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
Contemplating Cognizant (CTSH)
October 13, 2011
Cognizant Technology Solutions (CTSH) is a worldwide provider of Information Technology services. The company has over 100,000 employees based mostly in India, but is incorporated and headquartered in the U.S.
CTSH was named to the 2010 Fortune 100 Fastest Growing Companes list ranking 37th with 55% EPS and 30% Sales growth. Wikipedia reported that Cognizant has made Fortune’s Fastest Growing list for eight consecutive years.
CTSH was the subject of the September 2011 Online Stock Study at the Better Investing website. It was led by Carol Clemens and Christi Powell, two members of BI’s Heart of Oklahoma chapter. Handouts available to BI members include the CTSH Value Line and Morningstar reports as well as the audio presentation and power point slides.
Sadly, and once again, no completed SSG is available even though the purpose of the monthly Stock Study is to generate a SSG in about one hour using consensus decision-making by the online participants. I’ve complained, but these omissions month after month must be deliberate and seem foolish to me.
Company Background:
– According to Cognizant’s 2010 Annual Report, revenues increased an impressive 40% last year and the company added more than 120 new clients, most ever in its history.
** Revenue growth in Europe was especially noteworthy: sales in the United Kingdom increased 58%; the company began operations in Spain, expanded offices in Stockholm, Paris, Zurich, and Amsterdam, and opened office in Geneva.
– Most of CTSH’s revenues are generated in the U.S. and Wikipedia reported that 2010 revenues by geography were: 77% from North America; 19% Europe; other 4%.
– According to Value Line, 2010 revenues by segment were: 42% financial related services; 26% health care services; 18% retail-logistics-manufacturing; 14% other.
** IT Services are provided by an on-site technical and account management team supported by development centers located primarily in India.
– To distinguish itself from competitors, Morningstar observed, Cognizant chose to build a U.S.-based management team in order to gain the trust of U.S. customers and, at the same time, delivering the cost savings of offshore outsourcing.
** This model has provided CTSH with a “significant” competitive advantage;
** Like other IT providers, Cognizant’s clients are highly concentrated: CTSH’s top 5 and top 10 customers accounted for 20% and 30% of revenues;
** Mstar thought it was unlikely that clients would change their IT provider given the high costs of switching and the sticky nature of these relationships.
– The Indian government is ending its tax subsidies on software exports in 2011 and Cognizant’s low tax rates are xpected to rise.
– After the following table comparing four SSGs on Cognizant, I discuss key issues about CTSH’s future growth, its downtrending Return on Equity, its Competitors, and its Financial Condition.
| Cognizant Technology Solutions (CTSH) |
CarolC | ChristiP | Armin | AnnC (from BI’s First Cut) |
| SSG Date & Study Date | 7/27/11 & 9/7/11 | Unknown & Same | 8/15/11 | 7/8/11 |
| Data | Mstar via SC | Same | Mstar via BI | Same |
| Price | $60.84 | $72.95 | $63.93 | $76.40 |
| 52 week High & Low Price | $83.84 & $53.59 | Same& Same | Same & Same | Same & $52.10 |
| Last Quarter of Reported Data | Q2 ending 6/30/11 | Same | Same | Q1 ending 3/31/11 |
| Software Used | TK6 & Online SSG | Same & Same | TK6 | Online SSG |
| Project Growth From End of | Last Q | Same | Same | Unknown |
| Future Sales Growth | 21.4% | Unknown | 20.0% | 17.0% |
| Future EPS Growth | 18.9% | 19.0% | 16.0% | 16.0% |
| High P/E | 20.0 | 31.3 | 27.9 (last 3 yr ave) | 27.0 |
| High EPS | $6.32 | $6.35 | $5.59 | $5.36 |
| High Price next 5 yrs | $126.40 | $198.80 (37% > VL) | $156.00 (5.5% > VL) | $144.72 |
|
Value Line Estimated High Price = $95-145 |
||||
| Low P/E | 15.50 | Unknown | 12.5 | 15.0 |
| Low EPS | $2.66 | Unknown | $2.66 | $2.55 |
| Low Price next 5 yrs | $41.23 | $39.60 | $33.30 | $38.25 |
| Upside/Downside Ratio | 3.34 | 3.80 | 3.00 | 1.79 |
| Total Return | 15.75% | 22.20% | 19.50% | 13.63% |
| SSG Buy Under | Unknown | Unknown | $63.98 | Not Used |
| RV/PRV (outliers eliminated) | Unknown | Unknown | 118.8/102.6 (06 & 07 out) | Not Used |
| RV/PRV (no outliers) | Unknown | Unknown | 87.9/75.9 | Not Used |
| Quality | Not Used | Not Used | S&P = B+ | Not Used |
| PTPM – 5 yr ave | Unknown | Unknown | 19.2% Trend even | 19.15% Trend N/A |
| ROE – 5 yr ave Ending Yr Equity | Unknown | Unknown | 20.9% Trend down | 20.92% Trend N/A |
| ROE – 5 yr ave Beginning Yr Equity | Unknown | Unknown | 28.4% Trend down | Not Used |
| Debt to Equity – 5 yr ave | Unknown | Unknown | -0- Trend even | Not Used |
Estimating CTSH’s future growth: the Online Stock Study
(A) Carol&Christi gave participants 5 choices to estimate future Sales growth for the next 5 years: 31.9%, the company’s last 5 year average; 22.0%, Value Line’s estimate; 19.7%, average BI member sentiment; 20.1%, estimate from Manifest Investing, a pay site; and None of the Above.
** Value Line’s 22.0% estimate was for Sales per Share, not Sales, and VL makes no Sales estimate;
** BI’s 19.7% average member sentiment was based on some 78 Online SSGs made in the last 90 days which ranged from an estimated 39.4% high to a low of 7.5%;
** “None of the Above” is not a meaningful choice and I will not report it again;
** The Consensus (35% of the votes) chose 19.7%, BI’s average member sentiment; second place (30%) was for VL’s 22.0% estimate.
(B) Participants were given 4 (meaningful) choices to estimate future EPS growth for the next 5 years: 30.6%, the company’s last 5 year average; 20.5%, VL’s estimate; 17.6%, average BI Member sentiment; 18.5%, Morningstar’s estimate.
** The Consensus (35% of the votes) chose 17.6%, BI’s average member sentiment; 32% voted for Mstar’s 18.5% estimate.
(C) Carol&Christi then used BI’s Preferred Procedure to estimate CTSH’s future EPS growth. The PP involves making 4 estimates for the next 5 years: Sales growth (less) Pre-Tax Profit Margin (less) Taxes (divided by) Shares Outstanding (equals) EPS growth.
** Instead of using 19.7%, the Consensus choice for future Sales growth, Carol&Christi used 21.4% and offered no explanation; see Presentation Slide #40.
** For PTPM, they used the Online SSG’s default value (19.2%, last 5 year average); they substantially increased Taxes to 28.0% (up from the 16.6% default); and they increased Shares Outstanding to 310.0 M (up from 304.0 M).
### Their estimated Tax increase is likely due to the 2011 end of India’s tax subsidies, but a major weakness of the PP is that there is little or no guidance regarding the amount of any such a change.
** The PP result was 18.9% EPS which they used instead of the Consensus pick (17.6%), again without explanation. Carol used 18.9% while Christi rounded up to 19.0%.
** I no longer use the PP because it involves making too many estimates and too much guesswork; see: Pondering the Preferred Procedure, March 28, 2009
Estimating Future Growth: Armin and Ann’s SSGs:
(A) I found that CTSH’s historical growth over the last 5 years had been around 33% Sales & 31% EPS, both slowing to 28% during the last 3, and increasing to 40% Sales & 33% EPS over the last 2.
** When I did my SSG, the 7 analysts I ALWAYS check were closely estimating long-term EPS at an average of 21.12% with Mstar high at 21.9% and Zacks.com low at 18.5%.
** If you don’t check all 7, you can’t learn which is high, low or goofy. For how I estimate EPS for all my SSGs, see: Estimating EPS, March 5, 2009
** I lowered my EPS estimate to 16.0% because I did not want to substantially exceed VL’s High Price estimate which I add as a SSG criteria.
(B) Ann wrote that CTSH’s growth had been stready and strong with Sales and EPS growing at around 45% during the last 10 years and slowing to about 27% over the last few.
** Ann found that analysts (unidentified) were estimating lon-term EPS at 20.0%, but lowered her EPS choice to 16.0%, slightly less than her Sales estimate, to reflect lower profit margins in the next 5 years due in part to wage inflation in India.
(C) SSG Final Results:
| CarolC | ChristiP | Armin | AnnC | |
| Estimated EPS | 18.90% | 19.00% | 16.00% | 16.00% |
| Forecast High P/E | 20.0 | 31.3 | 27.9 | 27.0 |
| Forecast High Price | $126.40 | $198.80 | $156.00 | $144.72 |
| Forecast Low Price | $ 41.23 | $ 39.60 | $ 33.30 | $ 38.25 |
| Upside/Downside | 3.34 | 3.80 | 3.00 | 1.79 |
| Total Return | 15.75% | 22.20% | 19.50% | 13.63% |
| Overall Result | SSG BUY | SSG BUY | SSG BUY | SSG Don’t Buy |
– All of the judgments by the 4 SSGs are similar except for their Forecast High P/Es with Christi high at 31.3 and Carol low at 20.0.
– Ann’s was the only SSG that got a Don’t Buy.
Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE):
– Cognizant’s 5 year average PTPM is trending even and its ROE is trending down. Any downtrend could be a red-flag warning sign of deteriorating fundamentals or, on the other hand, a sign of an unsustainably high level.
– The way I evaluate this is to compare the company to its Industry Averages.
– I use the Industry data at Stock Central.com which is the only website I know of that lists six metrics for all companies in each industry and which is the only way to identify whether the 5 year industry average is distorted by outliers.
(A) PTPM:
– Even though Cognizant’s PTPM is trending even, which is not a troublesome sign, I ALWAYS want to know how each company compares to its industry average.
– Morningstar places CTSH in the Information Technology Services Industry which consists of 65 companies total.
– CTSH is substantially better than its Industry Average (19.2% vs 9.8%) and ranks 7th out of 65;
** Infosys (INFY), a direct competitor, ranks 2nd with a PTPM of 32.5%.
(B) ROE:
– The Industry data only uses Ending Equity and CTSH is slightly worse than its Industry Average (20.9% vs 21.2%), and ranks 10th.
– However, the Industry Average is distorted by three companies with unusually high ROEs (RSY @ 200%, UIS @ 77.9%, and IPXFF @ 75.1%);
** If these three are eliminated as outliers, CTSH looks substantially better (20.9% vs 13.4% Adjusted Industry Average).
(C) Conclusion:
– I am not troubled by Cognizant’s PTPM or ROE as they are substantially better than its PTPM Industry Average and its ROE Adjusted Industry Average;
– To learn how easy it is to adjust any Industry Average in order to remove distorting outliers, see: Investigating Industry Info, May 8, 2009
– The Online Stock Study did not discuss Cognizant’s PTPM and ROE which is a serious omission in my opinion.
Competitors:
– Competitors can be a confusing issue and easily get mixed up with peers, ordinary competitors, and direct or close competitors.
– BI reports only peer group members which are not necessarily competitors and which I never use.
– Some websites claim to show competitors, but may list a mishmash/hodgepodge: Bloomberg Business Week, for example, shows 5 so-called competitors for CTSH in 4 different industries.
– I most often rely on YahooFinance and Morningstar:
** YahooFinace lists CTSH’s direct competitors as: Infosys (INFY), Wipro (WIT), and Tata Consultancy (private);
** Morningstar, which I get on-line and free from my library, lists CTSH close competitors as: INFY, WIT, Accenture PLC (ACN), and ComputerSciences Corp (CSC).
CTSH’s Financial Condition:
(A) Value Line:
– VL gave Cognizant an A++, its highest grade, for Financial Strength;
– VL also reported that CTSH had no debt and $2.27 B in Cash as of 7/1/11.
(B) Morningstar:
– Mstar observed that CTSH had a strong balance sheet with more that $2.2 B in cash and no debt.
– Mstar also reported that Cognizant had a strong cash flow averaging in the low teens of revenue in the last 5 years, and expects the company to remain debt-free for the foressable future.
(C) S&P Stock Report:
– S&P found that CTSH had a strong balance sheet, steady cash flows, and rapid revenue growth;
– S&P also reported that Cognizant had a compound annual growth rate (CAGR) in free cash flow of 40% over the past 5 years which, it thought, might decline to 30% in the next 5.
(D) Bob Adams’ One-Click, Annual Report Spreadsheet:
– This easy-to-use spreadsheet gave CTSH’s 2010 Annual Report a 43 out of 100 with 5 Bullish and 8 Bearish results:
** The Bullish good things included: no debt; sales increased; ROE was adequate; free cash flow margin of 13% was good;
** The Bearish not-so-goods included: accounts receivable increased as did shares outstanding; cost of sales grew faster than sales and got a red-flag warning sign; sales grew slower than cash flow.
Armin
Admiring Apple (AAPL)
June 5, 2010
– Apple Inc (AAPL) makes the Macintosh personal computer, iPod music player, iPhone smart cell phone and, two months ago, began selling its iPad device (a book reader/web surfing tablet).
– These products are all elegantly designed, sold in Apple retail stores that are fun to shop in and buzz with excitement, and the company has the CEO of the Decade, according to Fortune magazine, Steve Jobs.
– AAPL was the Online Stock Study in May at the Better Investing website that was led by Mike Torbenson, education director at the BI Puget Sound chapter.
** Mike’s presentation slides, the recorded webinar (78 mins), the latest 10K and 10Q reports, and the Value Line report are all available to BI members.
Company Background:
S&P Stock Report:
– S&P reported AAPL’s CY 2009 sales as: 35% Macintosh computers (11 Million units shipped), 26% iPhones, 20% iPods (over 25 Million sold), and 10% music related.
Mike’s Presentation:
– In the last 15 months (1/09 to 3/10), AAPL’s price rose 350%, from $78 per share to $272.
– In 2009, revenue by product grew (or declined) as follows: iPod down (-2.5%), Mac up 7%, and iPhone up a whopping 93%.
** AAPL has 11% of the smart-phone market with NOK at 41% and RIM at 20% which Mike thought left lots of room for growth.
– The iPad was introduced in April 2010 and sold 1 million units faster than the iPhone. The iPad is now in the “early adopters” phase of growth with lots more room to grow.
Fortune magazine’s CEO of the Decade:
– In the past 10 years, Fortune wrote, Steve Jobs “has radically and lucratively reordered three markets — music, movies, and mobile telephones — and his impact on his original industry, computing, has only grown.”
– In addition, he has “creat[ed] more than $150 billion in shareholder wealth….and profoundly influenc[ed] the worlds of retail and design.”
– AAPL was worth about $5 billion in 2000, according to Fortune, just before Jobs implemented its “digital lifestyle” strategy, and today, at about $170 billion, it is slightly more valuable than GOOG.
The New York Times:
– On May 26, the Times reported that AAPL had passed MSFT to become the world’s most valuable technology company.
– Calling it the end of one era and the beginning of the next, the Times profoundly realized that the “most important technology product no longer sits on your desk but rather fits in your hand.”
– On May 30, the Times reported that the iPad had sold 2 million devices in less than two months, an average of 35,000 per day since its April debut.
Value Line:
– VL was so impressed with AAPL’s growth prospects that it raised its EPS estimate by 40.00% for this year (FY 2010).
– VL also thought that Apple’s long-term prospects looked “exceptionally bright.”
Morningstar:
– In April, Mstar raised its fair value estimate from $202 to $238 (with AAPL selling at $263.95) to reflect the iPad’s initial success.
– Still, the star of Apple’s show, according to Morningstar, remains the iPhone given its large global market and infrastructure (175,000 apps and growing).
SSG Discussion:
– The following table compares SSGs by Mike (found only in the webinar recording) with mine, the Investment Advisory Service, and with Take Stock.
** After the table, I discuss AAPL’s quality and several key SSG judgments as well as its financial condition.
| Apple Inc (AAPL) | MikeT | ArminF | Take Stock | Investment Advisory Service (IAS) |
| Date | 4-20-10 | 5-11-10 | Same | 3-10-10 |
| Data | S&P | Same | Morningstar-Hemscott | S&P |
| Price | $270.83 | $258.08 | Same | $224.84 |
| 52 week High & Low Price | $272.18 & $119.38 | $272.46 & $119.38 | Not Used | $224.48 & $89.58 |
| Last Quarter of Reported Data | Q2 ending 3-31-10 | Same | Same | Q1 ending 12-31-09 |
| Software Used | TK 6 | Same | TS Online | TK6 |
| Project Growth From End of | Last Quarter | Same | Last FY | Last Quarter |
| Sales Growth | 15.00% | 17.00% | 12.20% | 17.00% |
| EPS Growth | 15.00% (PP) | 17.00% | 12.20% initial 08.23% final | 17.00% |
| High PE | 25.0 | 20.8 (from 2009) | 30.0 | 25.0 |
| High EPS | $23.69 | $25.83 | $9.34 | $19.91 |
| High Price | $592.30 (20% > VL on 4-9-10) | $537.30 (8.5% > VL on 4-9-10) | $280.24 (23% < VL on 4-9-10) | $497.70 (8.2% > VL on 1-8-10) |
|
Value Line Estimated High Price = $365-495 on 4-9-10 and $305-460 on 1-8-10 |
||||
| Low PE | 16.0 | 9.5 | 13.1 | 15.0 |
| Low EPS | $11.78 | Same | $6.66 | $9.08 |
| Low Price | $125.90 (PVQ option) | $111.90 (Low PE x Low EPS) | $87.25 (Same) | $136.20 |
| Upside/Down | 2.2 | 1.9 | 0.13 (imputed) | 3.1 |
| Total Return | 16.9% | 15.8% | 2.0% | 17.1% |
| SSG Buy Under | N/A | $218.25 | $135.50 | N/A |
| RV/PRV (no outliers) | 90.6/78.7 | 86.2/73.7 | Not Used | 96.6/73.9 |
| Quality | N/A | S&P = B | TS = 6.3 | IAS = 1.0 |
| PTPM – 5 yr ave | 19.6% Trend up | 19.6% Same | 18.3% Trend N/A | 19/6% Trend up |
| ROE – 5 yr ave Ending Year Equity | N/A | 21.5% Trend up | Not Used | N/A |
| ROE – 5 yr ave Begin Year Equity | 30.4% Trend up | Same Same | 28.4% Trend N/A | 30.4% Trend up |
| Debt to Equity – 5 yr ave | -0- Trend even | Same Same | Same Same | Same Same |
Quality:
– Before beginning his SSG, Mike evaluated whether AAPL was a quality company by looking at its past performance in SSG Sections #1 and #2.
** For historical Sales and EPS, he found that the last 5 years looked very good and the results from the most recent quarter (Sales up 49%, EPS up 86%) were excellent.
** For historical Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE), he saw that the last 5 years were trending up and looked good while AAPL’s zero debt looked very good.
** Mike also compared APPL to other technology companies and to its Value Line industry (Computer and Peripherals), and concluded that Apple was a quality growth company.
– A typical BI/NAIC approach to quality is to assess whether the graph lines in Section #1 are up (growth), straight and parallel (consistency) and also whether the trends in Sections #2A and #2B are up or even.
– And, S&P rates AAPL a B for Quality, 5th out of eight grades, while IAS rates its Quality a 1 out of 5, most favorable.
Mike’s SSG:
Estimating Future Sales and EPS Growth:
– Mike looked at several indicators to estimate Apple’s future Sales growth: its last 5 years growth (31.9%); VL’s 3-5 year estimate (15.5%); its last quarter’s growth (48.6%); and TTM Sales growth (40.7%).
** Mike thought 15-20% seemed justified, so he chose 15.00% (presentation slides, PDF pages 24 & 25).
** Value Line’s 15.5% estimate was actually for Sales per Share and VL does not make a Sales growth estimate.
** 12.00% was Morningstar’s long-term Sales growth estimate and 28.17% was Zacks.com’s.
– To estimate future EPS growth, Mike used the Preferred Procedure (PP) which involves making four other estimates for the next 5 years: Sales Growth, Pre-Tax Profit Margin, Taxes, and Shares Outstanding.
** Relying on his 15.00% Sales growth estimate, he changed only one of the defaults: PTPM from its five-year average of 19.6% to last year’s 28.0%, a huge increase of nearly 8.5%.
** His PP came to 15.40% EPS which he rounded to 15.00% to match his Sales estimate.
** Instead of estimating 28.0% for the next 5 years, his PP would have been considerably different had Mike used 21.0% PTPM (last 2-year average), or 23.4% (last 3-year average).
** Moreover, Mike could have also used VL’s estimated Taxes of 30.0% (instead of the default 31.7%), or VL’s estimated Shares Outstanding of 975.0M (instead of the default 969.6M).
### I no longer use the PP because it involves too many estimates and too much guesswork for me: see Pondering The Preferred Procedure
Armin’s SSG:
Estimating Future EPS Growth:
– When I did my SSG, the SEVEN analysts I ALWAYS check were estimating long-term EPS at an average of 18.85% with Value Line high at 23.00% and Yahoo Finance via Thomson Financial low at 17.10%.
– Reuters.com was 17.69%, Zacks.com and CNNMoney via FactSet CallStreet were both 18.00%, Morningstar.com was 18.20%, and S&P via BI was 20.00%. Reuters 11 analysts ranged from a high of 30.0% to a low of 5.00%.
– I decided to use 17.00%, the lowest estimate (rounded) of the seven.
### To learn more about Estimating EPS, click here.
Forecasting the High and Low PEs:
– Even though 2009 was unusually low (and well below the five-year average of 34.8), I chose to use its 20.8 as my Forecast High PE.
– I thought 2009’s Low PE of 8.6 was too low to use for the next 5 years, so I used 9.5 for my Forecast Low PE which was proportional to my Forecast High PE (5 year average High PE / 5 year average Low PE = Forecast High PE / Forecast Low PE or “X”).
Take Stock:
– TS initially estimated 12.2% based on AAPL’s historic growth, but reduced that to 8.23% EPS by mechanically applying its version of the Preferred Procedure.
– TS also used 30.0 as its Forecast High PE, the maximum it is designed to permit.
Investment Advisory Service:
– IAS is a pay service from IClubCentral which delivers three SSGs each month that satisfy the BUY criteria along with an explanatory narrative. Its AAPL SSG was made available for free (but without the narrative explanation) at the StockCentral website.
– IAS used 17.00% estimated EPS (which seems reasonable to me since I used the same value <grin>) and 25.0 & 15.0 Forecast High & Low PEs) which seem moderately conservative since 30.0 & 20.0 are often used as maximum limits.
Final Results:
– Of the four studies, only IAS satisfied the SSG Buy Criteria in March, but today, or even 3-4 weeks ago, its SSG would not:
- Mike got a 2.2 U/D (min 3.0 required) and a 16.9% TR with a Forecast High Price that was 20% greater than VL’s estimate;
- I got a 1.8% U/D and a 15.8% TR with a Forecast High Price that was 8.5% greater than VL’s estimate;
- Take Stock got a .13 imputed U/D and a 2.0% TR with a Forecast High Price that was 23% less than VL’s estimate; and
- IAS got a 3.1 U/D and a 17.1% TR (last March when AAPL was selling for $224.84) with a Forecast High Price that was 8.2% greater than VL’s January estimate.
- However, IAS’s SSG would not satisfy the Buy criteria at the price I used ($258.08) or at AAPL’s current price ($263.95 on 6/3).
– I analyzed Apple some 30 months ago (on 1/18/08) when it was selling for $171.25 per share and, unlike now, it was then not close to a SSG Buy; if you’re interested, click here.
Financial Condition:
– Value Line gave Apple an A++ for Financial Strength, its highest grade. The company had no debt and $2.5 billion of cash assets as of 12-26-09.
– Morningstar found that Apple had a cash “hoard” of $34 Billion and an annual cash flow of almost $10 Billion which means, Mstar believed, almost unlimited financial flexibility.
– The Bob Adams one-click Annual Report spreadsheet gave Apple a 60 out of 100 with 11 Bullish and 7 Bearish results:
** The Bullish-good things include: no debt; sales are increasing and increasing faster than related costs; ROE gets a green flag (excellent); and free cash flow margin is also excellent.
** The Bearish-not-so-goods include: accounts receivable are increasing; cash flow growth is not increasing as fast as sales growth; and the price to sales ratio gets the only red flag (danger).
### Bob just updated his spreadsheet and the latest version is No. 4.14, dated 5-22-10.
### You can get this super-duper, easy to use spreadsheet for free, along with an explanation of its many features, by going to my Favorite Links page: click here.
Armin
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Projecting Growth at Patterson (PDCO)
August 18, 2009
Mark Robinson, founder and General Manager of Manifest Investing, recently posted his SSG of Patterson Companies (PRCO) at BI’s First Cut page. Mark used several extraordinary SSG methods: he added two years of estimated annual data, source and details unknown, which extended his projection of growth for the next 7 years out to 2015.
Also, Mark’s projected High EPS shows as $2.05 of the SSGs front page, but mysteriously as $2.50 on the back. The additional estimated data changed the 5 year average and trend of PTPM as well as ROE, and also led to a projected Low Price option, Low PE x Low EPS, that was higher than the current price even after he lowered his projected Low EPS by 40%. All of this is seriously strange and decidedly questionable..
In January, I critiqued Mark’s SSG for Stryker (SYK) and his SSG methods, https://arminfields.wordpress.com/2009/01/31/studying-stryker-syk-and-mulling-over-methods/
Here, Mark has some surprises which I discuss after the following comparative table. Armin-1 uses all of Mark’s judgments except it does not add any estimated annual data. Armin-2 is identical except it uses 10.00% estimated EPS instead of Mark’s 7.00%.
| Patterson Companies (PDCO) | Mark Robertson | Armin-1 | Armin-2 | Take Stock |
| Date | 7-10-09 | 8-7-09 | Same | 8-11-09 |
| Source of Historical Data | S&P | Same | Same | Hemscott/ Morning- star |
| Price | $21.01 | $25.00 | Same | $21.89 |
| 52 week High & Low Price | $33.85 & $15.75 | Same & Same | Same & Same | N/A |
| Last Quarter of Hist Data | Q4 ending 4-30-09 | Same | Same | Same |
| Software Used | TK 5 | Same | Same | Online TS |
| Years of Hist Data | 2001-2008 | 1999 -2008 | Same | Same |
| Years of Esti-mated Data | 2009 & 2010 ESTIMATED | NONE | NONE | NONE |
| Source of Est Data | UNKNOWN | None | Same | Same |
| Project Growth from | UNKNOWN | Last Q of Hist Data | Same | Last FY of Hist Data |
| Sales Growth | 6.00% | Same | Same | 2.90% |
| EPS Growth | 7.00% | Same | 10.00% | 0.30% |
| High PE | 22.0 | Same | Same | 25.6 |
| High EPS | $2.50 | $2.37 | $2.72 | $1.66 |
| High Price | $55.00 | $52.10 | $59.80 (9% > VL) | $42.56 |
|
Value Line Estimated High Price =$40-55 as of 5-29-09 and $35-45 as of 8-28-09 |
||||
| Low PE | 14.0 | Same | Same | 15.4 |
| Low EPS | $1.75(down from $2.90) | $1.70 (TTM) | Same | $1.69 |
| Low PE x Low EPS | $24.50 (> current price) | $23.80 (< current price) | Same | $26.03 (> current price) |
| Final Low Price | $16.00(“other” option) | Same | Same | $26.03 (> current price) |
| Upside/Down | 6.8 | 3.0 | 3.9 | Impossible to calculate |
| Total Return | 21.2% | 15.8% | 19.1% | 11.3% |
| SSG Buy Under | N/A | $25.03 | $26.95 | $21.28 |
| RV/PRV (no outs) | 69.9/67.3 | 60.5/56.6 | Same/55.0 | N/A |
| Quality | N/A | B+ | Same | 1.1 (un-acceptable) |
| PTPM – 5 yr ave | 11.3% (end est 2010, trend even) | 11.7% (end 2008, trend down) | Same | 11.2% trend N/A |
| ROE – 5 yr ave End Equity | 17.1% (end est 2010, trend down) | 17.4% (end 2008, trend even) | Same | N/A |
| ROE – 5 yr ave Start Equity | N/A | 19.3% (end 2008, trend up) | Same | 19.3% trend N/A |
| Debt to Equity – 5 yr ave | N/A | 30.5% (end 2008, trend up) | Same | N/A |
Discussion
– Mark added two years of estimated annual data (2009 and 2010, source and details unknown) to his SSG which meant that 1999 and 2000 were eliminated because our Toolkit software only holds 10 years of data. Then, he eliminated three more years (2001, 2002, and 2003) as outliers to arrive at a 6.00% quasi-historical sales growth rate that he used as his projected sales growth for the next seven years to 2015.
– Projected sales growth is important to Mark because it is the first element of the BI/NAIC Preferred Procedure which he uses “almost exclusively” to determine his projected EPS growth. Sadly, he did not set forth the other elements of his PP (Pre-Tax Profit Margin, Tax Rate, and Shares Outstanding) which, in Mark’s case, all had to be projected for the next seven years. A simple command, Alt-R, could have set forth the PP on the SSG’s front page.
– If this scheme wasn’t convoluted enough, Mark’s High EPS shows as $2.05 on the SSG’s front page, but as $2.50 on the back page. It’s supposed to be the same so this is a serious and major discrepancy, there’s no attempt at any explanation, and Mark’s SSG cannot be replicated, at least not without the secret code.
– Mark’s PP resulted in a 7.00% EPS rate ($2.05 or maybe 2.50 estimated High EPS in 2015). Unlike Mark, I no longer use the Preferred Procedure because it involves too many estimates and too much guesswork even under normal circumstances. See: Pondering the Preferred Procedure, https://arminfields.wordpress.com/2009/03/28/pondering-the-preferred-procedure/
– In his First Call write-up, Mark insists:
“It’s not the EPS growth rate that matters. It’s the 5-year estimate for EPS [AF: in dollars] that forms the core calculation on the SSG.” He adds: “(For those of you who teeter on the precipice of a nervous breakdown over the EPS growth rate, it’d be something on the order of 7% — but get over it, it’s the 5-year EPS value that really matters and I derive that almost exclusively using the preferred procedure.)”
** Overlooking this needless hectoring, Mark’s core calculation is seriously scrambled because it shows as $2.05 on his SSG’s front page and $2.50 on the back (it’s intended to be identical);
** Moreover, at four major websites, long-term EPS estimates are expressed only as a percentage rate (and not in dollars): Reuters, CNNMoney, Zacks, and YahooFinance. Two others show an EPS estimate as a percentage rate and as a dollar amount: S&P and Value Line. No website I know of makes a long-term EPS only in dollars. See: Estimating EPS, https://arminfields.wordpress.com/2009/03/05/estimating-eps/
– Perhaps the biggest disappointment is that Mark never even tried to explain why it was necessary to add ANY estimated data since the norm is to project the next 5 years based on actual data. How did he project our current recession? Which web site did he rely on and for what data? Why two years of estimated data and not one or three years?
– Lastly, the default for the projected Low EPS is no growth at all which, for Mark’s SSG, was $2.80 estimated (entered as 2010 actual). Mark lowered this by 40% to $1.75 but, once again, offered no explnation. With 6% growth for his projected High EPS and -40% for his projected Low EPS, Mark’s growth projections seem flaky and foolish, especially adding two years of estimated annual data.
CONCLUSIONS:
(A) It turns out that every one of Mark’s machinations were unnecessary. Armin-1 duplicates all of his judgments with one exception: it does not add those two years of estimated data. We both got a SSG Buy and satisfied the minimum 3.0 Upside/Downside and the 15% Total Return criteria. Armin-1 would look even better if I used the same $21.00 price as Mark did.
(B) Mark’s 7.00% projected EPS, after his many maneuverings, is not even close to what the analysts were estimating. When I did my SSG, the six long-term EPS estimates I always check averaged 12.70% with Value Line low at 10.00% and Reuters high at 14.40%. Thomson/FirstCall via YahooFinance was 11.75%, Zacks.com was 12.67%, FactSet CallStreet via CNN Money was 13.00%, and Reuters.com was 14.40%.
** Armin-2 used 10.00% estimated EPS, the lowest of the six analysts and also satisfied the SSG Buy criteria.
(C) The substantial variation among these six long-term EPS estimates demonstrates, I think, the wisdom of not using any estimated annual data in our SSGs. Unlike actual data, you can never be certain with any estimate and one website’s estimate is no more accurate than another’s. Moreover, our SSG wants six pieces of info for each year of annual data which are tricky to estimate. Note the different trends on PTPM and ROE that Mark got with his estimated data and that I got with actual data.
(D) Whenever we share our SSGs, at a club meeting or with BI’s First Cut or at another web site, all of us should try to make clear what we did and why, especially when we do something out of the ordinary. For example, Mark added two years of estimated annual data (source and details unexplained), used the Preferred Procedure (unexplained), got a High EPS of $2.05 on the front page and $2.50 on the back (unexplained), lowered his Low EPS from $2.90 to $1.75 (unexplained), and got a Low EPS x Low PE that exceeded the current price (unexplained).
(E) I think Mark’s SSG and his unique methods are unreliable, and neither helped me understand PDCO.
What do you think?
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Armin
Fundamental Investing Using the Stock Selection Guide (SSG) by armin fields 