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Scott Waxler
Scott Waxler
Articles (88)  | Author's Website |

The Carlisle Companies - A Fair Value Report

Earnings were helped in 2018 by affiliate closings, which was not the case in 2019. As has become the norm, investors don't seem to care.

September 09, 2020 | About:

Intent

The intent of this report is to provide the reader with a brief overview of my valuations for this company.

What They Do

Carlisle Companies (NYSE:CSL) designs, manufactures and markets products for the commercial roofing, energy, agriculture, mining, construction, aerospace and defense electronics, medical technology, foodservice, healthcare, sanitary maintenance, transportation, general industrial, protective coating, wood, specialty, automotive, and auto refinishing industries. Listed competitors are Atlas Roofing Corporation (private) and Harvey Industries (private).

Acquisitions Highlights

In November 2019, the company completed its acquisition of Providien, LLC, for consideration of $332.1 million, including $3.4 million of cash acquired. Providien is a provider of comprehensive manufacturing solutions for global medical device original equipment manufacturers, including: thermoforming, medical device contract manufacturing, precision machining and metals, and medical injection molding.

Divestitures Highlights

The company listed no new business divestitures in its most recent SEC 10-K filing.

Subsequent Events

In February 2020, the company entered into its Fourth Amended and Restated Credit Agreement administered by JPMorgan Chase Bank, N.A. Among other things, the amendment extended the maturity date of the Credit Facility from February 21, 2022, to February 5, 2025. During the first quarter of 2020, the company incurred $1.3 million of debt issuance costs to finalize the amendment, which will be recognized ratably over the extended maturity date of the Credit Facility.

The Credit Facility has a feature that allows the company to increase availability, at its option, by an aggregate amount of up to $500.0 million through increased commitments from existing lenders or the addition of new lenders. Under the Credit Facility the company may also enter into commitments in the form of standby, commercial, or direct pay letters of credit for an amount not to exceed $50.0 million. The Credit Facility provides for grid-based interest pricing based on the credit rating of the senior unsecured bank debt or other unsecured senior debt.

The Credit Facility is also subject to fees based on applicable rates as defined in the agreement and the aggregate commitment, regardless of usage.

Short-Term Target

My current short-term target for the stock is $137.24 with an initial trailing stop set at $120.50. Based on a recent price of $122.34, upward price movement will find resistance at $125.35 and again at $129.75, with final resistance found at $137.13. Downward price movement will find support at $118.86 and again at $113.27, with final support found at $101.51.

One-Year Growth Price Target

My one year growth price target is actually a price target range, determined by adding year over year earning growth to the prior year annual dividend yield and dividing the result by the current annual price to earnings ratio.

For this stock, my one year growth price target range is $110-$131.

Volatility Adjustment

There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock's volatility. A beta ratio of less than 1 means that the security's price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security's price will be more volatile than the market.

Basis my current beta ratio for this stock of 0.85, my volatility adjustment to recent pricing is $22 per share, making my current volatility adjusted price $144.

Quality of Earnings

A company's earnings can be impacted by a variety of sources unrelated to the company's current day to day operations. Discontinued operations, tax refunds, depreciation, and impairment for example, may distort a company's operating income and consequently its fair value. Investors should always explore the sources of a company's operating income to better understand potential valuation impacts.

Of the company's $8.47 in earnings per share, $0.00 came from some combination of other sources, income taxes, interest, minority interests, or discontinued operations.

Key Performance Indicator Rating

I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Based on a 0-105 scale, my KPI for this company is 44.

Five Year Growth of $10K

Had you invested $10K in this company five years ago (12/31/14), you would have received 111 shares of stock with a cost basis of $90.24 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $162.04 per share. During that holding period you would have collected $164 in regular and special dividends, and your initial $10K investment would have returned to you $17,957, a gain of 80% excluding regular and special dividends.

Annual Shareholder Return

I calculate annual shareholder return by subtracting the stock price at the close of business on the last day of a company's fiscal year, from the stock price at the start of business on the first day of the company's fiscal year, plus any dividends paid during that period, and then dividing the result by the opening stock price on the first day of a company's fiscal year.

For fiscal 2019, the company spent $6.83 per share buying back company stock, paid a common stock dividend of $1.84 per share, and had year-over-year annual price appreciation of $61.52, which created a year-over-year annual shareholder return of 63%.

Over the prior five year period, the company spent an average of $3.14 per share buying back company stock, paid an average annual common stock dividend of $1.30 per share, and had an average annual price appreciation of $4.22, which created an average annual shareholder return of 7%.

Cost of Common Equity

The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium.

My cost of common equity for this stock is 4.02%.

Insider Transactions

The SEC classifies insiders as "management, officers or any beneficial owners with more than 10% class of a company's security." Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their "insider" knowledge.

Over the past 12 months, the company has recorded 85 insider trades involving 359,714 shares of stock. Of those insider trades, 52 were Buys involving 201,596 shares of stock, and 33 were Sells involving 158,118 shares of stock, creating an insider buy to sell ratio of 1.3 to 1..

Enterprise and Equity Values

As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company's ability to generate cash is to compare the Enterprise Value to the Equity Value. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt.

For this company, my enterprise value (market cap plus debt less cash) is $145 and my equity value (market cap plus cash less debt) is $100, making my Enterprise to Equity ratio 0.69.

Risk/Reward Ratio

I determine my risk reward ratio by subtracting the current price from my terminate target and then dividing that result by my initiate target less a price fluctuation variable of 20%. What I am looking for with this ratio is a value of 2 or greater. My risk/reward ratio for this stock is (1).

Prior Average Valuations

My average valuation for the prior five year fiscal period was $64. The stock price during that time period averaged $101, earnings averaged $6.34 per share, and the average PE Ratio was 16. The current PE Ratio is 14.

Fair Value Investing

To a fair value investor, the basic investing tenet is price determines return. Accordingly it is important to remember that the current market price of an equity is the price negotiated between a willing buyer and a willing seller. This market price is not the fair value of the associated company, but the negotiated price of a single equity trade.

My most recent fair value estimate for this stock is $62. My estimated fair value forms the basis for my target prices as shown on my worksheet.

Thus, according to my analysis, Carlisle Companies is OVERVALUED – the stock is currently trading at levels above my most recent $100 terminate target. Please see linked PDF worksheet for more detail.

Risk

Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Disclosure

I am a long-term, buy and hold investor, practicing a value investing philosophy. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company's most recent SEC 10-K filing.

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About the author:

Scott Waxler
I run a baseline equity research firm (Wax Ink)that is not licensed or registered with any government agency.

Visit Scott Waxler's Website


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