Two new stocks made November’s Exec Comp Aligned with ROIC Model Portfolio, available to members as of November 15, 2023.
Recap from October Picks
Our Exec Comp Aligned with ROIC Model Portfolio (+0.9%) underperformed the S&P 500 (+2.0%) from October 13, 2023 through November 13, 2023. The best performing stock in the portfolio was up 12%. Overall, 6 out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P from October 13, 2023 through November 13, 2023.
This report leverages our cutting-edge Robo-Analyst technology to deliver proven-superior[1] fundamental research and support more cost-effective fulfillment of the fiduciary duty of care.
This Model Portfolio includes stocks that earn an Attractive or Very Attractive rating and align executive compensation with improving ROIC. This combination provides a unique list of long ideas as the primary driver of shareholder value creation is return on invested capital (ROIC).
New Stock Feature for November: CVR Energy Inc. (CVI: $31/share)
CVR Energy Inc. (CVI) is the featured stock in November’s Exec Comp Aligned with ROIC Model Portfolio.
CVR Energy has grown revenue and net operating profit after tax (NOPAT) by 9% and 30% compounded annually, respectively, since 2017. The company’s NOPAT margin improved from 4% in 2017 to 10% in the trailing twelve months (TTM), while invested capital turns rose from 2.0 to 3.4 over the same time. Rising NOPAT margins and invested capital turns drive the company’s return on invested capital (ROIC) from 7% in 2017 to 34% in the TTM.
Figure 1: CVR Energy’s Revenue & NOPAT: 2017 – TTM
Sources: New Constructs, LLC and company filings
Executive Compensation Properly Aligns Incentives
CVR Energy’s executive compensation plan aligns the interests of executives and shareholders by tying 19% of its annual performance-based bonuses to Return on Capital Employed (ROCE). According to CVR Energy’s proxy statement, the annual performance-based bonuses paid to the CEO and named executive officers in 2022 made up 41% and 35% of their total pay, respectively.
The company’s inclusion of ROCE, a variation of ROIC, as a performance goal has helped create shareholder value by driving higher ROIC and economic earnings. When we calculate ROIC using our superior fundamental data, we find that CVR Energy’s ROIC has increased from 7% in 2017 to 34% in the TTM. Economic earnings rose from $51 million to $777 million over the same time.
Figure 2: CVR Energy’s ROIC: 2017 – TTM
Sources: New Constructs, LLC and company filings
CVI Has Further Upside
At the current price of $31/share, CVI has a price-to-economic book value (PEBV) ratio of 0.3. This ratio implies the market expects CVR Energy’s NOPAT to permanently fall by 70%. This expectation seems overly pessimistic for a company that has grown NOPAT 30% compounded annually over the last five years and 14% compounded annually since 2008.
Even if CVR Energy’s
- NOPAT margin falls to 4% (compared to 10% in the TTM),
- revenue grows at consensus estimates in 2023 (-11%), 2024 (-11%), and 2025 (12%), and
- revenue grows just 3% each year from 2026 to 2032 (compared to 9% compounded annually since 2017),
the stock would be worth $46/share today – a 48% upside. See the math behind this reverse DCF scenario. In this scenario, CVR Energy’s NOPAT would still fall 5% compounded annually through 2032.
For reference, CVR Energy has grown NOPAT by 7% compounded annually since 2012. Should the company grow NOPAT 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 made based on Robo-Analyst findings in CVR Energy’s 10-Qs and 10-K:
Income Statement: we made $377 million in adjustments with a net effect of removing $334 million in non-operating expenses (3% of revenue). Clients can see all adjustments made to CVR Energy’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made $237 million in adjustments to calculate invested capital with a net increase of $149 million. One of the largest adjustments was $187 million (7% of reported net assets) in asset write downs. Clients can see all adjustments made to CVR Energy’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made $2.5 billion in adjustments, with a net effect of decreasing shareholder value by $1.7 billion. Apart from total debt, the most notable adjustment to shareholder value was $403 million in excess cash. This adjustment represents 13% of CVR Energy’s market value. Clients can see all adjustments to CVR Energy’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article was originally published on November 21, 2023.
Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendonça receive no compensation to write about any specific stock, style, or theme.
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[1] Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.