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Report example for Techne Corporation (21Jan2010)
Technical Analysis
During last mounth Tech has pictured two tops before
breaking down towards a support line in area $66.
Major volumes with red candles should not preclude
a probable retracement with an average side trending
line on a second support at $64.5.
TECH Stock Evaluation
TECH’s price has fallen near $66.00 and I see the current lower price as a positive in my analysis as the company has not revised fundamental guidance. The upgrade means that the current price has fallen below a strategic threshold.
Summary
Although there has been no revision to cash earnings estimates, the price of TECH has crossed a significant threshold in order to cause the upgrade and has not yet gotten very much of the upside in the market.
TECH Revenue
For a long time, value investors have used the current share price relative to sales per share levels as an important valuation tool. When looking at TECH through this framework, I can see that Price to Sales per share ratios over the last 10 years are in the range between 14.80x and 9.37x .
Utilizing this range I can see that TECH’s current Price to Sales per share ratio of 8.69x is quite a bit below what I consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $65.00, TECH is 30% below where we would expect to see it. This will beneficially factor into my final analysis of TECH as it is not often that this stock sinks to these levels.
TECH Cash Earnings
Looking at TECH, specifically in their Cash Earnings capabilities, at the last 10 years I can get a good understanding of what investors have grown to expect from TECH. For example, TECH's Cash Earnings ratio per share has fluctuated between 23.35 and 36.97 over this historical timeframe.
So with TECH's current price (latest close of $66.90) and most recent level of Cash Earnings reported, I see significant opportunity from a value perspective. At its current price level, TECH is 25% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with TECH.
TECH Dividends
Comparable to my analysis of Sales and Cash Earnings per share, I examine dividend yields from TECH against the historic high and low levels over an available data range. Because TECH has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In TECH’s case, the estimated annual dividend is $1.04 producing a current dividend yield of 1.53%. The highest dividend yield from TECH in recent history was 2.29% while the lowest dividend yield was 0.00%. TECH’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 33.62% above the median which weighs very positively on my analysis of TECH.
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
First, I want to evaluate managements ability to efficiently invest the company assets. For that purpose, I will utilize the Asset Turnover Ratio (ATO) which consists of sales divided by assets. I can see that this measure of management's investing ability was TECH's current rate of 0.56x as of last data reporting, and it is moderately above its 5 year average.
Leverage
In evaluating TECH's management team, I will look at how effeciently are they utilizing leverage. I find that the most clear way to demonstrate this is through the Assets to Equity Ratio, and as you can see, as of their last reporting TECH's Assets to Equity Ratio was 1.03x which is below its historical average over the last five years by 3%. To the extent that ROE is not significantly diminished, reduced leverage can be seen as an improvement in shareholder safety.
Profit Margin
The last of our three inputs on management analysis is profit margin. Currently, TECH's profit margins is above the 5 year average for TECH. Profit Margin (MGN) is a well known and highly visable measure of management's performance. Using the most current available data, TECH has a Profit Margin of 39.87% above it’s historical average by 4.2%.
Notes for Management
I regard each of these factors as important on their own, but a better understanding of management efficacy is Return on Equity or ROE which combines all of these factors. I generally consider 15% a normal level of ROE as most firms generate an after-tax ROE of somewhere between 10% and 20% each year. In the case of TECH, at its last reporting, the ROE of 23.10% was 8.10% above the average, which indicates that management is performing at a highly acceptable level.