Eight new stocks make March’s Exec Comp Aligned with ROIC Model Portfolio, available to members as of March 16, 2022.
Recap From February’s Picks
Our Exec Comp Aligned with ROIC Model Portfolio (-6.6%) underperformed the S&P 500 (-5.3%) from February 11, 2022, through March 14, 2022. The best performing stock in the portfolio was up 15%. Overall, seven out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P 500 from February 11, 2022, through March 14, 2022.
More reliable & proprietary fundamental data, proven in The Journal of Financial Economics, drives our research and provides investors with a new source of alpha. Our proprietary Robo-Analyst technology[1] scales our forensic accounting expertise (featured in Barron’s) across thousands of stocks[2] to produce an unrivaled database of fundamental data.
This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating and align executive compensation with improving ROIC. We think this combination provides a uniquely well-screened list of long ideas because return on invested capital (ROIC) is the primary driver of shareholder value creation.
New Stock Feature for March: Commercial Metals Company (CMC: $41/share)
Commercial Metals Company (CMC) is the featured stock in March’s Exec Comp Aligned with ROIC Model Portfolio.
Commercial Metals Company has grown revenue and net operating profit after tax (NOPAT) by 8% and 31% compounded annually, respectively, over the past five years, per Figure 1. The company’s NOPAT margin rose from 3% in fiscal 2016 (FYE is 8/31) to 8% over the trailing twelve months (TTM), while invested capital turns improved from 1.5 to 1.8 over the same time. Rising NOPAT margins and invested capital turns drove the company’s ROIC from 4% in fiscal 2016 to 15% TTM.
Figure 1: Commercial Metals Company’s NOPAT & Revenue Growth: Fiscal 2016 – TTM
Sources: New Constructs, LLC and company filings
Executive Compensation Properly Aligns Executive Incentives
Commercial Metals Company’s executive compensation plan aligns executives’ interests with shareholders’ interests by tying its annual cash bonus to the achievement of a target ROIC. Furthermore, 75% of executives’ performance share units (PSUs) are tied to the achievement of a positive three-year ROIC.
Commercial Metals Company’s inclusion of ROIC as a performance goal has helped create shareholder value through rising ROIC and economic earnings. Commercial Metals Company’s ROIC improved from 4% in fiscal 2016 to 15% TTM, and the company’s economic earnings grew from -$45 million to $376 million over the same period.
Figure 2: Commercial Metals Company’s ROIC: Fiscal 2016 – TTM
Sources: New Constructs, LLC and company filings
Commercial Metals Company Is Undervalued
At its current price of $41/share, CMC has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means the market expects Commercial Metals Company’s NOPAT to permanently decline by 40%. This expectation seems overly pessimistic for a company that has grown NOPAT by 5% compounded annually over the past two decades.
If Commercial Metals Company’s NOPAT margin falls to 7% (equal to fiscal 2021 vs. 8% TTM) and the company’s NOPAT grows by just 3% compounded annually over the next 10 years, the stock is worth $59/share today – a 44% upside. See the math behind this reverse DCF scenario. Should the company’s NOPAT grow more in line with historical growth rates, the stock has even more upside.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Below are specifics on the adjustments we make based on Robo-Analyst findings in Commercial Metals Company’s 10-Q’s and 10-K:
Income Statement: we made $111 million in adjustments, with a net effect of removing $50 million in non-operating expenses (1% of revenue). Clients can see all adjustments made to Commercial Metals Company’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made $1.3 billion in adjustments to calculate invested capital with a net increase of $264 million. One of the largest adjustments was $540 million (15% of reported net assets) in asset write-downs. Clients can see all adjustments made to Commercial Metals Company’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made $1.4 billion in adjustments with a net effect of decreasing shareholder value by $1.2 billion. Apart from total debt, the most notable adjustment to shareholder value was $85 million in deferred tax liabilities. This adjustment represents 2% of Commercial Metals Company’s market cap. Clients can see all adjustments to Commercial Metals Company’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article originally published on March 24, 2022.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
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[1] Harvard Business School features our research automation technology in the case Disrupting Fundamental Analysis with Robo-Analysts.
[2] See how our models overcome flaws in Bloomberg and Capital IQ’s (SPGI) analytics in the detailed appendix of this paper.