FIVE Stock Study (10-17-23)

I recently did a stock study on Five Below, Inc. (FIVE) with a closing price of $171.24. The original study is here.

M* writes:

     > Five Below is a value-oriented retailer that operated 1,340
     > stores in the United States as of the end of fiscal 2022.
     > Catering to teen and preteen consumers, its stores feature
     > a wide variety of merchandise, the vast majority of which
     > is priced below $6. The assortment focuses on discretionary
     > items in several categories, particularly leisure (such as
     > sporting goods, toys, and electronics; 48% of fiscal 2022
     > sales), fashion and home (for example, beauty products and
     > accessories, home goods, and storage solutions; 29% of
     > fiscal 2022 sales), and party and snack (including seasonal
     > goods, candy, and beverages; 23% of fiscal 2022 sales). The
     > chain had stores in 42 states as of the end of fiscal 2022.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 21.5% and 25.5%, respectively. Lines are mostly up, straight, and parallel except for EPS declines in ’20 and ’22. PTPM leads peer and industry averages while increasing from 9.7% (’13) to 11.3% (’22) with a last-5-year mean of 11.3%.

Also over the past decade, ROE leads peer and industry averages despite falling from 35.9% (’13) to 22.0% (’22) with a last-5-year mean of 24.1%. Debt-to-capital is lower than peer and industry averages with a last-5-year mean of 43.5%.

FIVE has no long-term debt (just leases and uncapitalized rentals), a Current Ratio of 1.7, and a Quick Ratio of 0.7. Value Line gives an A rating for Financial Strength, and M* assigns a “Wide” Economic Moat.

With regard to sales growth:

• CNN Business projects 16.1% YOY and 16.4% per year for ’24 (FY ends Jan 31) and ’23-’25 (based on 21 analysts).
• YF projects YOY 15.3% and 16.9% for ’24 and ’25, respectively (21 analysts).
• Zacks projects YOY 15.3% and 16.7% for ’24 and ’25, respectively (10).
• Value Line projects 16.1% annualized growth from ’22-’27.
• CFRA projects 15.0% YOY and 16.1% per year for ’24 and ’23-’25, respectively.
• M* provides a 2-year ACE of 17.0% annualized growth.

I am forecasting below the range at 14.0% per year.

With regard to EPS growth:

• CNN Business projects 19.0% YOY and 20.3% per year for ’24 (FY ends Jan 31) and ’23-’25, respectively (based on 21 analysts), along with a 5-year annualized growth of 21.8%.
• MarketWatch projects annualized rates of 18.3% and 19.7% for ’23-’25 and ’23-’26, respectively (23 analysts).
• Nasdaq.com projects 21.5% YOY and 21.9% per year for ’24 and ’23-’25 (11, 11, and 6 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 22.7%.
• YF projects YOY 16.0% and 20.8% for ’24 and ’25, respectively (21), along with 5-year annualized growth of 21.5%.
• Zacks projects YOY 16.2% and 21.5% for ’24 and ’25, respectively (11), along with 5-year annualized growth of 21.5%.
• Value Line projects annualized growth of 18.6% from ’22-’27.
• CFRA projects 15.6% YOY and 19.8% per year for ’24 and ’23-’25, respectively.
• M* projects long-term annualized growth of 25.0%.

I am forecasting below the long-term-estimate range (mean of six: 21.8%) at 16.0% per year. My initial value will be ’22 EPS of $4.69/share rather than 2023 Q2 EPS of $4.87 (annualized).

My Forecast High P/E is 35.0. Over the past decade, high P/E ranges from 39.5 in ’15 to 93.7 in ’13 with a last-5-year mean of 55.7 and a last-5-year-mean average P/E of 40.7. I am forecasting below the entire range (close to the current P/E).

My Forecast Low P/E is 22.0. Over the past decade, low P/E has trended down from 58.7 (’13) to 23.3 (’22) with a last-5-year mean of 25.7. I am forecasting near the low end of the range [only ’17 (20.2) and ’20 (21.6) are lower].

My Low Stock Price Forecast (LSPF) of $103.20 is default based on $4.69/share initial value. This is 39.7% less than the previous close and 20.7% less than the 52-week low.

These inputs land FIVE in the HOLD zone with a U/D ratio of 2.6. Total Annualized Return (TAR) is 15.0%.

PAR (using Forecast Average—not High—P/E) of 10.4% is less than I seek in a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 206 studies (my study and 102 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 15.0%, 16.0%, 38.2, and 24.4, respectively. I am equal on EPS growth and lower on the other three. Value Line’s projected average annual P/E of 30.0 is lower than MS (31.3) and higher than mine (28.5).

MS high / low EPS are $10.19 / $4.54 versus my $9.85 / $4.69 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is $11.00. I am lowest of the three.

MS LSPF of $114.70 implies a Forecast Low P/E of 25.3: more than the above-stated 24.4. MS LSPF is 3.5% greater than the default $4.54/share * 24.4 = $110.78, which results in more aggressive zoning. MS LSPF is also 11.1% greater than mine.

My TAR (over 15.0% preferred) is less than the 17.9% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 1.0 and 1.9 per Zacks and my projected P/E, respectively: the latter being overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is slighly undervalued. Kim Butcher’s “quick and dirty DCF” prices the stock at 25.0 * [$13.75 – ($0.00 + $4.55)] = $230.00, which suggests the stock to be 25.5% undervalued [NOTE: Value Line does not include CapEx in the FIVE statistical matrix. I found $251.95M for ’23 on wsj.com and calculated a per share number based on the FCF vs. FCF/share values on the same web page to get the $4.55].

FIVE is a BUY under $163. With a forecast high price around $344, TAR meets my 15% criterion right about now.