Tuesday, March 8, 2016

Upgrades & Downgrades

Today the portfolio received an upgrade and a downgrade.

BNP Paribas upgraded Phillip Morris to Outperform from Neutral.  I guess we will take it despite the fact the company will continue to face currency headwinds. In reality I'm not sure why anyone bothers upgrading or downgrading the tobacco companies. I'd bet more money has been lost following them than staying the course.

Credit Agricole downgraded Boston Beer Company to Underperform from Outperform.  Understandable considering the competition within the industry. Yet remember not to long ago when management told us to expect earnings of $7.60-$8.00 per share? Well I do and I'm sticking by the numbers those in the know give me; not some analyst.

Warren Buffet said it best. "Forecasts tell you a great deal about the forecaster; they tell you nothing about the future."

I've stated before I do not put much faith into analyst upgrades or downgrades. Most the time I'm suspicious of the reasoning.  Such as giving clients an opportunity to pick up shares at a discount or sell higher. Especially when it comes from JP Morgan or Goldman Sachs. Sorry but I just don't trust those institutions.

In reality I think SAM is a great buy under $200 and I stand by that. Let's assume the stock grows EPS by 7%/yr for the next 10 years with 2016 coming in at 7.80. That's a low assumption by the way considering the company has grown EPS by 21% on average the last 10 years.

YearEPSChange in EPS
20167.80.55
20178.350.58
20188.930.63
20199.560.67
202010.220.72
202110.940.77
202211.710.82
202312.530.88
202413.400.94
202514.341.00
202615.341.07

If all goes according to plan we can expect 2026 EPS coming in at 15.34 which would mean the stock is trading at 11 times 2026 earnings with today's price. Not exactly stellar, but this would assume the stock pretty much goes nowhere for 10 years too.

What if the company increased EPS by a more optimistic 13% each year? 

YearEPSChange in EPS
20167.81.01
20178.811.15
20189.961.29
201911.251.46
202012.721.65
202114.371.87
202216.242.11
202318.352.39
202420.742.70
202523.433.05
202626.483.44

Now the stock is trading at 6.6 times 2026 earnings. Well all the sudden this looks like a very attractive stock. Valuations on alcohol companies usually fetch a premium too so keep that in mind. 

In reality I'm not concerned how any of this will turn out. It is however a good exercise to see what you think EPS will be for your favorite companies later on down the road. Use any combination of changes you can think of. It might help you become more disciplined in your own stock analysis and picking 

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