Lazy Ninja wrote:Appreciate the analysis Peculiar_Investor. JCI isn't on my watch list, or one that I've ever looked at, but your breakdown raised a few questions for me.
And I'd forgotten to answer them. Sorry.
Lazy Ninja wrote:Looking back at the fundamentals over the past 10 years, revenue growth has averaged 7.3% (2001-2010) and EPS growth has averaged 4.5% over the same period. If you exclude the '09-10, then revenue growth is a fairly consistent 11.2% and EPS growth was 15.3%.
The type of analysis you've done here obviously works better the less cyclical a company's revenues/earnings are. The more consistent a company is, the more likely I am to be interested, but do you have any rules of thumb for deciding when to discard/ discount an unusually good or bad year (or two)? EPS growth of either 4.5% or 15.3% (or somewhere in between) would make a HUGE difference in determining a fair valuation. Was it the consistency you saw in the 2000-2008 period that led you to discount the 2009-10 portion?
There's the rub in the investment process, making judgments. In general I'll look at the 10 year rates and then again the rates for the past 5 years, and as you note, look for consistent growth. In the ideal world, I've love to find consistent corporate performance (but not
too consistent -- think Madoff
)I invest in the real world, so I expect some bumps along the way and each case/company is different. As we all know the '09-'10 period was a difficult time for most companies, so I gave JCI's management the benefit of the doubt on those years.
Lazy Ninja wrote:Peculiar_Investor wrote:Historically, P/E stayed in the 11-16 range, which I would consider a fair valuation for a company this size with the fundamental growth rates.
Does PEG factor into your analysis then? If I believed that EPS growth of 15.3% was sustainable over the short-mid term, then a P/E of 11 to 16 seems like a bargain to me.
Not directly, but it is likely evident behind the scenes in the model and calculations.
Lazy Ninja wrote:Peculiar_Investor wrote:I'm modeling 2012-2015 EPS growth to slow towards mid-single digits, say 7%, which gives me an implied 2015 EPS of $3.11, which implies at 16x EPS a price of $49.81. To get my 15% total return, I need to buy at about $27.
I understand using a slowing growth rate over time. For one thing, it would be extraordinarily difficult for a large company to keep cranking out 15% growth, so the reduction seems prudent. For another, extrapolated far enough into the future, one would be looking at some absurdly optimistic intrinsic value. In this case though, your 7% growth rate is closer to the (impaired?) 4.5% rate mentioned earlier than the 15.3%. Any particular reason? More importantly, why did you use the high end of the historical P/E ratio to arrive at $49.81, as opposed to say, the mid-point of 13.5, which would imply a price closer to $42? Or, to put it slightly differently, why assume both a slowing rate of EPS growth, and the high end of the historic multiple?
As I mention upthread, my technique was "originally derived from the Canadian Shareowners Stock Study Guide methodology, which took it's work for the US based NAIC, now known as
http://www.betterinvesting.org. These tools have been discussed before, see
http://www.financialwisdomforum.org/for ... 42#p141342
In simplifying my explanation, I neglected to mention that the PE range values are actually the average high PE and average low PE over the past 5 years.
The model forecasts out 5 years to calculate a
upside price, which is the
upside EPS multiplied by the
upside PE. Now I've got a view on the high end of where the price could be in 5 years time. The model also calculates a future
low price, I just didn't cover it in my explanation. The model has other data points to review as well. Once again judgment enters the equation, as you point out, if growth is slowing, shouldn't an investor expect multiple compression to occur? But that is why I'm using the average high PE, not the absolute high PE.
BTW, if you (or anyone else) is interested, the folks at BetterInvesting.org are having an Open House.
BetterInvesting wrote:You can invite your friends, family, neighbors, colleagues, customers, acquaintances, at no obligation, to sample the wealth of resources provided by the BetterInvesting community --- as your guests and our guests, at
http://www.betterinvesting.org/openhouse
Lazy Ninja wrote:I realize this stuff is as much art as science, but would appreciate any elaboration that you'd be willing to offer.
So true.
I'm a buy and hold investor who plans to hold for a minimum of 5 years, hopefully forever. Once I've completed a stock study and reviewed the companies business, management team and fundamentals, I'll usually play around with the assumptions a bit to gain an understanding of the sensitivity of my judgments. I use some Graham techniques as well in an attempt to ensure that I have some margin of safety in picking an entry/exit point.
Hope this both answers your questions and gives you some valuation ideas to further consider.
Edit: Added link to yielder post in the Archives.