In the first round of the Growth Portfolio playoffs we have #9 seeded Wolverine World Wide, Inc. (WWW) taking on #8 seeded ARM Holdings plc (ARMH). Wolverine World Wide is a designer, manufacturer and marketer of a range of casual footwear and apparel, performance outdoor footwear and apparel, industrial work shoes, boots and apparel, and uniform shoes and boots. ARM Holdings plc designs microprocessors, physical intellectual property and related technology and software, and sells development tools.
The following table depicts the recent earnings reports for each company:
($ in billions)
($ in billions)
Wolverine World Wide is up 66.25% excluding dividends in the past year (up 66.83% including dividends) while ARM Holdings is up 47.71% excluding dividends (up 48.68% including dividends), and are beating the S&P 500, which has gained 31.3% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This wild-card matchup will determine the winner which will go on to play against Gilead Sciences, Inc. (GILD) in the next round of the playoffs for the Growth Portfolio Super Bowl.
Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. Wolverine World Wide carries a 1-year forward-looking P/E ratio of 19.47 which is fairly priced for the future right now while ARM Holdings' 1-year forward-looking P/E ratio of 44.14 is currently expensively priced. Game 1 goes to Wolverine World Wide.
This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for Wolverine World Wide is currently at 1.51 based on a 1-yr earnings growth of 23.08% while ARM Holdings' 1-yr PEG ratio stands at 3.80 with a 1-yr growth rate of 26.66%. Another game goes in the direction of Wolverine World Wide for a two to nothing series lead.
EPS Growth Next Year
This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above. Wolverine World Wide has a projected EPS growth rate of 23.08% while ARM Holdings sports a growth rate of 26.66%. ARM Holdings manages to salvage a game in the series to make it two games to one in favor of Wolverine World Wide.
Dividend yield is a no brainer; it must be had in a dividend portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. In my dividend portfolio I don't discriminate against low yielding stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings. Wolverine World Wide pays a dividend of 0.71% with a payout ratio of 25% of trailing 12-month earnings while ARM Holdings pays a dividend of 0.33% with a payout ratio of 33% of trailing 12-month earnings. Wolverine World Wide takes a three to one series lead in this match and can advance to the next round with just one more victory.
Return on Assets
Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less investment. Wolverine World Wide is showing a 3.6% efficiency rate on their assets while ARM Holdings is showing 9.8% efficiency. With this victory ARM Holdings stops Wolverine World Wide from clinching the series and takes it to Game 6 with Wolverine World Wide leading three games to two.
Return on Equity
Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better. Wolverine World Wide proves their efficiency of managing their shareholders equity to be 13.8% while ARM Holdings sports a value of 11.9%. By winning this game Wolverine World Wide advances to the next round of the playoffs with a four to two series win.
Although Wolverine World Wide upset ARM Holdings, ARM Holdings is still a great company with great long-term story. Both companies have excellent short-term and long-term earnings growth potential, hence the reason why they are in my growth portfolio. After beating ARM Holdings, Wolverine World Wide will advance to the next round of the playoffs and go head to head against the #1 seeded Gilead.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!