"According to seeking Alpha's market currents alert at 10:41 AM Morgan Stanley fires up Ancesty.com (ACOM +2.0%) as a Long Research Tactical Idea after analysts got excited that an episode of the TV show Who Do You Think You Are? starring Reba McEntire drew a stellar 7.5M viewers."
Although this company's growth rate over the past three years has been extraordinary, the company's track record is still too young to rely on. However, there appears to be a strong and growing interest with people wanting to know more about their ancestry. Consequently, Ancestry.com, Inc. appears poised for continued above-average growth in the future. Furthermore, if the TV show Who Do You Think You Are?, remains successful, then it could be a catalyst towards accelerating this company's future growth.
Growth stocks are defined as companies with high rates of change of earnings growth of 15% to 20% or better. Growth stocks offer the potential for share prices to rise in lockstep with their profit growth in the long run. Therefore, the PEG ratio formula (price equals growth rate) tends to be the most appropriate formula used to value growth stocks. However, due to the exponential nature of compounding large numbers, PEG ratio forecasts are capped at 40%.
Because of the higher valuation typically awarded to fast growth, growth stocks offer the potential for greater capital appreciation. On the other hand, they also offer higher risk. First of all, they tend to command much higher than average PE ratios, and second, achieving very high levels of growth is very difficult to sustain. Consequently, forecasting future earnings growth is more important with high growth stocks than any other class of stock. Also, the average growth stock typically plows all of its profits back into the company to fund its future growth, instead of paying dividends.
Ancestry.com Inc.: Large-cap Growth at an Attractive Price
About Ancestry.com Inc.: Directly from its website
Ancestry.com Inc. (NASDAQ:) is the world's largest online family history resource, with more than 1.7 million paying subscribers. More than 8 billion records have been added to the site in the past 15 years. Ancestry users have created more than 31 million family trees containing over 4 billion profiles. In addition to its flagship site ancestry.com, Ancestry.com offers several localized Web sites designed to empower people to discover, preserve and share their family history.
Earnings Determine Market Price: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Ancestry.com Inc. : Historical Earnings, Price, Dividends and Normal PE Since 2009
(Click charts to enlarge)
Performance Table Ancestry.com Inc.
The Two Keys to Long-Term Performance
Years of research and experience have taught us that there are two critically important keys to achieving above-average, long-term shareholder returns at reasonably controlled levels of risk. The first key is earnings growth, or what we like to call the rate of change of earnings growth. The faster a company can grow its business (i.e. earnings), the larger the income stream it can produce with which to reward shareholders. This is because of the power of compounding, which Albert Einstein was alleged to have called "the most powerful force on earth." Ultimately, both capital appreciation and dividend income will be a function of a company's ability to grow its profits.
The second key is valuation. When a company can be purchased at its intrinsic value based on earnings and cash flow generation, the shareholders' rate of return or long-term capital appreciation will inevitably correlate to and/or equal its earnings growth rate. Overvaluation will lower that rate of return and conversely, undervaluation will increase it. Consequently, paying strict attention to the valuation you pay to buy a stock is a critical component of both greater return and taking lower risk to achieve it. Because, ironically, when you overpay for even the best business, you simultaneously lower your return potential while increasing your risk of achieving the lower return.
The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two keys to long-term performance. Notice the impact that valuation (black line above or below orange earnings justified valuation line) had on the following performance results.
The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 2009.
A further indication of valuation can be seen by examining a company's current price-to-sales ratio relative to its historical price-to-sales ratio. The current price-to-sales ratio for Ancestry.com Inc. is 2.47, which is historically low.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:
- The rate of change (growth rate) of the company's earnings
- The price or valuation you pay to buy those earnings
Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.
Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. Ancestry.com Inc. is clearly an industry leading superior business, which based on the consensus estimates from leading analysts, appears to be capable of growing earnings at an above-average rate for the foreseeable future. At its current price, which is attractively aligned with its True Worth™ valuation, Ancestry.com Inc. represents an opportunity for growth at a reasonable price. The important factor is that Ancestry.com Inc., with its strong balance sheet and potential for future earnings growth, has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for outsized future returns.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component toward making sound and prudent commonsense investing decisions.
The consensus of eight leading analysts reporting to Capital IQ forecast Ancestry.com Inc.'s long-term earnings growth at 15%. Ancestry.com Inc. has no long-term debt at 0% of capital. Ancestry.com Inc. is currently trading at a P/E of 15.9, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Ancestry.com Inc.'s True Worth™ valuation would be $52.47 at the end of 2017, which would be a 15.1% annual rate of return from the current price.
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stake holders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any perspective company to that of a comparable investment in low-risk Treasury bonds. Comparing an investment in Ancestry.com Inc. with an equal investment in 10-year Treasury bonds, illustrates that Ancestry.com Inc.'s expected earnings would be 7.6 times that of the 10-Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.
Summary & Conclusions
This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although, with just a quick glance you can know a lot about the company, it's imperative that the reader conducts his or her own due diligence in order to validate whether the consensus estimates seem reasonable or not.
After falling off of its extreme overvaluation highs, Ancestry.com Inc. has recently come back to fair value with a PE ratio that approximates its forecast earnings growth. Furthermore, there is a strong possibility that future earnings growth could be higher than is currently forecast. Nevertheless, after once being what we would consider ridiculously overvalued, the company can at least be bought today where fundamentals reflect fair value. Consequently, Ancestry.com appears to be an attractive investment in a small-cap company with room to grow. Therefore, it is suitable for the aggressive investor seeking maximum capital appreciation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.