This weekend, my two dearest friends sent their sons off to college for the first time. Both young men are well-equipped to handle the change: They’re affable, hard-working, and bright. No matter how difficult, it’s time to let go. (I’ll have to remember that when I’m in my friends' shoes a few years from now!)
In honor of those parents who packed up their sons and daughters for college--and in honor of the kids, too--we’re dedicating this week’s column to solid companies that it’s time to let go of.
Specifically, we screened for companies with Morningstar Economic Moat Ratings of wide or narrow whose stocks have returned more than twice as much as the S&P 500 so far this year. We narrowed the list further by isolating those stocks trading 50% or more above our fair value estimates, suggesting that they’re significantly overpriced. Fifteen names made the list. There’s plenty to like about these companies--just not at their stock prices today.
Here’s what our analysts had to say about five of the names after their latest earnings reports.
Ansys (ANSS)
Fair value estimate: US$140.00
Last close (as of 8/21/19): US$218.04
Fair value uncertainty: Medium
“Ansys reported strong second-quarter results as it outperformed our financial expectations. Management attributed the strong top-line performance to some lumpiness in the recognition of revenue brought on by multi-year contracts (namely in the United Kingdom and Other Asia-Pacific). However, we still think the firm’s underlying performance was strong, and Ansys remains a premier simulation provider within the surging high-tech, aerospace & defense, and automotive sectors, among others. The firm moderately improved its full-year 2019 financial forecast given its first-half performance. We have taken the refreshed outlook into account, and we raise our fair value estimate to US$140 per share from US$135. With the recent additions of Granta Design, Helic, and DfR Solutions, we believe the firm’s high-tech simulation offerings have become well rounded and are more complete solutions versus peers. We continue to believe in Ansys’ gold-standard, narrow-moat position in the simulation software market. We see good long-term growth potential as products get smarter and clients look to speed their time to market and improve development efficiency. Still, with shares trading at a stretched valuation, we’d seek a wider margin of safety before committing new capital to the name.”
Andrew Lange, equity analyst
Boston Beer (SAM)
Fair value estimate: US$244.00
Last close (as of 8/21/19): US$439.60
Fair value uncertainty: Medium
“Narrow-moat Boston Beer's sales momentum continued through the second quarter of 2019, with revenue up 16.6% (helped by a 17% increase in shipment volume) and depletions growing by a double-digit rate for the fifth quarter in a row. The increase in revenue was largely driven by the success of the Truly Hard Seltzer and Twisted Tea brands but slightly tempered by weakness at the Samuel Adams and Angry Orchard brands. From a profitability perspective, the increased usage of third-party breweries (continuing the trend seen over the last several quarters) coupled with higher temporary labor costs at company-owned breweries weighed on gross margin, which fell 210 basis points to 49.9%. However, we're maintaining our full-year outlook for gross margin at 51% (still within management's narrowed range of 50% to 51% from 50% to 52% prior) as we think the firm's efforts to extract costs from its operations and strengthen its manufacturing capabilities (including an automated line for variety packs of hard seltzer, which began production this quarter) should help keep its bottom line intact.
"We don’t intend to alter our near-term sales outlook materially (our current estimate for full-year volume growth stands around 12.5%, versus management's updated outlook for 13% to 18%, excluding the impact from the Dogfish Head acquisition), and anticipate little change to our fair value estimate. We stand by our thesis that longer term, an industrywide deceleration in craft beer volumes will slow Boston Beer’s top-line gains, and we reiterate our outlook for around 5% sales growth toward the end of our forecast period. Our outlook for profitability (low-teens average operating margin over the next five years) should remain intact. After incorporating second-quarter results, we continue to view shares as substantially overvalued.”
Jaime Katz, senior analyst
Match Group (MTCH)
Fair value estimate: US$55.00
Last close (as of 8/21/19): US$85.35
Fair value uncertainty: High
“While Match Group reported a strong second quarter and upped its full-year revenue and EBITDA guidance, we remain convinced that the stock is overvalued. Yes, this narrow-moat name has consistently outperformed consensus expectations; however, even in our bullish scenario, we don’t believe the current valuation is warranted. While we continue to expect strong top-line growth throughout the next five years, likely to be accompanied by impressive margin expansion, current valuation multiples imply much higher revenue growth and margin expansion. Match is trading at 12 and 28 times our 2020 sales and adjusted EBITDA projections, respectively. Match shares also trade at a 2020 free cash flow yield of only 2.9%, compared with wide-moat Facebook’s 5.5%. We have increased our projections due to the firm’s better-than-expected results, raising our assumptions for user growth and monetization. Our fair value estimate is now $55 per share, up from $50, but the shares are still [2]-star rated.”
Ali Mogharabi, senior analyst
Ormat Technologies (ORA)
Fair value estimate: US$47.00
Last close (as of 8/21/19): US$72.35
Fair value uncertainty: Medium
“We are reaffirming our US$47 fair value estimate for Ormat Technologies after the company reported second-quarter adjusted EBITDA of US$94.9 million, up from US$80.8 million in the same year-ago period. Management reaffirmed its 2019 revenue guidance of US$720 million-$742 million and increased its adjusted EBITDA expectations to US$375 million-$385 million, up from the previous US$370 million-$380 million.
"We remain focused on Ormat's margins and management's ability to drive margin improvement. Margins at the electricity segment were 41.7% in the second quarter, down from 48.2% in the first quarter, excluding Puna. We expect full-year margins of 42% and annual 0.5% improvement in our five-year forecast. Puna is expected to be back on line early next year.
"Margins at the product segment continue to be weak at 20.6% in the quarter. This is an improvement from first-quarter margins of 19.2% but below our 30% margin expectations. Blended margins for the electricity, product, and storage units was 35.4%, below our full-year 38.3% expectations.
"Ormat's market valuation is 29 times our 2020 earnings expectations, which we think is rich even when considering our expectations for 10% annual earnings growth over the next five years. Management notched solid revenue growth in the quarter, but margins remain our focus.”
Andrew Bischof, senior equity analyst
SBA Communications (SBAC)
Fair value estimate: US$155.00
Last close (as of 8/21/19): US$260.42
Fair value uncertainty: High
“Narrow-moat SBA Communications posted another excellent quarter. The United States, which accounts for about three fourths of total revenue, remains exceptionally strong and shows no signs of slowing, and strength in Brazil, SBA's largest non-U.S. market, drove excellent performance internationally. The quarter beat consensus estimates on the top and bottom lines and led to SBA raising its full-year outlook. However, we've been expecting this strength to persist, and our forecast for the remainder of 2019 already leaves us within the revised guidance. With a strong U.S. economy and all four carriers spending heavily to upgrade their networks, this seems like the best of times. Without substantial acceleration in revenue growth that is already historically high, we can't justify the current valuation. We don't expect a material change to our US$152 fair value estimate, leaving this excellent company overvalued.”
Matthew Dolgin, equity analyst
