Case Study - Backward Valuation (Time to Sell?)

An unstoppable bull. Market has been making highs every other day. Needless to say, my portfolio has been hitting record valuation every other day as well. It’s only February and my Net Worth has went up 11% YTD. Portfolio value has ran up 20% YTD. This is crazy.

When everything is jolly, I am quite cautious in this market looking at opportunity to reduce my holdings whenever market provides me with the incentive to. Well, buying is easy, the difficult part is to do a clean divorce with your holdings. Maybe the problem is when I liquidate, I may lose out on future gain (if any). Also it does not feel good to hold less in a bull market.  Emotion aside, I guess I will need to stick to my resolve if the numbers tell me the stock is now not a price which is attractive in fact it could be a premium its about time I say goodbye to this company no matter how good it is.

The company in question is PICO Far East. I have been holding this company since 2013, providing me with a dividend of 6% annually for the past few years (who says only REITS) provide yield that high. This is a stock providing me the best of both worlds. Growth and Yield.

Bought at a price of $2. This has move up substantially these 2 months to 2.9 today. Thoughts start to run in my mind the past week. Is the price right to bid farewell? I shall try to find out calculating backwards

EPS Model

Using a 5 Year horizon, a discount rate of 15% and a growth rate of 7% based on the arguments stated below. By reversing the calculation, I will be calculating how much EPS will have to be this year to satisfy a price of 2.9.

Current price (P) = HKD 2.9

P = FP/(1+R)^N

FP=P x (1+R)^N

   = 2.9(1.15)^5

   = 5.8

Current PE is trading at 11x earnings not seen since 2012. One of the highest since 2009. Average PE stands at 10.99 (Period 2009-2016)

The missing value here is Future EPS

FP = EPS x FPE

5.8 = EPS x 10.99

EPS = 0.5276

F = EPS(1+R)^N

0.5276 = EPS (1.07)^5

EPS = 0.5276/(1.07)^5

       = 0.37

Using the following assumption, earnings per share for FY16 is 24.57. EPS will need to be 37cents to justify a price of HKD2.9. This indicates that EPS will need to grow close to 50% for FY17. To do that, revenue will need to grow substantially to justify share an EPS.

I have an emotional attachment to this company and love the way the management carry out their business. However the numbers tell me the price has gone ahead of what the company is actually worth.

I will need to trust the numbers that I have calculated and come back to this company when prices are more reasonable. Given a choice now I will never add on to this company at this price. So if i will not but it also means it could be time to sell. Probably its time to say goodbye and hopefully hello in future PICO.

Case Study - Backward Valuation (Time to Sell?)

Febuary Net Worth - Cross 250K Mark

  

Ever Since Trump won the Election, world markets have been on drugs. The rally does not seem to stop. Our STI is closing on 3,100 level, DOW, Nasdaq and the S&P have been hitting record high every other day. How long will this continue no one will know. I am kind of jittery now with how much markets have done their run up

I believe all good things will come to an end. I have not been adding additional companies to my holdings except for Under Armor which I have state my case in my previous post.

Looking to sell some of my holdings in fact as they have benefit from this bull run. I find valuation to be probably just about right or trading at a slight premium to what they are actually worth. I am very cautions in this extremely happy market. The sad thing about this run up is that my War Chest is starting to grow. Do not really like cash sitting around not working.

Have shorted some futures contract to hedge my exposure as well. Should market snap I will be able to use the gain to add on to additional position should market starts to catch a cold and do a pullback .

Achievement

My networth has finally cross the 250K mark (Sitting on around 90K Cash). Did not expect this to happen at the start of the year. Its not a convincing cross though as its mostly capital gains from the recent run up, but still a positive for me as I crawl closer to my goal of hitting 1 million by the time I am 40.

Networth

The chart below shows my personal Networth growth ever since I started investing. The power of compounding is really true

Feb Holdings

No.	Counter	No. of Shares	Market Price	Total Value based on Market Price (Base Currency)	Total Value based on Market Price (SGD)	Allocation(%)
1	Riverstone Holdings Ltd	22,000	0.88	19,360	19,360	11.90%
2	Food Empire	25,000	0.62	15,500	15,500	9.53%
3	Low Keng Huat	10,000	0.60	5,950	5,950	3.66%
4	Bank of China	38,000	3.68	139,840	24,533	15.08%
5	PICO	108,000	2.61	281,880	49,453	30.40%
6	Chow Tai Fook	12,000	6.78	81,360	14,274	8.77%
7	Prada	500	31.55	15,775	2,768	1.70%
8	Sa Sa	21,000	3.26	68,460	12,011	7.38%
9	Belle Int	8,000	5.15	41,200	7,228	4.44%
10	Alibaba	80	103.57	8,286	11,600	7.13%
				Total(SGD)	162,676	100.00%

Almost all my holdings has an improvement in price movement hence my portfolio has gain substantially in Jan.

Pico Far East (0752:HK) remains my largest holdings. They have recently released their FY16 result and I am optimistic on their business execution for the next 12 months. Dividends has also increased this year which is a slight bonus for me. I am not contemplating on selling a small portion of my holdings in Pico.

There is going to be a string of earnings result in Feb and March. Except for Pico and Alibaba, all my companies have yet to release their result. I am cautiously optimistic on all of them.

The only stock I can still accumulate is Alibaba. Had a blowout result but the price did not appreciate that much. Waiting for March bonus before making a decision.

Under Armor Drop Present Value?

I have initiated a position in Under Armour

The Catalyst

I was watching CNBC new last week and they were talking about Under Armour. When they the chart of UAA appears on my TV screen

This got me interested. The intraday fall looks like the company has fallen off a cliff. Dropping an impressive 24% in a single day !

Something must have happened right ? As I listen to the commentary it turns out that their result has not met analyst estimate , their CFO has been dismissed ( they put it in a nicer term . He has left the company due to personal reason ) , lastly, CEO gave a bleak outlook for 2017. The company is not going to grow as much as what the market expected.

I decided to look at a longer time horizon of Under Armour. The stock has fallen from its peak of 50+ to current low 20’s

The thoughts that went thought my mind at the point of time was a plunge of 25% in a day and more than 60% from its peak, things should not be that bad right? There should be some value in this company. Could the price drop be too much such that it provides me with a case to buy?

Its been sometime since I got i

Personal Thoughts

Under Armour is a brand that I see huge potential. Although I do not own any Under Armour brand apparel at the moment, the brand strikes to me as a premium sports brand at the same level as Adidas and Nike. Puma, Reebok and even New Balance are in the second tier sports apparel. If I were given Puma, Reebok , New Balance and Under Armour, without a doubt I will choose Under Armour over the other 3.

My first encounter with this brand was a few years back while watching EPL, Under Armour are the shirt sponsor of Tottenham then( Currently they still are). Well at the time I was just wondering what this brand was and I believe at that time its not popular or even non existence in Singapore. It probably was already very popular in the USA. However in the past 2 years especially, this brand starts to have a strong inprint in my mind sub consciously. I used to go to the gym and a lot of gym guys and personal trainers wear this brand. Then came Stephen Curry, as a person who watch basketball, he was sponsored by Under Armour. Considering our country do not have many shops selling this brand, i.e the major sports retailer like Royal Sporting House, World of Sports, and they have an unusually low number of outlet in Singapore but the brand can have such an impact on me shows that they must have done something right. Probably it’s just me but I do see more people on the streets wearing this brand compared to years ago.

Digging for Information

Decided to know the history of this brand. It’s amazing when I read that this company was founded in 1996 by Kevin Plank, who is still the CEO of Under Armour. In a short span of 20 years, the company has made a name for itself as a branded sports apparel competing with the likes Nike and Adidas. His business started in the basement of his grandmother’s house and he sold his products from the trunk of his car. He sold T-shirt using synthetic fiber as he was sick of having to change out of soaked wet T-Shirt worn under his jersey. A number of deals started to come along the way and the company started to grow. They become the outfitter of XFL football league(League fail after its inauguration season). Initially Under Armour only sells Apparel, mainly their UA tech, their performance apparel wicks perspiration out of the skin instead of absorbing them. They only did enter the footwear business in the early 2008. Considering Under Armour is such a new company as compared to Nike and Adidas, it does have the potential to be as big as these 2 heavyweights.

A 2015 data from the internet

Its obvious there is still much room for growth for Under Armour as compared to Adidas and Nike.

Why did the price Collapse?

Under Armour has fallen from a high of 50 to today’s low 20’s. So what was causing the collapse? When its price was at 50, the P/E of went as high as 111. There is nothing wrong with such a high PE. The company will just need to deliver extremely good result for an extended period of time. The P/E for Nike is around 22 currently to put things into perspective. Time just ran out in 2016 when they are unable to to deliver. I guess the stock exploded when Stephen Curry exploded on the screen. That was the main catalyst. He is still good but with such a high stock price, earnings will need to grow at a very high rate to satisfy the market. The PE has fallen tremendously to around 40 level now. Is 40 expensive? Compared to Nike yes it is but it’s cheaper than its PE for the past few years. The PE will gradually fall if they continue to grow their EPS which is highly possible.

Currently investors are not optimistic about Under Armour’s future growth

Is Under Armor a Buy?

Since it’s a growth company, cash flow method cannot be used. Instead I will use EPS model to try and get a value.

To determine the future stock price I will need to have 2 values

• Future EPS
• Future PE

Future EPS

The formula to compute Future EPS is as follows:

F = EPS ( 1+R)^N

Where:

• F= Future EPS
• EPS = Current EPS
• R = Compound growth rate
• N = number of years in the future

CAGR works out to be 14.19% hence we will use a compound growth rate of 14.19%

The EPS is at 0.45 for FY16

I will take a 5 year time period

F = 0.45(1+0.1419)^5

  = 0.8736

Future PE

I will now need to find the future PE of  Under Armor

The Historical PE ratio range from 41 to 76.78

The average PE over the 10 year period is 49.35

FP = EPS x FPE

Where

• FP = Future price
• EPS = Future EPS
• FPE = Future PE

FP = 0.8736 x 49.35

     = 43.11

Step2: Calculate Today’s Intrinsic Value

The intrinsic present value calculation is as follow:

P = FP/(1+R)^N

Where

• P= present value of future price
• FP = Future stock price
• R= minimum acceptable rate of return
• Number of years

P = 43.11/(1.1)^5

   = 26.76

The PV of future price makes out to be 26.76 with the above assumption. Since current price is at 21, the company seems to be oversold. However should earnings continue to deteriorate the price will definitely head lower.

This gives me a case to Buy UAA.

Final Thoughts

Nike is trading at a PE of 22 with growth expected to be around 7%. CEO Plank expects Under Armor to grow at around 12% for 2017 instead of the 20+ % it used to grow at. Well as the base starts to get bigger, growth at 20+% may not be that easy to achieve. Growing from 1K to 2k is easier than growing from 10K to 20K. 12% growth on 2016 numbers is still not smaller than 20% growth on 2015 numbers. Under Armor is currently trading at a PE of 46 that is around 2 times the PE of Nike. Market is currently pricing a 14% growth in revenue for that PE.

With my calculation, I believe the stock is a little undervalued but there is not much margin of safety. Growth in North America is slowing down. Under Armor is seeing double digit growth in Asia particularly in China. Basketball in huge in China and Stephen Curry shoes are going to sell well as it seems that Under Armor seems to be making Curry (SC) of UA just like Nike branding Jordan the basketball shoe Nike.

In terms of sponsorship deals Under Armor is still lagging far behind Nike and Adidas. It’s only got Tottenham and Deportivo for soccer (Adidas has a whole bunch of teams), Stephen Curry for basketball (Nike has an entire Army of players). Not sure about American Football as it’s not a sport that is popular in Singapore. Well it’s where Plank starts his business he got to have got it right.

I have decided to be a shareholder of Under Armor although the price may not be cheap but it’s reasonable. I do see a future in this brand and hopefully it will be able to compete with the like of Nike and Adidas in Future. Plank seems to be a very good business person who can grow a company from the basement of his grandma house to an 8.5 Billion company today.