Rating Update: Stock Rating A-Highest (1/23/20)-Super Micro Computer Inc (SMCI).

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BUSINESS

Super Micro Computer, Inc., together with its subsidiaries, develops and provides high performance server solutions based on modular and open architecture. It offers a range of server, storage, blade, workstation, and full rack solutions, as well as networking devices, server management software, and technology support and services. The company also provides a range of application optimized server solutions, including rackmount and blade server systems; and server subsystems and accessories comprising server boards, and chassis and power supplies, as well as other system accessories, including microprocessors, and memory and disc drives. In addition, it provides customer support services and hardware enhanced services. The company offers its products to data center, cloud computing, enterprise IT, big data, high performance computing, and Internet of Things/embedded markets.
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INVESTMENT RATING

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SMCI is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

Super Micro Computer 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 highly consistent signals. Super Micro Computer has a good Appreciation Score of 82 and a very high Power Rating of 86, producing the Highest Value Trend Rating.

Super Micro Computer’s stock is selling well below targeted value. The current stock price of $28.79 compares to targeted value 12 months forward of $55.
This high appreciation potential results in an appreciation score of 82 (only 18% of the universe has greater appreciation potential.)
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Super Micro Computer has a Power Rating of 86. (This very high Power Rating indicates that SMCI has a better chance of achieving attractive investment performance over the near to intermediate term than all but 14% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been favorable; the recent trend in SMCI’s earnings estimates has been favorable; and is currently in a modestly favorable positi.

INVESTMENT PROFILE

SMCI’s financial strength is exceptional. Financial strength rating is 93.
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Relative to the S&P 500 Composite, Super Micro Computer Inc has moderate Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that SMCI is lower risk. Relative weaknesses include: high stock price volatility, and low historical growth. SMCI’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. SMCI has unusually low market capitalization.

CURRENT SIGNALS

Super Micro Computer’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

Super Micro Computer’s current technical position is very strong. The stock price is in a 5.6 month up move. The stock has appreciated 68.7% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Recent meaningful positive changes in fundamentals have benefitted Super Micro Computer Inc (NASDAQ: SMCI): the consensus estimate for June, 2020 increased significantly, the stock’s power rating rose above 70, and the consensus estimate for June, 2021 increased significantly.
The stock is currently rated A.
Super Micro Computer Inc (NASDAQ: SMCI) stock enjoyed a major increase of 11.6% on 1/23/20. The shares closed at $3.84. However, trading volume in this advance was unusually low at 58% of normal. The stock has been exceptionally strong relative to the market over the last nine months and has risen 6.6% during the last week.

CASH FLOW

In 2019, Super Micro Computer generated a very significant increase in cash of +$141.7 million (+120%). Sources of cash were much larger than uses. Cash generated from 2019 EBITDA totalled +$121.4 million. Non-operating uses consumed -$3.7 million (-3% of EBITDA). Cash taxes consumed -$14.9 million (-12% of EBITDA). Withdrawal of investment from the business totalled +$112.2 million (+92% of EBITDA). On a net basis, debt investors removed -$98.9 million (-81% of EBITDA) while equity investors supplied +$25.6 million (+21% of EBITDA).
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SMCI’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Super Micro Computer Inc Peer Group. In most years, Super Micro Computer was in the second quartile and top quartile. Currently, Super Micro Computer is above median at -3% of EBITDA (-$3.7 million).

SMCI’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Super Micro Computer Inc Peer Group. In most years, Super Micro Computer was in the third quartile and lower quartile. Currently, Super Micro Computer is below median at -12% of EBITDA (-$14.9 million).

SMCI’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Super Micro Computer Inc Peer Group. (Since 2017 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Super Micro Computer was in the lower quartile and top quartile. Currently, Super Micro Computer is upper quartile at +92% of EBITDA (+$112.2 million).

SMCI’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Super Micro Computer Inc Peer Group. (Since 2017 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Super Micro Computer was in the top quartile and second quartile. Currently, Super Micro Computer is lower quartile at -81% of EBITDA (-$98.9 million).

SMCI’s Equity Investors, %EBITDA has suffered a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Super Micro Computer Inc Peer Group. (Since 2017 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Super Micro Computer was in the top quartile. Currently, Super Micro Computer is upper quartile at +21% of EBITDA (+$25.6 million).

SMCI’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Super Micro Computer Inc Peer Group. (Since 2017 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Super Micro Computer was in the top quartile and third quartile. Currently, Super Micro Computer is upper quartile at +117% of EBITDA (+$141.7 million).
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SMCI’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Super Micro Computer Inc Peer Group as well. In most years, Super Micro Computer was in the top quartile and second quartile. Currently, Super Micro Computer is at the upper quartile at +7%.

PROFITABILITY

SMCI’s return on equity has eroded very significantly since 2010 even as it experienced a very sharp recovery after the 2018 low.
This very significant erosion was due to very strong negative trend in pretax operating return and small positive trend in non-operating factors.
The productivity of SMCI’s assets remained stable over the full period 2010-2019: asset turnover has exhibited little to no overall change even as it experienced very sharp improvement from the 2017 level.
Additionally, pretax margin experienced a very strong overall downtrend that accelerated very sharply from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
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SMCI’s return on equity is slightly below median (8.1%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is at median (5.7%) reflecting asset turnover that is at median (1.96X) and at median pretax margin (2.9%).
Tax “keep” rate (income tax management) is upper quartile (81.5%) resulting in after tax return on assets that is substantially above median.
Financial leverage (leverage) is lower quartile (1.75X).

GROWTH RATES

Overall, Super Micro Computer’s growth rate has slowed considerably in recent years.
Super Micro Computer’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 14.8% per year.

Total asset growth has been 14.5% per year.

Annual E.P.S. growth has been 9.9% per year.

Equity growth has been 13.0% per year. (More recently it has been 7.4%.)
No consensus growth rate forecast is available for Super Micro Computer.
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Relative to the Super Micro Computer Inc Peer Group, Super Micro Computer’s historical growth measures are generally top quartile. Revenue growth (14.8%) has been upper quartile. Total asset growth (14.5%) has been upper quartile. Equity growth (13.0%) has been upper quartile. E.P.S. growth (9.9%) has been at median.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Super Micro Computer’s stock price performance has been volatile and quite good. Between March, 2009 and January, 2020, Super Micro Computer’s stock price rose +485%; relative to the market, this was a +40% gain. Significant price moves during the period: 1) April, 2013 – February, 2015: +318%; and 2) April, 2012 – October, 2012: -55%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 74.1% 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 December, 2019 of 74.1% is upper quartile relative to Super Micro Computer Inc Peer Group.

Current 5-year total return performance of -7.2% is lower quartile relative to the S&P 500 Composite.
Through December, 2019, with lower quartile current 5-year total return of -7.2% relative to S&P 500 Composite, Super Micro Computer’s total return performance is lower quartile relative to Super Micro Computer Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, SMCI’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the price/earnings ratio, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/assets, then by the price/equity ratio. The lowest factor, ratio of enterprise value/revenue, is lower quartile.
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Super Micro Computer has a major value gap compared to the median. For SMCI to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.37X to 0.56X. If SMCI’s ratio of enterprise value/revenue were to rise to 0.56X, its stock price would be higher by $13 to $42.
For SMCI to achieve upper quartile valuation relative to the Super Micro Computer Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.37X to 0.75X. If SMCI’s ratio of enterprise value/revenue were to rise to 0.75X, its stock price would increase by $25 from the current level of $29.

VALUE TARGETS

SMCI is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Super Micro Computer’s current Price Target of $57 represents a +96% change from the current price of $28.79.
This high appreciation potential results in an appreciation score of 82 (only 18% of the universe has greater appreciation potential.)
Reinforcing this high Appreciation Score of 82, the high Power Rating of 86 contributes to an Value Trend Rating of A.
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Super Micro Computer’s current Price Target is $57 (-17% from the 2019 Target of $68 but +96% from the 01/23/20 price of $28.79). This slight fall in the Target is the result of a +7% increase in the equity base and a -22% decrease in the price/equity multiple. Each of the Value Drivers contributed to this decline in the price/equity multiple. The forecasted decline in growth has a large negative impact on the multiple. The forecasted decline in return on equity also has a large negative impact as did the increase in cost of equity.
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PTR’s return on equity forecast is 12.5% — in line with our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2011 and 2019. The current forecast is below the 2011 peak of 16%.

PTR’s growth forecast is 8.0% — slightly below our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2011 and 2019. The current forecast is significantly below the 2011 peak of 21%.

PTR’s cost of equity forecast is 7.5% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic decline between 2011 and 2019. The current forecast is steady at the 2011 peak of 9.4%.
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At Super Micro Computer’s current price of $28.79, 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 11.0% per year, and a return on equity of 13.5% versus a cost of equity of 7.4%.
PTR’s 2021 Price Target of $57 is based on these forecasts and reflects an estimated value of existing assets of $37 and a value of future investments of $19.

About John Lafferty 61383 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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