Introduction:

The purpose of this four-session workshop is to discuss the SSGs that were prepared by the Online Stock Study Series at the Better Investing (BI) website and to compare them to my SSGs and to Take Stock.  I’m primarily interested in comparing SSG methods and judgments.  

The workshop begins today, 5-5-08, with Staples (SPLS).  The rest of the schedule is: Proctor & Gamble (PG) this Wednesday; next Monday, 5-12, Colgate-Palmolive (CP) and next Wednesday, CVS-Caremark (CVS).

Staples was the first BI Online Stock Study and was led by Ken Peters, a member of the BI Space Coast Chapter in Florida and a poster-contributor here at Stock Central.  Thanks Ken for an excellent study.

Materials you can download include the audio-video presentation, Consensus SSG in PDF, 10-12-07 Value Line, and a fact sheet from SPLS.

Company Background:

According to the latest Value Line, Staples is one of the largest office supply chains with nearly 1750 leased stores in North America and 300 internationally.  SPLS also sells Staples-branded products in over 2400 grocery stores, and has catalog sales in 19 countries.  Its top, direct competitors (not just industry peers) are Office Depot and OfficeMax according to Yahoo Finance and Hoovers.com.

SSG Comparisons:

This table compares the BI Consensus SSG to two of mine (one with S&P data and the other with Hemscott data, but with the same judgments) and to Take Stock.

* I updated the BI Consensus SSG on 5-1-08 to get current data and the current price for SPLS, but did not change any of its judgments.

Discussion - BI Consensus SSG:

- One of the first things Ken did was to assess the quality of SPLS with his Toolkit software by checking the four measures in SSG Section 2 which, he found, were all trending in the right direction: Pre-Tax Profit Margin; Return on Equity with ending equity; Return on Equity with beginning equity; and Debt to Equity.  Note that three trends changed from “up” to “even” on the updated Consensus SSG.

- After eliminating outliers in SSG Section 1 to get a relatively straight and consistent trend line for the last 6 years of Sales growth, Ken asked the participants to estimate the rate of future Sales growth.  They were given five choices (12-11-10-9-&-7%) and the Consensus judgment was 10.0%, about one percent less than the company’s historical Sales growth.

- Participants were then asked to estimate future EPS growth and were given five choices (2% above sales growth, 1% above, same, 1% below, or 2% below).  The Consensus was 10.0%, the same rate as the decision for future sales growth.

- Ken only wanted to project future growth from the last Fiscal Year, even after someone asked why not project from the last Quarter of actual data.  He might use the last Q, he said, if SPLS had already reported its third quarter.

- High PEs had been trending down from 25.6 in 2002 to 21.9 in 2006 which the group took notice of.  To estimate the Forecast High PE, they were given five choices (23.6, 21.0, 19.6, 18.0, and 16.7) but only 23.6, the average High PE for the past 5 years, was explained.  The Consensus chose 21.0 whereas Ken said he would have chosen 19.6. 

- After deciding to use 15.5 as the Forecast Low PE, participants were asked to make their last judgment call, the Forecast Low Price.  The SSG’s first option of $21.20 (Forecast PE x Forecast Low EPS) was thought too close to the present price of $22.48 so the group decided on $18.00 which was 80% of the present price.

Discussion: Armin’s SSG and Take Stock:

- My method for making an EPS estimate is to check all the long-term estimates I know of and usually wind up choosing Reuters less 1 Standard Deviation (which the web site provides).  I believe this appropriately “wrings out” analyst over-optimism and provides a reasonably conservative result.  And, for every SSG, I always check all the estimates to learn which is out-of-whack and which is in the ball-park.

- SPLS was the Stock to Study in the November 2007 issue of Better Investing magazine.  All six of the analysts I checked at that time have since lowered their EPS estimates by about 2% on average.

- On 5-1-08, when I updated my SSGs, those six analysts were estimating long-term EPS at around 13-13.50% with S&P and FactSet CallStreet high at 14.00% and Value Line low at 11.50%; Zacks was 12.64%, Reuters was 13.45%, and First Call was 13.65%.  Reuters less 1 Standard Deviation was 10.06%, and that was the basis for my 10.00% SSG estimate. 

- Take Stock was way, way low at 4.8%, even lower than the lowest of any analyst.  At Reuters, 8 analysts estimated from 8.0% to 20.0% while at FactSet CallStreet, 7 analysts estimated from 8.0% to 17.0%.

- SPLS High PE had declined from 23.6 in 2002 to 21.9 in 2006.  Whereas the Consensus SSG lowered its Forecast High PE to 21.0, I was less optimistic about the future and lowered mine even more to 17.5.  I also lowered my Forecast Low PE more than the Consensus for the same reason.

- Take Stock gave SPLS a 1.6 for Quality, which is unacceptable as 3.4 is the minimum required to pass muster, with 6.7 desired, and 10 the max. By comparison, S&P gave SPLS a B+ for Quality which is fourth out of its 8 grades.

- Take Stock’s 23.2 Upside/Downside Ratio, which I calculated because the program does not use that concept, is high because its present price ($21.70) was nearly the same as its Forecast Low Price ($20.98). 

Conclusions about Comparisons:

- Different judgments for High and Low Forecast PEs account for why the Consensus got a near SSG Buy (14.7% Total Return) and I did not (13.3%).  Declining trends are especially difficult to forecast and I think it’s largely a matter of guesswork. 

- NAIC/BI criteria require a minimum 15.0% Total Return as one of the SSG Buy criteria…..not to be confused with 15.0% minimum growth for a small company.  See NAIC (now BI) Stock Selection Handbook, 2003 edition, page 121.

- I always compare my Forecast High Price to Value Line’s to make sure that my SSGs do not substantially exceed VL, at least not without a good reason.  Here, all 5 SSGs were below VL’s estimated High Price which is expressed as a range from a low end of X to a high end of Y dollars (VL’s low is not comparable to the SSG’s Forecast Low Price).

- Ken said he usually projects SSG growth from the last Fiscal Year.  Unlike Ken, I almost always project future growth from the last quarter of actual data and some people even project from the next FY by estimating the fourth quarter, a method that can have significant consequences for our SSGs.

- Although Take Stock does not use the Upside/Downside concept, it is not programmed to use a lower Forecast Low Price (e.g., 80% of the present price like the Consensus used) in situations like SPLS, where the present price is close to the Forecast Low Price. I think this is a major shortcoming.

-  Finding and Comparing Competitors:  I like to know how the company I'm SSGing compares to its competitors (which are not the same as its peers).  Hoovers.com and Yahoo Finance list the top, direct competitors of Staples as: Office Depot (ODP), Office Max (OMX), and Corporate Express (pvt). 

** Unfortunately, the Online SSG at the BI website, a feature separate from but used by the Online Stock Study, does not show competitors at all, and only provides one company (ODP) as a peer to Staples.  Whatever peers are shown cannot be added to or revised.  I think these are major shortcomings.

** To compare to competitors and to industry averages, I like to use the Ratios at Reuters.com and the Key Ratios at MSNMoney.com, both of which are easily reached from the Research Links page at StockCentral.

- Data Comparisons: I got a 2.6 Upside–Downside Ratio with Hemscott data compared to 3.0 with S&P data, even though my judgments were the same, which I think is a noteworthy difference since the NAIC/BI Buy criteria is 3.0 minimum.  And, Take Stock’s price was inexplicably $1.35/share less than the Hemscott data file although both had the same date.

Armin Fields

The Comparing SSGs Workshop will continue on Wednesday, May 7 with a discussion of the BI Online Stock Study for Proctor & Gamble (PG). 

It will be here, in this “Workshop” forum, and I hope you’ll join me.

How do I set up the stock screener?

Pam

email   pgarrity1@msn.com

Armin:

You indicated that "EPS estimates less one standard deviation" are found on the Reuters.com website.  Where exactly are they found?  Thanks.

Steve

Hey Steve:

Reuters just recently stopped making any long-term EPS estimates whatsoever: no estimated rates, no High and Low estimate, no number of analysts, and no Standard Deviations.

Sad!!

The EPS estimate data that I used all the time was on Reuters Estimate page for each stock.

Other websites continue to offer free long-term EPS estimates which you can easily get from Stock Central's Research Links page (FactSet CallStreet, First Call, and Zacks), but there's no site I know of that offers the Standard Deviation.

Armin