This blog post is presented in response to questions and comments on recent articles I published. Therefore, I offer this following post to clarify certain confusions that readers had.
My articles were dealing with valuation discussions about dividend growth stocks to include utilities. Three utility companies were discussed where I felt there was some confusion regarding their current valuations. Therefore, I offer this blog post through the lens of FAST Graphs™ the fundamentals analyzer software tool to hopefully cast a light upon the darkness.
FAST Graphs™ are a “tool to think with” and as such, have no agenda of their own. Instead, they are designed to provide “essential fundamentals at a glance” and allow the user to interpret the data according to their own philosophies, strategies and beliefs. In this context, FAST Graphs™ are the deliverer or reporter of important information.
Essentially, the FAST Graphs™ stock research tool provides investors many benefits, but there are four things they do especially well.
- 1. FAST Graphs provide a historical review and instantaneous perspective of how well the business behind the stock has historically performed.
- 2. FAST Graphs provide an instantaneous perspective of how the market has historically capitalized or priced the company’s operating results or business performance.
- 3. FAST Graphs provide a consensus estimate of leading analysts near term earnings expectations for a company’s current fiscal year and next fiscal year followed by a five year consensus estimate.
- 4. FAST Graphs provide the opportunity to override and therefore input the user’s own estimates or expectations of the company’s future prospects.
This Blog post will primarily look at valuation through the lens of FAST Graphs. I consider this powerful graphing tool an essential first step when attempting to determine both fair value and the potential return that a common stock offers me. However, they are not the final step. Instead, they provide a very efficient mechanism that allows me to determine whether I want to embark on a more comprehensive research effort or not. Consequently, they can save me (and you) from wasting a lot of my time and effort towards a lost cause.
In addition to providing some short commentary on each of the companies covered with this blog post, the reader will be provided live working FAST Graphs™ on each selection.
(Follow this link to free, live, and fully functioning F.A.S.T. Graphs™ on the companies discussed in this blog post. Run this “tool to think with” through its paces. Draw graphs displaying 2 to 20 years of history. Discover how this tool dynamically re-evaluates valuation based on the company’s earnings and price relationship.)
In order to get the maximum benefit from this powerful stock research tool, it’s imperative that multiple graphs covering various time frames are drawn. To be clear, when I use this stock research tool, I start with the 15-year default and then I will expand out to the 20-year, followed by a 10-year, followed by a 5-year, and finally a 2-year graph. This allows me to see the dynamic of the company’s growth rates as they change. I suggest that all subscribers run multiple charts on any company they are examining.
FAST Graphs™ are a dynamic tool that calculates the company’s changing growth rates each time a different time period is selected. Therefore, the user can determine such things as whether the company’s earnings growth rates are accelerating, decelerating or staying the same, and see major inflection points, if any, in a company’s business vividly revealed. This is a major component of the “tools to think with” aspect of this fundamental research tool.
To summarize and clarify, the following commentary on each of the three companies covered in this blog post is offered as a valuation preview prior to a more comprehensive research effort. Stated more clearly, what follows is an earnings and price correlated view of each company based solely on the “fundamentals at a glance” provided by this powerful stock research tool.
Transalta (TAC) Undervalued Historically But Future Returns Questionable
A quick snapshot from the company’s website:
“Beginning as a small, local power company in 1909, we have transformed over the last century to become an experienced and well respected power generator and wholesale marketer of electricity. With approximately $3 billion in annual revenue, more than $9 billion in assets, and power plants in Canada, the United States and Australia, we’ve proven our worth as a power generator, as a community member, and as a solid investment.”
Let’s examine Transalta (TAC), utilizing the four primary features that FAST Graphs™ provide.
1. FAST Graphs provide a historical review and instantaneous perspective of how well the business behind the stock has historically performed.
Looking at the 12-year earnings and price correlated FAST Graphs™ shows that Transalta has averaged 7% earnings growth since going public in July of 2001. However, note the cyclical nature of the company’s earnings change per year highlighted in yellow at the bottom of the graph. The orange line plots the company’s earnings per share and represents a fair value PE of 15.
2. FAST Graphs provide an instantaneous perspective of how the market has historically capitalized or priced the company’s operating results or business performance.
In this example, we see that the market has normally applied a premium valuation represented by the blue normal PE ratio line. The calculated normal PE ratio has been 23.2. By visually looking at the graph you can see that this stock has traded at the 23.2 PE quite often. However, you can also see periods of time where the price has been above and below this normal valuation. Moreover, the current blended PE of 13.3 appears to represent very attractive valuation from the historical perspective.
When reviewing the performance table below, the reader should note that high beginning valuation based on the normal PE to today’s low valuation has diminished performance. The dividend component remained strong based on the company’s operating earnings growth. However, capital appreciation was hurt by high valuation, but nevertheless has remained positive.
3. FAST Graphs provide a consensus estimate of leading analysts near term earnings expectations for a company’s current fiscal year and next fiscal year followed by a five year consensus estimate.
Unfortunately, there are no analysts currently providing estimates for Transalta’s near or longer-term earnings growth. Consequently, FAST Graphs™ automatically default to calculating the company’s historical EPS growth since 2007, which has only averaged 1% per annum (note that when analyst estimates are not available, FAST Graphs™ are programmed to find the most relevant average historical earnings results of five years or longer). On this basis, the majority of future return would be based on the company’s current dividend yield and modest growth expectations. Therefore, although this company may be fairly valued, future returns appear relatively weak based on earnings growth.
4. FAST Graphs provide the opportunity to override and therefore input the user’s own estimates or expectations of the company’s future prospects.
The following screenshot represents a spot of the FAST Graphs™ navigation bar that allows subscribers to check consensus estimates from Zacks. The user can check these numbers against the Capital IQ data provided on the graph, and if different, input the Zacks’ data as an override. Or another common method that many investors use for forecasting is to run the company’s five-year historical earnings growth as a proxy for the next five years estimate (note that this