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AAON: Share Price Defying Gravity - Time To Don Parachutes

Mar. 09, 2021 9:35 AM ETAAON, Inc. (AAON)3 Comments
Robert Honeywill profile picture
Robert Honeywill


  • I previously opined that I liked the AAON business, but not the share price.
  • Other contributors before me offered similar sentiments - we have mud on our faces - the share price, and accordingly the multiple, have continued to grow.
  • Lower future EPS growth rates and a stratospheric P/E multiple seldom go hand in hand. Markets do correct eventually - this will likely come to an abrupt end.
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AAON: Investment Thesis

Based on SA Premium analysts' estimates, AAON, Inc. (NASDAQ:AAON) is projected to grow EPS by an average of 14.59% per year for the three years 2019 to 2022 (I start with 2019 to eliminate COVID-19 distortions). The 14.59% forward estimate compares to a 2.70% average yearly EPS growth rate for the three years ended 2019. Table 1 below shows EPS grew only slightly from $1.03 for 2017 to $1.05 for 2019, contributing to the low historical growth rate through the end of 2019, and the higher growth rate reflected in analysts' forward estimates. A better measure of AAON's longer-term EPS growth is the actual and projected average yearly EPS growth rate of 8.1%, based on EPS of $0.97 for 2016, and analysts' consensus estimate of $1.58 EPS for 2022. That's quite a good EPS growth rate, but it has to be questioned if it justifies a P/E ratio in the mid-forties and higher. Current P/E ratio is 50.11 - the future EPS growth rate already is more than fully reflected in the current share price. If multiples sink back to the historical average of 44.14 (see Table 3 below), negative returns are indicated from buying and holding AAON shares through the end of 2022. The indicated negative returns quickly get into double digits for P/E ratios below the 44.24 historical average. The company, as a business, appears to be performing well, the dividend is safe, and the balance sheet strong with no debt. But there appears to be a real danger to the share price from potential multiple contraction, leading to negative returns. It might not happen tomorrow, or next quarter, but market prices have a way of correcting over time, and often quite abruptly. A detailed analysis follows.

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This article was written by

Robert Honeywill profile picture
I am a retired accountant with a background in large mining projects, from feasibility to full-scale operation, large scale primary industry and food processing, commercialisation of university intellectual property, and consulting to small businesses, government departments and insolvency practitioners. I have gained a wealth of experience from having the extreme good fortune to work, in a cooperative environment, with so many people far more intelligent and smarter than me; from scientists and engineers with MBA qualifications, to University professors across a range of disciplines. Through the accident of mergers, acquisitions and dispositions, I held, at various times, financial controller positions within Utah International Inc, General Electric Inc, and BHP Billiton organizations. If I have a special skill, it is in methods of assessment of projects with long lives, where costs are front loaded and/or future revenues are subject to considerable degrees of uncertainty. In relation to stocks, I have a theory, using projections to calculate a present value per share is far less useful for a share buying decision, than using those same projections for calculating future value per share for determining potential exit value and rate of return.

Analyst’s 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.

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