 Price | 12-30-10 | 11-12-10 |
| Data | Mstar via BI See fn [1] | Same | Mstar via SC See fn [1] | S&P via BI See fn [1] |
| Price | $61.80 | $61.89 | $61.67 | $59.00 |
| 52 week High & Low Price | $66.94 & $43.45 | $66.94 & $43.45 | Not Used | $66.94 & $43.45 |
| Last Quarter of Reported Data | Q3 ending 9-30-10 | Q3 ending 9-30-10 | Same | Same |
| Software Used | Online SSG See fn [2] | TK 6 | TS Online | Online SSG See fn [2] |
| Project Growth From End of | Last FY See fn [2] | Last Q | Last FY | Last FY See fn [2] |
| Sales Growth | 7.50% | 13.00% | 09.20% | 07.50% |
| EPS Growth | 16.80% | 13.00% | 20.00% init 06.85% final | 16.20% from Avi’s PP |
| High PE | 25.0 | 20.0 | 24.8 | 25.0 |
| High EPS | $5.67 | $5.51 | $3.63 | $5.44 |
| High Price | $141.75 42% > new VL | $110.20 10% >new VL | $90.03 | $136.00 43% > old VL |
|
Value Line Est High Price = 80-100 as of 12-24-10 and $75-95 as of 9-29-10 |
||||
| Low PE | 14.0 | 12.3 | 14.2 | 14.0 |
| Low EPS | $2.99 (ttm) | $2.93 (ttm) | Same | Same |
| Low Price | $41.86 (Low PE x Low EPS) | $36.80 (Same) | $42.46 | $41.02 (Same) |
| Upside/Down | 4.02 | 1.9 | 1.48 (imputed) | 4.29 |
| Total Return | 18.08% | 12.2% | 7.9% | 18.19% |
| SSG Buy Under | Not Used | $54.79 | $45.02 | Not Used |
| RV/PRV (outliers elim) | Not Used | Not Used | Not Used | Not Used |
| RV/PRV (no outliers) | Not Used | 90.8/80.3 | Not Used | Not Used |
| Quality | Not Available | S&P = Not Rated | TS = 6.3 (good) | Not Available |
| PTPM – 5 yr ave | 3.06% Trend NA | 03.10% Trend even | 3.10% Trend NA | 03.13% Trend NA |
| ROE – 5 yr ave Ending Yr Equity | 13.24% Trend NA | 13.20% Trend up | Not Used | 13.13% Trend NA |
| ROE – 5 yr ave Begin Yr Equity | Not Used | 13.8% Trend up | Same Trend NA | Not Used |
| Debt to Equity – 5 yr ave | Not Used | 38.6% Trend up | Same Trend NA | Not Used |
[1] On 12-22-10, Better Investing and StockCentral changed their SSG data provider to Morningstar and the new data also comes with a long-term EPS estimate from Zacks. Previously, BI got its SSG data and EPS estimate from S&P while SC (and Take Stock) got their SSG data from Morningstar-Hemscott.
[2] On 11-19-10, the BI Online SSG added the capability to project future growth from the end of the last Quarter, the last Fiscal Year, or the historical Trend line. Our TK 6 software always had those options. Previously, the Online SSG only projected from the end of the last FY and here Avi chose to project from the last FY on 12-30-10, but had no choice on 11-12-10.
Estimating Future Sales Growth for the Next 5 Years:
** “None of the above” is not a meaningful choice that I will not repeat.
** The consensus (40% of the votes) chose 7.0%, Mstar’s optimistic estimate, while the next highest vote-getter (31%) was Yahoo’s estimate of 5.0%.
** The future Sales growth decision is important only because Avi used the BI/NAIC Preferred Procedure to decide future EPS growth and the PP turns on this issue.
– Choices that Avi did not offer the participants were: 11.6%, historic sales growth last 5 years; 15.7%, last 3 years; 16.7% last 2 years; 11.53% Zacks.com sales growth estimate for the next 5 years; and, the most surprising omission, 6.2% Mstar’s conservative estimate.
Estimating Future EPS Growth for the Next 5 years – Part 1:
– Avi provided three (meaningful) choices: 23.0%, MHS’s historic EPS growth; 16.5%, Yahoo Finance’s estimate for the next 5 years; 7.0%, same as the group’s Sales growth choice.
** The Consensus choice (46% of the votes) was 7.0%, same as its Sales growth estimate, and the next highest vote getter was 16.5%, Yahoo’s estimate.
Estimating Future EPS Growth for the Next 5 years – Part 2:
The Consensus/Avi SSG:
– Avi threw out the above two Consensus choices in order to use the NAIC/BI Preferred Procedure to estimate MHS’s future EPS growth This slideshow could not be started. Try refreshing the page or viewing it in another browser. GameStop Corp (GME) is a large chain of 6450 retail stores that sell new and used video games as well as related equipment . Some 69% of GME’s stores are in the US and 20% in Europe. It also has several e-commerce websites, publishes Game Informer magazine with 4M subscribers, and just began selling downloadable games and add-ons at Internet kiosks inside its stores and from GameStop.com, its main website. GME was the monthly Online Stock Study for December at the Better Investing website. It was led by Patrick Donnelly, a Director of the BI Pittsburg Chapter and the BI Volunteer Advisory Board. Pat’s presentation slides, handouts, and the recorded session are available for downloading by BI members. The purpose of the monthly Stock Study is to complete a SSG in about one hour with consensus decision-making by the on-line participants. Participants made most of the judgments, but Pat also made a few. No Consensus SSG is available, and may never be, so I had to rely on the recorded session which is awkward and time-consuming. Company Background: – In November, Value Line reported that GME has recently set up downloadable game content kiosks in it stores across the U.S. and is revamping its website from strictly e-commerce to a full-featured gaming platform. – “Dismal long-term prospects” is how Morningstar began its late September report on GME which it called a no-moat retailer. Pricing competition from rivals and the use of the Internet to play and/or download games, Mstar predicted, would eventually lead to declining revenue and razor-thin margins. ** Used video games represented 20% of revenue and 47% of gross profit in 2009, and are essential to GME’s financial health. However, Wal-Mart, Best Buy and Target have begun in-store programs to buy and sell used video games. ** Mstar identified three, big risks faced by GME: ** Mstar concluded: “In the near term, we think retail rivals will impinge revenues and profits from new games and consoles. In the medium term, we expect video game publishers to disrupt the used game business [AF: by using the Internet to sell directly to gamers]. Thus, GameStop faces a bleak long-term outlook, selling the video game equivalent of vinyl records.” Recent Acquisitions: – In November 2008, GameStop spent $500.4 M to acquire Micromania, a French retailer of video and computer games with 368 locations. [2009 GME Annual Report, page 2] – In November 2009, GameStop acquired a majority stake in Jolt Online Gaming, an Ireland-based publisher of online games that are free to play on Facebook or with most Internet browsers. ** Terms were not revealed, except that GME will provide up to $30M in the next 2-3 years for the company’s development. – In July 2010, GameStop bought Kongregate, a social gaming and game development site, that offers more than 36,000 free games and that Time.com recognized as one of the 50 best websites in 2010. ** Again, the acquisition terms were not disclosed in GME’s press release. SSG Discussion: – The table below compares the Consensus SSG with mine, Take Stock, and with LenD’s SSG from 2009 (which I got from BI’s First Cut). ** After the table, I discuss several key SSG judgments and dig a little deeper into GME’s Relative Value, down-trending Return on Equity, and its overall Financial Condition. VL Estimated High Price = $40-60 as of 11-5-10 Estimating Future Sales Growth for the next 5 years: – Pat gave the participants 5 choices: 24.0%, the 10-year historical growth rate; 11.0%, the industry average; 7.0%, Value Line’s estimate; 3.5%, from the latest quarter; and none of the above. ** None of the above is a meaningless choice which I will not repeat; ** Value Line’s 7.00% was for Sales per share (not Sales) and VL makes no estimate of future Sales growth; ** Zacks.com was also estimating 24.17% Sales growth for the next 5 years; ** Historically, GME’s sales growth has been steadily declining since 2006: down to 20.0% growth during the last four years; 13.1% in last three; and 3.1% during the last two years. ### The Consensus opted for 7.0% (from VL) which got 43% of the votes while 11.0% (the industry average) got 21%. Estimating Future EPS Growth for the next 5 years: – Participants were again given 4 (meaningful) choices: 7.0%, same as their Sales growth estimate; 30.0%, last 8 year average; 17.0%, highest of seven long-term estimates that Pat found; and 11.0%, the average of the seven estimates. ** Presentation slide 34 vividly sets forth the distribution of the seven estimates that are all from different data sources; ** The company’s EPS growth, like its Sales growth, has also been steadily declining: 31.0% last four years, 12.3% last three; and -5.4% (that’s a negative 5.4%) during the last two years. The recent downtrend in EPS and Sales is one negative indicator of quality based on BI standards. ** The Consensus choice was 11.0%, the average of the seven estimates (51% of the votes), while 7.0%, same as their Sales growth estimate, was next (24%). ### Pat decided to use 9.0% because of GME’s stock buyback program. – I estimated 6.70% future EPS growth, the average of the same seven estimates that Pat checked less 3 Standard Deviations, because I guessed that GME was headed for tough times. ** Excel easily calculates the Standard Deviation and I usually go no lower than the average less 2 SDs (7.96% here) and more often use the average less 1 SD (9.25%); ** For how to find the seven long-term estimates and how I estimate EPS for all my SSGs, see: Estimating EPS. ** For my evaluation of these EPS estimates from seven different sources, see: Evaluating EPS Estimates. Estimating the Future High PE for the next 5 years: – Participants were given 4 options: 24.0, 5 year historical average; 26.1, 5 year average PE x 1.5 ; 18.0, estimated EPS x 2 or a PEG of 2; 13.5, estimated EPS x 1.5 or a PEG of 1.5. ** The Consensus chose 13.5 or a PEG of 1.5 (40% of the votes) while the next choice was 24.0 (24%) ### Pat decided to use 15.5, the 5 year average High & Low PE. – I used 14.4, from 2009 and the lowest High PE in the last 5 years. Final Results: – The Consensus/Pat began with 9.00% EPS estimate and got a Forecast High Price of $57.50 (which was towards the high end of VL’s $40-60 estimate) as well as a 3.4 Upside-Downside Ratio and a 23.6% Total Return. – I started with a very low 6.70% EPS estimate and got a Forecast High Price of $45.20 (near VL’s low end), a 3.0 UD and a 15.8% TR. My SSG resulted in the most conservative appraisal and still satisfied the minimum SSG Buy Criteria of 3.0 UD and a 15.0% TR. ** I also satisfied another criterion that I impose: to never substantially exceed or fall below VL’s estimated High Price, at least not without a good reason. – Len began with an 11.1% EPS estimate (in April 2009) and got a Forecast High Price of $73.10, a UD of 5.3 and a TR of 19.7%. – Take Stock began with a -6.00% EPS estimate (that’s a negative 6.00%) which seems unreasonably low and stupid. Relative Value (RV): – Relative Value is defined as the current PE divided by the 5-year average PE and an RV between .85 and 1.10 is ideal according to the BI/NAIC Stock Selection Handbook [page 113, 2003 edition]. ** Under .85 signals that investors are unwilling to pay more for the stock (and might know something we need to investigate) while over 1.10 suggests that we might be paying too much. ** Take Stock does not use the RV concept and the other three SSGs got an RV well under .85 with the Consensus & Pat the lowest at 47.5 while I got 49.2. That’s a second negative indicator. – Eliminating outliers changes the RV denominator so I try to report two sets of figures (with and without outliers eliminated). ** I almost never discuss RV/PRV because that feature is broken in the TK6 software. I checked RV five times to make sure I got the same numbers and the software’s defect occurs when outliers are eliminated and then restored. Return on Equity (ROE) and Pre-Tax Profit Margin (PTPM): ROE: – GameStop’s 5 year average ROE is trending down and that can be a red-flag warning sign of deteriorating fundamentals or, compared to its Industry Average, an indicator that the company has an unsustainably high ROE. **However, GME’s ROE is much worse with Morningstar-Hemscott data than its Industry Average (13.9% vs 19.5% Electronic Stores Industry) and ranks 4th out of 5 companies with ROEs that range from a high of 25.9% to a low of 10.7%. ** And, GME’s ROE is slightly worse with S&P data than its Industry Average (17.4% vs 17.6% Computer & Electronics Retail). There is no company-by-company listing so no ranking is possible. ** GME’s down-trending ROE is a third negative indicator!! PTPM: – GameStop’s PTPM is trending up, which always is a good sign, but I also like to know how the company compares to its industry since I prefer to buy industry leaders. ** GME’s PTPM is slightly better with M-H data than its Industry Average (6.2% vs 5.7% Electronic Stores Industry) and ranks 3rd out of 5 companies that range with PTPMs from 6.7% high to 3.8% low. ** GME’s PTPM is also slightly better with S&P data than its industry average (6.2% vs 5.7% Computer Electronics Retail). Financial Condition: – Value Line gave GME a B+ for Financial Strength and reported that it had $289 M in cash (down from $905 M in 2009) and $448 M in debt (all long term) as of 7-31-10. – Morningstar thinks GME’s financial health is “okay”, but could deteriorate. On 8-25-10, the company had $290 M in cash and $448 M in long-term debt. – On Bob Adams’ one-click Analyzing the Annual Report spreadsheet, GME’s latest AR scored 83 out of 100 with 13 bullish and 5 bearish results: ** The Bullish or good things include: debt is decreasing as is accounts receivable and shares outstanding; sales are increasing and increasing faster than related costs; interest coverage at 14.0 gets a green flag (very good) as anything below 5.0 is worrisome to Bob; debt to equity is reasonable. ** The Bearish or not-so-goods include: free cash flow at 5.0% gets a red, danger flag as anything less than 10.0 is bad news to Bob; ROE is inadequate and gets a yellow, caution flag; and short interest at 22.7% is very high and increasing as 20.0% or more is a warning sign that a sizeable number of investors are betting that GME’s stock price will decline (which might explain GME’s low RV). – You can get this free, easy-to-use spreadsheet and a description of its many features by going to my Favorite Links page, click here. Conclusion: What Does It All Mean? – Because of its several negative trends and the critical Mstar assessment, I’m way not interested in GameStop. And, I have little reason to expect that GME knows how to profit from the Internet; even if it soon learns, what will the company do with its 6400+ stores? – Furthermore, how does GME plan to make money from Kongregate and Jolt, the two free-to-play game sites it recently acquired? Also, what about the large amount of short interest that’s betting on the stock price going down? – Lastly, what’s your guess about GameStop’s future prospects? Please tell me what you think, especially if you’re a gamer, by leaving a comment in the box below. Armin (happy holidays to all) Abbott Laboratories (ABT) is a large, global and uniquely diversified drug company that consists of four, main segments: Pharmaceutical Products, $16.5 billion in 2009 sales (54% of total); Nutritional Products, $5.3 billion (17%); Diagnostic Products, $3.6 billion (12%); and Vascular Products, $2.7 billion (9%). Its strong and diverse product line-up led Morningstar to conclude that the company had a wide economic moat and, as a result, a competitive advantage. ABT was the Stock To Study in the May/June 2010 issue of Better Investing magazine. The STS is expected to double in investment value (appreciation and dividends) within five years which is Better Investing’s goal. I just compared CarolT’s SSG, which I got from BI’s First Cut page, with two of mine and with Take Stock. Both my SSGs use the same judgments, but Armin-1 uses S&P data (like Carol did) while Armin-2 uses Morningstar-Hemscott data. Carol’s SSG and First Cut write-up were also reprinted in the May/June issue of BI. Company Background: – Acquisitions are a major driver of ABT’s growth. In recent years, the company has substantially invested in increasing its low-cost drugs and broadening its geographic presence, especially in underserved growth markets: – Humira, ABT’s best selling drug and a treatment for rheumatoid arthritis, generated $5.5 Billion in 2009 sales, up about 22% from 2008. ** Humira is approved for six uses and is a leading therapy for autoimmune diseases. – Depakote, once one of Abbott’s blockbuster drugs, lost its patent protection in 2008 and accounted for only $331 Million in 2009 sales, down 74.5% from 2008; – ABT’s nutritional products are leaders in the infant formula market (Similac and Isomil) as well as in the adult nutritional market (Ensure and Glucerma); – ABT’s Xience line of drug-coated stents was approved for sale in July 2008 and its Model V reportedly became the top seller in the U.S in 2009; ** ABT acquired the vascular business and the Xience stent from Guidant Corp as part of its acquisition by BSX which, by agreement, also sells the Xience under the Promus name. ** ABT is developing a new type of stent made of an absorbable material rather than metal and could be three years ahead of its competitors. – Much of the info in this Company Background section came from the STS article in Better Investing magazine supplemented by ABT’s latest Annual Report and Wikipedia. – ABT’s direct competitors according to Yahoo Finance are Merck (MRK), Sanofi –Aventis (SNY), and Roche Holding (RHHBY) while Morningstar reports its close competitors as Pfizer (PFE), Baxter International (BAX) and Johnson & Johnson (JNJ). Legal Problems: – ABT’s 2009 Annual Report mentions numerous lawsuits, mostly in a vague and unsatisfying manner: – ABT estimates its possible loss from these legal matters at around $170-310 Million, and has recorded $215 Million as a reserve. [2009 Annual Report, page 55] ** Apparantly, this reserve does not include anything for the $1.67 Billion judgment against the company and Abbott seems to be hiding much of the potential bad news. SSG Discussion: – After the comparison table that follows, I discuss several key SSG issues, ABT’s declining ROE, its high Debt, and overall Financial Condition. Value Line Estimated High Price =$95-115 as of 4/16/10 Carol’s SSG: Estimating Future Sales and EPS Growth: – Carol checked three estimates of future Sales growth (from Morningstar, Value Line, Manifest Investing) and used the lowest of the three (6.00%) from Morningstar. ** Value Line’s 7.50% was for Sales per Share (not Sales) and VL makes no estimate of future Sales growth. ** Overlooked was Zacks.com which estimated 9.59% Sales growth for the next 5 years. – Carol then used the Preferred Procedure to estimate future EPS growth which involves four estimates for the next 5 years: Sales growth, Pre-Tax Profit Margin, Taxes, and Shares Outstanding. ** Carol relied on her 7.50% Sales estimate and made no changes in the PP’s defaults which resulted in 4.80% EPS estimate. ** Had she checked some analysts, Carol might have seen that her 4.80% EPS estimate seems unduly low. Armin’s SSGs: Estimating Future Sales and EPS Growth: – When I did my SSG, the seven analysts I ALWAYS check were estimating long-term EPS at an average of 11.06% with the high at 12.00% (S&P and CNNMoney via FactSet CallStreet) and the low at 9.90% (YahooFinance via Thomson First Call). ** Value Line was 10.00%, Reuters.com was 10.34%, and Morningstar and Zacks.com were 11.60%. The seven analysts at Reuters ranged from 13.00% high to 4.20% low. ** I decided to estimate future EPS growth at 10.00% based on the estimate from Zacks (rounded), the lowest of the seven. ### To learn more about Estimating EPS, click here Final Results: – Only Armin-1 and Armin-2 satisfied the SSG Buy Criteria of a minimum 3.0 Upside/Downside and a 15% Total Return. Moreover, I add another requirement: not to substantially exceed or fall below Value Line’s High Price estimate: – Carol considered ABT a Buy even though her SSG got a 14.00% TR: ** BI’s Stock Selection Handbook says that 15.00% is only a goal for our entire portfolio and not something that every stock must achieve. [Handbook, pages 65-66, 2003 edition]. ** I disagree and seek a 15% TR for every SSG Buy: that way, my criteria are clear and unambiguous, and don’t depend on the vagaries of my (unspecified) portfolio. Return on Equity (ROE): – ROE with Ending Equity (26.70%) is trending down with S&P data and any downtrend is often a red-flag warning sign of deteriorating fundamentals. ** However, this downtrend does not trouble me for several reasons: DEBT: – ABT had $16.5 Billion in total debt as of 12/31/2009, according to the company’s latest Annual Report, largely incurred to finance recent acquisitions. [2010 A. R., PDF page 63] – Carol was not concerned with ABT’s Debt and her First Cut write-up mentioned: “Debt and Return on Equity may be a cause of concern for some. Interest coverage of about 15; they have managed well over 10 years with this higher level of debt.” – However, ABT’s Debt to Capital Ratio (40.49% with S&P data) is much higher than five of its direct or close competitors: MRK @ 28.22% and SNY @ 14.32% identified by YahooFinance and PFE @ 21.30%, JNJ @16.63% and BAX @ 35.93%) identified by Morningstar. ** Moreover, ABT’s 40.49% Debt to Capital Ratio is also higher than its 38.70% S&P Industry Average (Pharmaceuticals). – The one-click Annual Report spreadsheet by Bob Adams found that ABT’s Debt was a concern, but not it’s Interest Coverage: ** The 49% Long-Term Debt to Equity Ratio got a red-flag warning and may be excessive since normal is less than 25%; ** The Interest coverage at 14.8x (Pre-Tax Profit exceeds interest paid on LT Debt) got a green flag or very good. Financial Condition: – VL rated ABT an A++ for Financial Strength, its highest grade, with $16.5 Billion in Debt ($11.3 Billion Long-Term) and $8.8 Billion in Cash as of 12/31/09. – Morningstar observed that ABT held less cash than its peers because of acquisitions, but that its cash flow was more than adequate to meet interest expenses. – The Bob Adams’ one-click spreadsheet gave ABT’s 2009 A.R. a 41 out of 100 with 9 Bullish and 8 Bearish results: ** The Bullish-good things included: Sales are increasing and increasing faster than Cash Flow; ROE and Free Cash Flow/Sales are very good. ** The Bearish not-so-goods included: Accounts Receivable and Inventories are increasing and the Cost of Sales is increasing faster than Sales. ### You can get this super-duper, free and easy-to-use spreadsheet, and a summary of its many features, by going to my Favorite Links page: click here Armin – Paychex (PAYX) provides comprehensive payroll, human resource and benefit outsourcing to small and medium-sized companies with 10 to 200 employees. It served about 554,000 clients as of May 31, 2009 (down 3% from 2008) according to its latest annual report. – PAYX was the Online Stock Study for November 2009 at the Better Investing website that was led by Ron Bruyn, a Director of the BI Orange County (CA) Chapter. Study materials available for downloading include Ron’s SSG, the Presentation Slides, Value Line, and other handout material. – After a three month delay, the recorded session is finally available at the BI website. A Consensus SSG was nearly, but not totally, completed and I waited for the recording in the hopes that it would explain why (it didn’t). Company Background – Morningstar considers that PAYX has a “wide economic moat” which constitutes a completive advantage. Switching to another company is costly, PAYX has a respected brand name, and clients are reluctant to entrust their payroll cash and other HR functions to an unknown or unproven competitor. – In FY 2009, PAYX earned about 4% of its revenues by essentially doing nothing due to the “float”, cash that results from the lag between when PAYX receives and then pays payrolls. During the lag, Paycheck invests and earns interest on these funds. ** Interest from the float was way down last year, some 43%, from $131.8M in 2008 to $75.5M to 2009. ** Morningstar expects the float to earn 3.0% annually during the next 5 years. – In its 2nd Q ending November 30, 2009, PAYX’s total revenues were down 5.3% and EPS declined 10.3%. – In addition to its core payroll business, PAYX has branched out to provide retirement/401(k) record-keeping services, workmen’s compensation insurance, and comprehensive HR outsourcing. Revenue from these services has grown to about 25% of the company’s total revenue. ** PAYX has recently entered the health and benefits services market which it believes offers significant room for revenue and profitability growth. SSG Discussion – The following table compares Ron’s SSG to mine. I also updated both SSGs with the current price and data, but left all judgments unchanged. After the table, I discuss several issues raised by the comparison. Value Line Est High Price = $45-60 as of 8-21-09 and $45-55 as of 11-20-09 The Current Price – The Online Stock Study was held on November 4th, but September 28th was the (old) price date that Ron used for his presentation. Worse, his SSG shows that the data was updated November 2nd, but inexplicably not its (even older) price. ** Good practice is to keep our SSGs updated with the current price and current data, especially when we share them. Estimating Future Sales Growth – Ron gave the online participants 5 options to estimate PAYX’s future sales growth for the next five years: 13.10%, its ten-year historical growth rate; 7.00%, Value Line’s estimate; 6.00%, Ron’s estimate; 5.50%, the one-year estimate from YahooFinance; and -6.30%, its sales growth in the most recent quarter. ** The recorded session reveals that Ron’s 6.00% estimate was based on Value Line’s dollar estimate for the next 3-5 years converted to a rate. It looks like a mistake was made to think VL offered two rates for the same thing. – The Consensus chose 6.00% (Ron’s estimate from VL), but 7.00% (VL’s estimate) was very close in second place. ** VL’s 7.00% estimate was actually for sales per share growth and (sadly) Value Line does not make an estimate for sales growth. ** Zacks.com was estimating 10.13% sales growth for the next 5 years which Ron did not mention while Morningstar, which often makes a sales estimate in its narrative report, made none this time. – The 13.10% and -6.30% choices were neither realistic nor meaningful options. PAYX’s sales growth has declined every year for the past 10 years from 13.10% in 1999 to 10.70% (5 years ago) to 7.70% (3 years ago) to 0.80% (last year). Estimating Future EPS Growth Ron’s SSG: – Ron offered the participants 5 options: 6.00%, the same as their Sales growth choice; 13.10%, PAYX’s ten-year historical growth rate; 6.50%, VL’s estimate; 7.40%, Ron’s estimate based on the Preferred Procedure; and 13.30%, the five-year estimate from YahooFinance. ** The 13.30% estimate from Yahoo Finance might have indicated to Ron and the participants that a 7.40% estimate was too low. – The Consensus chose 7.40%, Ron’s estimate. Armin’s SSG: – When I did Armin-1, Value Line had made a low-ball estimate of 6.50% compared to the other six analysts I checked. They were averaging 12.89% long-term EPS with YahooFinance high at 13.30% and Zacks.com low at 12.13%. ** The six estimates were close with only 1.17% separating the lowest from the highest. – I chose to estimate 10.00% EPS which was the very lowest of the seven analysts at CNNMoney and the nine analysts at Reuters.com (with both groups ranging from 15.0% to 10.0%). – When I did Armin-2, VL was even more a low-ball and had reduced its estimate to 5.50%. The other six analysts had slightly lowered their average a smidge to 12.58% (down from 12.89%) with Morningstar.com now high at 13.10% and Zacks.com still low at 12.28%. – 10.00% was still the lowest estimate at CNNMoney and at Reuters.com. ** For how I estimate EPS for every SSG I do and for the names of the seven estimates I always check, see: Estimating EPS Forecasting the High and Low PEs Ron’s SSG: – The group was given 5 choices to estimate the Forecast High PE: 28.1, the last five-year historical High PE average; 24.0, the most recent year High PE; 14.8, two times the estimated EPS growth rate or a PEG of 2.0; 10.6, one and one-half times or a PEG of 1.5; and 24.0, the average High PE for the last five years + the current PE / 2. ** The Consensus chose the most recent year High PE (39% of the votes), but Ron’s fifth option was close and in second place (35%). Apparently unnoticed, both were 24.0. ** I do not use the PEG because one number does not fit all stocks, there’s no agreement on what that number should be or even how it should be calculated. – Of the five choices Ron offered to estimate the Forecast Low PE, one was “none of the above” and, as a result, was meaningless. The other four choices were: 20.0, the last five-year historical Low PE average; 13.7, the most recent year Low PE; 7.4, one times the estimated EPS growth rate or a PEG of 1.0; and 20.4, the average Low PE for the last five years + the current PE / 2. – The Consensus (50% of the votes) chose 13.7, the most recent year Low PE, but Ron chose 20.0, the last five-year average (26% of the votes). The recorded session does not explain why the Consensus choice was disregarded. [Why bother having a vote?] Armin’s SSG: – High/Low PEs have fallen from 40.1/29.7 in 2004 to 24.0/13.7 in 2008. I used the lowest High PE in the last 5 years, from 2008. Forecasting the Low Price Ron’s SSG: – Ron gave the group 5 choices: $29.60, the low PE x the low EPS option and the method most appropriate for growth companies; $28.20, the average low price during the last 5 years; $20.30, the recent severe low price; $20.30, the price PAYX’s dividend will support; and $23.40, 80% of the current price. – The Presentation Slides show that the participants were not asked to vote. The recorded session does not explain why there was no voting. – Ron’s SSG shows that he selected $20.30 as his Forecast Low Price, the recent severe low. Armin’s SSG: – I selected $19.30 as my Forecast Low Price, the low PE x the low EPS. Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE) PTPM: – The 5-year average PTPM is trending down which is usually a red-flag warning of deteriorating quality and, to me, a signal to check further. To others, it is often a sign to abandon their study. Ron, on the other hand, ignored the downtrend (Slide 34). ** With S&P data, PAYX is way better than its industry average (40.0% vs 15.4%, Data Processing & Outsourcing Industry. ** With Hemscott/Morningstar data, PAYX is placed in a different industry and is way-way better than its industry average (39.6% vs 6.9%, Staffing and Outsourcing Industry). Moreover, PAYX ranks first out of 35 companies. ** Therefore, I would not curtail any PAYX study because of this downtrend. ROE: – The 5-year average ROE trend is up which is a good sign. ** With S&P data, PAYX is again way better than its industry average (33.8% vs 18.1%) and way-way better with Hemscott data (33.5% vs 10.7%) Financial Condition – Value Line gives PAYX an A for Financial Strength, reports no debt, and $315 M in cash and short term securities as of 8-31 (down from $473 M as of 5-31). – Morningstar says that PAYX is in “excellent financial health” with no debt and the ability to generate a strong cash flow. – The one-click Annual report spreadsheet by Bob Adams gives PAYX a 48 out of 100 with 9 Bullish results (good things) and 7 Bearish results (not-so-goods): ** The Bullish things include: no debt, sales are increasing (up 1%) and growing faster than cash flow, and ROE is adequate. ** The Bearish not-so-goods include: cost of sales is growing faster than sales and free cash flow should be higher. Cash flow growth is down 5% and should increase, Bob notes, the same as or better than the company’s sales growth. ** You can get this super-duper, easy-to-use free spreadsheet along with an explanation of its many features by going to My Favorite Links page: click here. What Does the PERT-A Show? – The Toolkit software has a nifty feature called the PERT-A (in TK 5) and the Quarterly Trend Analysis (in TK 6). My favorite part is the last three columns of the Worksheet which show the per cent change by TTM quarter for the growth of EPS, Pre-Tax Profit, and Sales. ** For PAYX, the Worksheet shows 12 consecutive quarters of a decline in all three measures. This data shows me that PAYX’s performance has been dreadful with no sign of any improvement. The same awful record is also shown on the PERT-A graph, for those who prefer a visual analysis. – If you are still interested in PAYX, check out my earlier post, Probing the Performance of Paychex (PAYX). POLL (please leave your answers as a comment): – How many consecutive “down” quarters will you tolerate before selling any stock? – How many consecutive “up” quarters do you want before you’d consider buying PAYX? -Armin – 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. Value Line Estimated High Price = $80-100 as of 11-27-09 (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] *** – 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. 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 9th. 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 Guessing about GameStop (GME)
December 24, 2010
GameStop (GME)
Consensus SSG & PatD
Armin
Take Stock
LenD
Date
11-30-10
12-18-10
12-16-10
4-21-09
Data
S&P
Same
Mstar-Hemscott
S&P
Price at SSG
$19.92
$21.67
$21.56
$29.80
52 week High & Low Price
$26.75 & $17.12
$25.75 & Same
Not Used
$57.20 & $16.91
Last Quarter of Reported Data
Q3 ending 10/31/10
Same
Same
Q4 ending 1/31/09
Project Growth From End of
Last Q
Same
Last FY
Last Q
Estimated Sales Growth
7.00%
6.60%
2.90%
11.0%
Estimated EPS Growth
9.00%
6.60%
-6.00%
11.1%
Forecast High PE
15.5 (Hi & Lo PE 5 yr ave)
14.4 (from 2009)
19.4
18.0
High EPS
$3.71
$3.12
$1.65
$4.06
Forecast High Price
$57.50
$45.20
$31.97 (20% < VL)
$73.10
VL=$70-$110 as of 11-7-08
Forecast Low PE
7.0 (from 2008)
7.0 (from 2009)
8.2
9.0
Low EPS
$2.41 (ttm)
Same
$2.14
$2.40
Forecast Low Price
$9.00 (lowest in last 5 yrs)
$13.70 (80% x 52 week low)
$17.55 (low PE x low EPS)
$21.60
Upside/ Downside Ratio
3.4
3.0
1.35 (imputed)
5.3
Total Return
23.6%
15.8%
8.20%
19.7%
Buy Under
NA
$21.58
$15.99
NA
RV/PRV (no outliers)
47.5/43.6
49.2/46.0
Not Used
64.6/58.2
RV/PRV (outliers out)
Not Used
65.7/61.5
Not Used
Not Used
Quality
S&P = NA
S&P = B+
TS = 1.6 (fails)
NA
PTPM – 5 yr ave
6.2% Trend even (thru 2009)
Same Same
6.2% Trend NA
6.1% Trend up (thru 2008)
ROE – 5 yr ave (with ending year equity)
Not Used
13.8% Trend down (thru 2009)
Not Used
13.3% Trend up (thru 2008)
ROE – 5 yr ave (with starting year equity)
17.4% Trend down(thru 2009)
Same Same
17.6 Trend NA
Not used
Debt to Equity – 5 yr ave
43.8% Trend down (thru 2009)
Same Same
Not Used
NA
Auditing Abbott Labs (ABT)
June 25, 2010
Abbott Labs (ABT)
Carol
Armin-1
Armin-2
Take Stock
Date
5/3/10
5/4/10
Same
Same
Data
S&P
Same
MStar-Hemscott
Same
Price
$50.87
$50.79
Same
$50.19
52 week High & Low Price
$66.79 & $42.10
Same & $42.00
Same & Same
Not Used
Last Quarter of Reported Data
Q1 ending 3/31/10
Same
Q4 ending 12/31/09
Same
Software Used
TK6
Same
Same
TS Online
Project Growth From End of
Last Quarter
Same
Last Quarter
Last FY
Sales Growth
6.00%
10.00%
Same
4.00%
EPS Growth
4.80% (from PP)
10.00%
Same
4.00% initial 1.09% final
High PE
18.4
15.3 (from 2009)
15.0 (Same)
19.9
High EPS
$4.81
$6.14
$6.16
$4.04
High Price
$88.50 (7% < VL)
$93.90 (1% < VL)
$92.40
$80.17 (16% < VL)
Low PE
11.0 (from 2009)
Same
10.9
15.4
Low EPS
$3.81 (TTM)
Same
Same
Same
Low Price
$41.90 (Low PE x Low EPS)
Same
$41.50 (Same)
$58.67 (exceeds curr price)
Upside/Down
4.2
4.8
4.9
Impossible to Calculate
Total Return
14.0%
16.2%
Same
12.9%
SSG Buy Under
N/A
$52.95
$51.93
$45.96
RV/PRV (outliers removed)
83.2/79.2 (2007 out)
(no outliers)
Same
Not Used
RV/PRV (no outliers)
N/A
79.0/71.7
Same
Not Used
Quality
A (2nd highest)
Same
Same
2.6 (fails)
PTPM – 5 yr ave
22.00% Trend even
Same Same
20.90% Trend up
Same Trend N/A
ROE – 5 yr ave Ending Year Equity
26.70% Trend down
Same Same
24.60% Trend up
27.1% Trend N/A
ROE – 5 yr ave Beginning Yr Equity
N/A
29.40% Trend up
29.10% Trend up
Not Used
Debt to Equity – 5 yr ave
46.80% Trend up
Same Same
46.60% Trend up
Not Used
Probing Paychex (PAYX): A Follow-Up
February 14, 2010
Paychex (PAYX)
RonB-1 (initial)
Armin-1 (initial)
RonB-2 (updated)
Armin-2 (updated)
Date
9-28 (price) 11-02 (data)
11-6-09
2-12-10
Same
Data
S&P
Same
Same
Same
Price
$29.29
$30.37
$29.53
Same
52 week High & Low Price
$33.67 & $20.31
$32.88 & Same
$32.88 & $20.31
Same
Last Q of Reported Data
Q1 ending 8/31/09
Same
Q2 ending 11-30-09
Same
Software Used
TK 6
TK 5
Same
Same
Project Growth From End of
Last Q
Same
Same
Same
Sales Growth
6.00%
10.00%
6.00%
10.00%
EPS Growth
7.40% (from PP)
10.00%
7.40%
10.00%
High PE
24.0
Same (from 2008)
24.0
Same (from 2008)
High EPS
$2.01
$2.17
$1.96
$2.21
High Price
$48.20
$54.50
$47.00
$53.00
Low PE
20.0 (Ron) 13.7 (Cons)
13.7 (from 2008)
20.0
13.7 (from 2008)
Low EPS
$1.48
$1.41 (ttm)
$1.48
$1.41 (ttm)
Low Price
$20.30 (Ron-recent severe low)
$19.30 (low EPS x low PE)
$20.30 (recent severe low)
$18.80 (low EPS x low PE)
Upside/Down
2.1
2.2
1.9
2.2
% Payout
63.9%
Same
63.9%
Same
Total Return
13.1%
15.1%
12.4%
15.1%
SSG Buy Under
N/A
$28.10
$27.73
RV/PRV
86.3/80.3 (2004 all out, 05 Hi PE out)
79.8/72.8 (no outs)
89.6/83.3(same outs as Ron-1)
80.3/72.8 (no outs)
RV/PRV (no outliers)
80.3/72.8
79.8/72.8
80.3/74.6
Same
Quality
A+
Same
Same
Same
PTPM – 5 yr ave
40.00% trend down
Same Same
Same Same
Same Same
ROE – 5 yr ave End Equity
N/A
33.87% trend up
Same Same
Same Same
ROE – 5 yr ave Start Equity
34.30% trend up
Same Same
Same Same
Same Same
Debt to Equity – 5 yr ave
-0- trend even
Same Same
Same Same
Same Same
Measuring Medtronic (MDT): Part 2
January 22, 2010
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
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
Brainstorming BRLI (Bio-Reference Labs)
January 2, 2010
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 outliers)
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
Fundamental Investing Using the Stock Selection Guide (SSG) by armin fields 