I went to the library to get the latest Value Line on MHK and cross-check my data from the S&P files before I responded. As seems to be the case over 50% of the time, VL's data was different in two years, but in favor of MHK (better EPS and NI figures). I made the changes in my SSG and tweaked it a little.
>>>>> Another issue for me is that it's near its 52 week high, and in fact it's at the end of a long run up, from 20 a year and a half ago to the mid 50s now. Can it continue that?
Gee, can't you say that about your AZO? ;>) And how does a stock double over 5 years if it doesn't break new highs? As William O'Neil likes to say, it does it one dollar at a time.
>>>>>If you look at the Pert A, quarter-over-quarter sales, the last time they were in double digits was 9/99, and the last five quarters have all been under 4%, with two negative quarters. This sort of slowdown is one of the key warning flags for me; if sales slow down dramatically, either they have to pick back up again equally dramatically, or earnings are going to start to collapse.
Valid points. But the Dal-Tile acquisition adds about a billion in sales to a company stuck at the $3 bil mark the last few years.
>>>>Using the Preferred Procedure and a 10% sales growth rate, I get five year earnings of 3.83. Using the calculated average high and low PEs, I get a high five years out of only 63.2, using the severe recent market low of 18.4, this gives me a sell signal.
I got earnings of $5.25 in 2005 using 11.7% growth (less than consensus) and quite a difference from your calculation. Considering VL just upped their 2002 estimate to $3.70, I'm comfortable with my estimate.
Here's a snippet from an email exchange with a fellow club member who expressed similar doubts about MHK:
>>>>I am using an unweighted average, and this average is diminished by a particularly low high PE (9.8) in 2000. Perhaps you adjusted your forecast high PE upward because of that?
I eliminated the "high" PE of 9.8 in 2000 as an outlier. Just my judgment. That left an ave. high of 18.8, which with the new data is coincidentally the PE for 1996. It seems reasonable to me in this day of high PEs, so I left it. Besides, my SSG gave a current PE of 16.8 so a high of 18.8 did not seem unreasonable. I also considered the fact that the ave. S&P 500 PE is what, 25?
>>>>>My forecasted low price is $25.84, which is at the upper end of all the estimates except for the estimate you used. You used the estimate that is 20% less than the current price. This seems risky to me when the current PE is near the average high PE.
I redid the SSG with a low of $40, barely putting it in the buy zone. Any lower and it's a hold. Another judgment point I made. Seems to me that choosing the low price is always the biggest part of applying judgment, and of course you can make or break an SSG output this way. Perhaps I'm too sanguine here. My rationale was based on the recovering economy, the strong move MHK has made since September lows, looking at a stock graph for support levels, and thinking that a 45% haircut was unreasonable for a textile company that just added $1 bil in sales by buying Dal-Tile and is now enjoying increased EPS estimates. If it was a high-flying software or tech company, then I would be less optimistic and would choose a lower low. But it's a textile company! Perhaps I just wanted the SSG to support my thesis. ;>) I admit it's not the best looking SSG, but everything else in my analysis looked strong.
VL said this 1/11/02: We expect EPS up over 20% vs. same Q last yr.....MHK is taking market share from weaker competitors (I like that!).... we have raised 2002 estimates to $3.70 (my Graham estimate used only $3.33 and gave a FV of $73. I really like that).....Dal-Tile did approx. $1 bil in sales last year (helping the slowing revenue growth in my PERT) ...
VL also cautions, " MHK might tread water for a while, since it now trades at a higher PE than it has for some time." I find this statement quite puzzling, since they give it their highest rating, a 1. That statement is as confounding as Morningstar giving a 5 star rating to one of my funds when it is being beaten by it competition and lost 30% in the last year!
- Kris |
