The Value in Trends® ((ViT)) system uses a quantitative approach to screen for value. Then, the trend direction, momentum and condition is analyzed to determine investment entry/exit points. The ViT system produces an efficient overview of the fundamentals and technicals of a company, paving the way for further extensive research into economic conditions, industry dynamics and company specifics.
In their Q1 FY14 financial results, revenues came in at $215.6 million for MYRG, $14.3 million higher than the comparable quarter in 2013, reflecting a 7.1% increase. The figure was also 3.6% higher than the consensus estimate of $208.2 million. Meanwhile, net income was $6.3 million, or $0.29 per diluted share, compared with $7.0 million and $0.32 per diluted share in Q1 2013. Analysts, however, were expecting $0.32 per share.
On the back of these results, analysts have been upgrading their estimates. Adjusted net income of $33.7 million and $37.6 million are expected off sales of $925.1 million and $977.1 million in FY2014 and FY2015 respectively. That equates to EPS figures of $1.56 in 2014 and $1.73 in 2015, 9.4% higher than the 2013 EPS figure of $1.58.
With the share price trading at $25.33 as at the end of June, the FY14 EPS estimate has the company trading on a forward P/E of 17.4x but then reducing to 15.7x in 2015. Elsewhere, the forward valuation multiples also look attractive. FY14 and FY15 Price/Sales are only 0.63x and 0.59x respectively. The forecasts for Price/Cash Flow over the same period are 7.2x and 7.8x respectively.
QUANTITATIVE VALUE ANALYSIS
I define value as the combination of an attractive price and quality factors. Quality can be further broken down into profitability, health and efficiency.
(NYSE:I) Relative Price
To examine price, I use the conventional approach of analyzing price multiples. I rank these into deciles with 1 being the cheapest 10% and 10 indicating the most expensive 10% of companies based on that specific multiple. Then, I backtest the performance of each of these deciles going back over the past 14 years (end December 1999 to end December 2013) to determine whether the company is attractively positioned based on the historical returns. I conducted my tests across the Russell 3,000 index.
- MYR Group's Ev/Ebitda of 5.8x ranks them in the first decile and amongst the cheapest 10% of companies across the Russell 3,000. Based on the back-tested returns, companies in this decile have produced the highest returns, 15.1% p/a.
- The Company is ranked in the third decile in terms of P/E, with a ratio of 15.6. Historically, this has been the third best performing decile, producing an annualised return of 9.6%.
- When measured on a P/S basis, the Company also appeals with a ratio of only 0.6. This positions the group in the second decile, where the annualised return for companies historically is 10.9%. This is second best performing decile over the period in question.
- The company trades on a P/B of 1.8 ranking it in the fourth decile. This has also been the fourth best performing decile over the 14 years of data tested, producing an annualised return of 8.7%.
- With a P/CF ratio of just 7.2x, MYR Group is quite cheap compared with the rest of the Russell 3,000. They are ranked in the second decile, where companies have produced an annualised return of 11.9%. This decile is also the second best performer.
For quality purposes, I first analyze profitability and break down the calculation of Return on Equity through DuPont analysis. The resulting figure for Asset Turnover then measures efficiency while the reading for Leverage is an indication of health. Combined with profit margins, this gives a good overview of company quality.
Once again, I rank the components into deciles from 1-10. Then, I backtest the performance of each of these deciles on the Russell 3,000 going back over the past 14 years to determine whether the company is attractively positioned based on the historical returns.
- MYRG's ROE of 12.6% ranks them in the fourth decile. Companies in this bracket were the fourth worst performing producing an annualised return of 6.9%.
- With a low profit margin of only 2.9%, the Company is ranked in the seventh decile. However, companies in this decile have actually produced strong annualised returns of 9.6% over the period tested. That's good enough to be the second best performing decile.
- A/T is impressive at 1.9x. This ranks it the top decile across the Russell 3,000, which has also been the best performing over the 14 years, producing an annualised return of 11.2%.
- The leverage reading for MYR Group is 1.7. That ranks them amongst the lowest 40% across the Russell 3,000. However, this decile has only been the 5th best performer over the period tested, producing annualised returns of 6.5%.
TECHNICAL TREND ANALYSIS
I break down the examination of a company's trend into three components:
- Direction of the trend
- Momentum of the trend and;
- Condition of the trend
- MYRG's share price has considerably volatile over the past number of years. However, it has remained above the 200-week MA since 10 August, 2012, thus confirming the uptrend in place since lows registered on 27 July of the same year. Each of the 50, 100 and 200-week MAs now offer support, currently at $24.42, $22.94 and $21.16 respectively. As at 30 June, the share price is $25.33 and looking to challenge the 52-week highs at $27.30.
- Considering the volatility of the share price, it should not come as any surprise to learn that momentum has equally been as volatile. Despite being in decline for most of this year, momentum has remained in positive territory since late August 2013. After threatening to break into negative territory in early May of this year, momentum quickly rebounded and looks set to continue upwards in the interim.
- The key levels to look out for on the RSI chart are 70 and above, which equates to an overbought condition. Meanwhile, a reading of 30 or below reflects an oversold condition. The weekly RSI for the MYRG is almost 66. Therefore, it is nearing an overbought condition. However, strong trends coincide with companies whose share prices surge into overbought conditions so this should not act as a deterrent.
From a quantitative value perspective, MYRG appeals, ranking amongst the cheapest 20% of companies in the Russell 3,000 across Ev/Ebitda, P/CF and P/S. Historically, companies in this valuation band have produced annualised returns of 11-15%. These attractive valuation are accompanied by solid readings across my quality analysis. The company is among the top 10% in terms of Asset turnover. Although margins are paltry at 2.9%, companies in this bracket have actually produced annualised returns of almost 10% over the past 14 years.
The technical analysis reveals a share price in a strong uptrend, backed by momentum. With the stock still not in overbought territory, the share price should challenge the 52-week highs before too long at $27.30.
To sum up, from a long-term investment perspective, the initial evaluation through the ViT system on MYR Group is positive. The stock warrants further research. For more on the company, you can check out their Q1 presentation here. The company is estimated to release earnings on August 4th, which will give investors more detailed information to determine the industry and company specific dynamics.
Consensus estimates are for Sales of $228.75 million and net income of $8.18 million. That equates to an EPS figure of $0.41. It is interesting to note that brokers have been increasing these estimates since early May. Of the 10 brokers covering the stock, seven have a buy rating and three have a hold. The consensus target price is $29.
From a shorter-term trade perspective, MYR Group catches my attention. I expect to see the price take out the 52-week high and pave the way for a continued move higher.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.