Rating Update: Stock Rating A-Highest (12/2/19)-Spartan Motors Inc (SPAR).

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BUSINESS

Spartan Motors, Inc., through its subsidiaries, engineers, manufactures, and sells heavy-duty and purpose-built specialty vehicles in the United States, Canada, South America, and Asia. It operates through three segments: Fleet Vehicles and Services, Emergency Response Vehicles, and Specialty Chassis and Vehicles. The Fleet Vehicles and Services segment provides walk-in vans, cutaway vans, truck bodies, and parts and accessories for use in e-commerce/last mile/parcel delivery, beverage and grocery delivery, mobile retail, and trades and construction industries under the Aeromaster, Velocity, Ultimate, Trademaster, Metromaster, Utilivan, Spartan Upfit Services, and Reach brands.
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INVESTMENT RATING

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SPAR’s future returns on capital are forecasted to be above the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.

Spartan Motors has a current Value Trend Rating of A (Highest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Spartan Motors has a neutral Appreciation Score of 59 but a very high Power Rating of 100, with the Highest Value Trend Rating the result.

Spartan Motors’ stock is selling well below targeted value. The current stock price of $17.68 compares to targeted value 12 months forward of $23.
This neutral appreciation potential results in an appreciation score of 59 (41% of the universe has greater appreciation potential.)
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Spartan Motors has a Power Rating of 100. (SPAR’s very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 0% of companies in the universe.)
Factors contributing to this very high Power Rating include: the recent trend in SPAR’s earnings estimates has been extremely favorable; recent price action has been extremely favorable; and is currently in a modestly favorable positi.

INVESTMENT PROFILE

SPAR’s financial strength is average. Financial strength rating is 44.
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Relative to the S&P 500 Composite, Spartan Motors Inc has both Growth and Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that SPAR is normal risk. Relative weaknesses include: low historical profitability, low financial strength, and high earnings variability. SPAR’s valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. SPAR has unusually low market capitalization.

CURRENT SIGNALS

Spartan Motors’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

Spartan Motors’ current technical position is very strong. The stock price is in a 11.0 month up move. The stock has appreciated 157.8% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Recent notable positive changes in fundamentals have benefitted Spartan Motors Inc (NASDAQ: SPAR): the consensus estimate for December, 2020 increased significantly, and the consensus estimate for December, 2019 increased significantly.
The stock is currently rated A.
On 12/2/19, Spartan Motors Inc (NASDAQ: SPAR) stock enjoyed a major increase of 17.1%, closing at $0.01. This advance was accompanied by normal trading volume. Relative to the market the stock has been exceptionally strong over the last nine months and has risen 2.7% during the last week.

CASH FLOW

In 2018, Spartan Motors experienced a significant decline in cash of -$6.08 million (-18%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$31.57 million. Non-operating uses consumed -$2.84 million (-9% of EBITDA). Cash taxes consumed -$2.26 million (-7% of EBITDA). Re-investment in the business amounted to -$41.89 million (-133% of EBITDA). On a net basis, debt investors contributed +$6.54 million (+21% of EBITDA) while equity investors provided +$2.80 million (+9% of EBITDA).
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Spartan Motors’ Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Spartan Motors Inc Peer Group. In most years, Spartan Motors was in the third quartile and lower quartile. Currently, Spartan Motors is below median at -9% of EBITDA (-$2.84 million).

Spartan Motors’ Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Spartan Motors Inc Peer Group. In most years, Spartan Motors was in the top quartile and third quartile. Currently, Spartan Motors is slightly below median at -7% of EBITDA (-$2.26 million).

Spartan Motors’ Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Spartan Motors Inc Peer Group. (Since 2016 Business Re-investment, %EBITDA has experienced a very sharp decline.) In most years, Spartan Motors was in the top quartile and third quartile. Currently, Spartan Motors is substantially below median at -133% of EBITDA (-$41.89 million).

Spartan Motors’ Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Spartan Motors Inc Peer Group. In most years, Spartan Motors was in the top quartile and lower quartile. Currently, Spartan Motors is at the upper quartile at +21% of EBITDA (+$6.54 million).

Spartan Motors’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Spartan Motors Inc Peer Group. (Since 2015 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Spartan Motors was in the lower quartile and second quartile. Currently, Spartan Motors is above median at +9% of EBITDA (+$2.80 million).

Spartan Motors’ Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Spartan Motors Inc Peer Group. In most years, Spartan Motors was in the top quartile and lower quartile. Currently, Spartan Motors is lower quartile at -19% of EBITDA (-$6.08 million).
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Spartan Motors’ Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Spartan Motors Inc Peer Group. In most years, Spartan Motors was in the second quartile and third quartile. Currently, Spartan Motors is slightly below median at +3%.

PROFITABILITY

Spartan Motors’ return on equity has improved very significantly since 2009 accelerating very sharply after the 2015 level.
The key to the story for SPAR is a very strong positive trend in pretax operating return significantly augmented by a very strong positive trend in non-operating factors.
The productivity of Spartan Motors’ assets rose over the full period 2009-2019: asset turnover has enjoyed a strong overall uptrend.
Reinforcing this trend, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Spartan Motors’ return on equity is at median (8.5%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is at median (4.2%) reflecting asset turnover that is above median (1.96X) and below median pretax margin (2.1%).
Tax “keep” rate (income tax management) is at median (80.2%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is slightly above median (2.56X).

GROWTH RATES

There are no significant differences between Spartan Motors’ longer term growth and growth in recent years.
Spartan Motors’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 7.3% per year.

Total asset growth has been 3.7% per year.

Annual E.P.S. growth has been 18.0% per year.

Equity growth has been -0.7% per year.

Spartan Motors’ consensus growth rate forecast (average of Wall Street analysts) is 20.0% — substantially above the average of the historical growth measures.
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Relative to the Spartan Motors Inc Peer Group, Spartan Motors’ historical growth measures are erratic. Revenue growth (7.3%) has been at the upper quartile. E.P.S. growth (18.0%) has been at the upper quartile. Total asset growth (3.7%) has been below median. Equity growth (-0.7%) has been lower quartile.

Consensus growth forecast (20.0%) is upper quartile.
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PRICE HISTORY

Over the full time period, Spartan Motors’ stock price performance has been volatile and superior. Between February, 2009 and December, 2019, Spartan Motors’ stock price rose +675%; relative to the market, this was a +83% gain. Significant price moves during the period: 1) October, 2018 – December, 2019: +163%; 2) April, 2018 – October, 2018: -62%; 3) February, 2017 – October, 2017: +143%; 4) January, 2016 – August, 2016: +240%; 5) June, 2009 – October, 2009: -56%; and 6) February, 2009 – June, 2009: +397%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 162.7% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of 162.7% is upper quartile relative to Spartan Motors Inc Peer Group.

Current 5-year total return performance of 27.0% is upper quartile relative to the S&P 500 Composite.
Through October, 2019, with upper quartile current 5-year total return of 27.0% relative to S&P 500 Composite, Spartan Motors’ total return performance is upper quartile relative to Spartan Motors Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, SPAR’s overall valuation is high. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/assets is slightly above median. Price/equity ratio is at median. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.

Relative to Spartan Motors Inc Peer Group, SPAR’s overall valuation is high. The highest factor, the price/earnings ratio, is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/assets is at the upper quartile. Price/equity ratio is above median. The lowest factor, the ratio of enterprise value/revenue, is below median.
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Spartan Motors has a major value gap compared to the median valuation. For SPAR to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.67X to 0.93X. If SPAR’s ratio of enterprise value/revenue were to rise to 0.93X, its stock price would be lower by $7 to $25.
For SPAR to hit lower quartile valuation relative to the Spartan Motors Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.67X to 0.42X. If SPAR’s ratio of enterprise value/revenue were to fall to 0.42X, its stock price would decline by $-7 from the current level of $18.

VALUE TARGETS

SPAR’s future returns on capital are forecasted to be above the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
Spartan Motors’ current Price Target of $23 represents a +32% change from the current price of $17.68.
This neutral appreciation potential results in an appreciation score of 59 (41% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 59, the high Power Rating of 100 results in an Value Trend Rating of A.
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Spartan Motors’ current Price Target is $23 (+51% from the 2018 Target of $15 and +32% from the 12/02/19 price of $17.68). This dramatic rise in the Target is the result of a +17% increase in the equity base and a +30% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a very large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a very large negative impact.
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PTR’s return on equity forecast is 17.2% — above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly above the 2015 low of 4%.

PTR’s growth forecast is 9.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well above the 2016 low of 2%.

PTR’s cost of equity forecast is 8.3% — slightly above recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is above the 2015 low of 4.0%.
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At Spartan Motors’ current price of $17.68, investors are placing a positive value of $7 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 5.0% per year, and a return on equity of 11.2% versus a cost of equity of 5.6%.
PTR’s 2020 Price Target of $23 is based on these forecasts and reflects an estimated value of existing assets of $13 and a value of future investments of $10.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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