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Report example for Keynote Systems. (28Jan2010)
Technical Analysis
See chart and quickly understand the side
trend between lines 11.4 and 9.5 which therefore
represent rispectively resistance and support.
KEYN Stock Evaluation
I will continue to track closely the current ratios and metrics for KEYN and evaluate them against historical averages . This framework will give me the tools necessary to understand when a downgrade from my Undervalued rating will be most timely.
Summary
The NASDAQ has achieved some pretty solid gains in the last twelve months. Interestingly, in regards to KEYN, the Technology sector has actual outperformed the NASDAQ over this intermediate time period. I believe my Undervalued is still justified by analysis of historical valuation metrics .
KEYN Revenue
Cash earnings is the most important factor in my analysis, but it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic I look very closely at revenue numbers as my second most important factor in valuing a company's stock. Looking at Price to Sales per share ranges based on historical data for KEYN: the high and low end of the Price to Sales per share ratios are 5.33x and 3.19x respectively.
Notice that KEYN's current Price to Sales per share ratio is 1.80x, which is quite a bit below what I consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $9.8, KEYN is 60% below where I would expect to see it. This will beneficially factor into final analysis of KEYN as it is not often that this stock sinks to these levels.
KEYN Cash Earnings
With a historical high Cash Earnings per share ratio of 44.84 and a historical low Cash Earnings per share ratio of 25.80, an investor can relate where value becomes optimal.
At a difference of 64% below the average historical Price to Cash Earnings ratio, my view would be quite positive at this point. However, as with all metrics, I need to also take other factors into account when looking at KEYN. While I view better Cash Earnings metrics as very important, if the market is slow to identify this value, or if Cash Earnings were to fall from these levels, I would become more neutral .
KEYN Dividends
A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive rating. That being said, I don't require dividend payments for company's whose management has elected to forgo them entirely.
KEYN has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In this case, the estimated annual dividend is $0.20 producing a current dividend yield of 2.00%. The highest dividend yield from KEYN in recent history was 2.96% while the lowest dividend yield was 0.00%. A dividend yield of 30% above the historical median should be enticing. KEYN receives a positive boost in my view because as you know, equity at its core is simply a claim on future dividends.
Evaluating Management
In evaluating management, I focus on three key measures, which combined,
produce Return on Equity (ROE). These measures are the investing of company
assets, the use of leverage, and the day to day operation of the business. Below
I summarize where each of these measures are currently compared to their
average levels over the last five years. This gives a good indication of the
strengths and weaknesses of each area.
Asset Turnover Ratio
In analyzing the first key for evaluating management I need to look at whether KEYN’s management is efficiently investing company assets. For this purpose I look at calculating the Asset Turnover Ratio (ATO) which consists of sales divided by assets. At a rate of 0.44x at their last reporting, this measure of management’s investing ability is significantly above its 5 year average by 29%.
Leverage
The second metric to evaluate management is to look at their financing activities, which shows whether the management of KEYN is being effective in their use of leverage. For this I utilize the Assets to Equity Ratio. KEYN’s last reported Assets to Equity Ratio was 1.21x which is above its historical 5-year average. It is important to remember that, while higher leverage can be acceptable, management must adequately justify the change with increasing sales and earnings.
Profit Margin
The third measure of management effectiveness is profit margin, which for KEYN is currently significantly below its 5 year average. Profit Margin (MGN) is the most visible as well as most popular measure of management efficacy and is computed by dividing earnings by sales. With a last reported Profit Margin of 4.07%, KEYN is significantly below its historical average. While a profit margin reduction of this magnitude may reflect management difficulties, it may also reflect a significant change in industry conditions not isolated to KEYN.
Notes for Management
While each of these measures is useful by themselves, the combination (i.e. ROE) is the ultimate indicator of management effectiveness for KEYN. Most firms generate an after-tax ROE of somewhere between 10% and 20% with an average of about 15% per year. In the case of KEYN, at its last reporting, the ROE of 2.20% was poor in comparison to the averages.