The Good and the Bad: AutoNation and Silicon Laboratories

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October picks summary

The most attractive stocks (+ 4.4%) underperformed the S&P 500 (+ 5.7%) from October 6, 2021 to November 1, 2021 by 1.3%. Top performing large cap stocks gained 15% and top performing small cap stocks rose 16%. Overall, 16 of the 40 most attractive stocks outperformed the S&P 500.

The most dangerous stocks (+ 1.3%) outperformed the S&P 500 (+ 5.7%) as a short portfolio from October 6, 2021 to November 1, 2021 by 4.4%. Top performing large cap stocks fell 13% and top performing small cap stocks fell 18%. Overall, 28 of the 37 most dangerous stocks outperformed the S&P 500 as short.

The most attractive / dangerous model portfolios outperformed by 1.6% as an evenly weighted long / short portfolio.

11 new stocks are on the most attractive list this month, and nine new stocks are on the most dangerous list this month. The most attractive and dangerous stocks of November were made available to members on November 3, 2021.

The most attractive stocks have high and increasing returns on invested capital (ROIC) and low economic price-to-book ratios. Most dangerous stocks have deceptive profits and long periods of growth appreciation implied by their stock valuations.

Hottest stock feature for November: AutoNation

A

AutoNation Inc. is the featured stock in November’s Most Attractive Stock Model Portfolio.

Over the past decade, AutoNation has increased its revenue by 5% compounded annually and net operating income after tax (NOPAT) by 8% compounded annually over the past decade.

The company’s NOPAT margin fell from 3% in 2010 to 5% in the last twelve months (TTM), while invested capital rotations fell from 1.6 to 2.4 over the same period. The increase in margins and the improvement in rotations of invested capital increase AutoNation’s ROIC from 4% in 2010 to 12% TTM.

Over the past five years, AutoNation has generated $ 2.7 billion (33% of market cap) in accumulated free cash flow (FCF). During the TTM, AutoNation generated $ 2.8 billion in FCF.

Figure 1: Turnover and NOPAT since 2010

AN is undervalued

At its current price of $ 125 / share, AN has an economic price-to-book value (PEBV) of 0.3. This ratio means that the market expects AutoNation’s NOPAT to permanently decline by 70%. This expectation seems too pessimistic for a company that has grown NOPAT by 5% compounded annually for the past five years.

Even though AutoNation’s NOPAT margin drops to 3% (equal to a five-year average, from 5% TTM) and the company’s NOPAT only increases by 1% compound annually for the next decade, the stock worth $ 181 / share today – a 40% upside. Discover the math behind this reverse DCF scenario. If AutoNation increases its earnings more in line with historical levels, the stock has even more potential.

Critical details found in financial documents by my company’s Robo-Analyst technology

Below are details of the adjustments I’m making based on Robo-Analyst’s results in AutoNation’s 10-K and 10-Q:

Income statement: I made $ 844 million in adjustments, with a net effect of eliminating $ 310 million in non-operating expenses (here.

Bottom Line: I made $ 5.8 billion of adjustments to calculate invested capital with a net increase of $ 5.8 billion. One of the most notable adjustments was $ 2.2 billion in asset write-downs. This adjustment represents 10% of the published net assets. You can see all the adjustments made to AutoNation’s balance sheet here.

Valuation: I made $ 4.7 billion in shareholder value adjustments, all of which decreased shareholder value. Besides total debt, one of the most notable adjustments to shareholder value has been $ 100 million in net deferred compensation. This adjustment represents 1% of AutoNation’s market capitalization. See all AutoNation valuation adjustments here.

Most Dangerous Actions Characteristic: Silicon Laboratories (SLAB)

Silicon Laboratories Inc.

SLAB
is the featured stock in November’s Most Dangerous Stock Model Portfolio.

Silicon Laboratories’ economic profits, the company’s true cash flow, fell from $ 18 million in 2017 to – $ 69 million on TTM. The company’s NOPAT margin increased from 10% in 2017 to 2% TTM, while the turnover of invested capital fell from 1.1 to 0.7 during the same period. The decline in NOPAT’s margins and the turnover of invested capital reduce the ROIC of Silicon Laboratories from 11% in 2017 to 2% TTM.

Figure 2: Economic benefits since 2017

SLAB offers low risk / reward

Despite its poor fundamentals, Silicon Laboratories is still valued for significant earnings growth and overvalued.

To justify its current price of $ 203 / share, Silicon Laboratories needs to improve its NOPAT margin to 11% (five-year high from 2% TTM) and increase NOPAT by 33% compounded annually for the next decade. Discover the math behind this reverse DCF scenario. Given that Silicon Laboratories’ NOPAT has fallen 7% compound annually over the past decade, I think these expectations are overly optimistic.

Even though Silicon Laboratories can achieve a 5% NOPAT margin (three-year high) and increase NOPAT by 13% compounded annually for the next decade, the stock is only worth $ 81 / share today – a downside of 60 % compared to the current share price. . Discover the math behind this reverse DCF scenario. If Silicon Laboratories’ NOPAT were to grow at a slower pace or, worse yet, continue its downtrend, the stock would fall even further.

Each of these scenarios also assumes that Silicon Laboratories is able to increase its revenues, NOPAT and FCF without increasing working capital or capital assets. This assumption is unlikely but allows me to create the best scenarios that demonstrate how high the high expectations built into the current valuation are.

Critical details found in financial documents by my company’s Robo-Analyst technology

Below are details of the adjustments I make based on Robo-Analyst’s results in Silicon Laboratories 10-K and 10-Q:

Income statement: I made $ 55 million in adjustments, with a net effect of eliminating $ 19 million in non-operating expenses (2% of revenue). You can see all the adjustments made to the income statement of Silicon Laboratories here.

Balance sheet: I made $ 983 million of adjustments to calculate invested capital with a net decrease of $ 593 million. One of the most notable adjustments was $ 104 million in mid-year acquisitions. This adjustment represents 6% of the published net assets. You can see all the adjustments made to Silicon Laboratories’ balance sheet here.

Valuation: I made adjustments of $ 3.3 billion with a net effect of increasing shareholder value of $ 2 billion. The most notable adjustment to shareholder value was $ 2.7 billion in excess cash. This adjustment represents 35% of the market capitalization of Silicon Laboratories. See all Silicon Laboratories valuation adjustments here.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific action, style, or theme.


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