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A Quality Exec Comp Plan Lowers The Risk Of Investing In Boise Cascade Company

Four new stocks make September’s Exec Comp Aligned with ROIC Model Portfolio, available to members as of September 15, 2021.

Recap From August’s Picks

The Exec Comp Aligned with ROIC Model Portfolio (-1.7%) underperformed the S&P 500 (+0.1%) from August 13, 2021 through September 13, 2021. The best performing stock in the portfolio was up 12%. Overall, four out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P 500 from August 13, 2021 through September 13, 2021.

This Model Portfolio only includes stocks that earn an attractive or very attractive rating and align executive compensation with improving ROIC. I think this combination provides a uniquely well-screened list of long ideas because return on invested capital (ROIC) is the primary driver of shareholder value creation.

New Stock Feature for September: Boise Cascade Company (BCC)

Boise Cascade Company (BCC) is the featured stock in September’s Exec Comp Aligned with ROIC Model Portfolio.

Boise Cascade grew revenue by 9% compounded annually and net operating profit after tax (NOPAT) by 29% compounded annually from 2015 to 2020, per Figure 1. The firm’s trailing-twelve-month (TTM) NOPAT is up 53% year-over-year. NOPAT margin improved from 2% in 2015 to 9% over the TTM.

Figure 1: Boise Cascade’s NOPAT Growth: 2015 – TTM

ROIC-Based Pay Properly Incentivizes Executives

Boise Cascade’s executive compensation plan aligns executives’ interests with shareholder’s interests by tying its performance stock unit awards to a one-year ROIC performance goal.

Boise Cascade’s inclusion of ROIC as an executive compensation performance goal has helped drive shareholder value creation through rising ROIC and economic earnings. Boise Cascade’s ROIC improved from 6% in 2015 to 18% in 2020, and even higher, to 45% over the TTM. Meanwhile, economic earnings grew from $3 million in 2015 to $172 million in 2020, and to $567 million over the TTM.

Figure 2: Boise Cascade’s Return on Invested Capital: 2015 – TTM

BCC Is Undervalued

At its current price of $56/share, BCC has a price-to-economic book value (PEBV) ratio of 0.2. This ratio means the market expects Boise Cascade’s NOPAT to permanently decline by 80%. Certainly, this ratio is impacted by a large improvement in economic book value during 2020 and the TTM. However, if I look at a longer time frame, BCC still looks undervalued. The firm’s 3-year average economic book value is $4.3 billion compared to a market cap of just $2.2 billion.

Even if Boise Cascade’s NOPAT margin falls to 3% (equal to five-year average, compared to 9% TTM) and the firm’s NOPAT falls by <1% compounded annually over the next 10 years, the stock is worth $88/share today – a 57% upside. See the math behind this reverse DCF scenario. For reference, Boise Cascade has grown NOPAT by 16% compounded annually since 2012. Should the firm grow NOPAT more in line with historical growth rates, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I make based on Robo-Analyst findings in Boise Cascade’s 10-K and 10-Qs:

Income Statement: I made $77 million in adjustments, with a net effect of removing $73 million in non-operating expenses (1% of revenue). You can see all the adjustments made to Boise Cascade’s income statement here.

Balance Sheet: I made $248 million in adjustments to calculate invested capital with a net decrease of $52 million. One of the largest adjustments was $85 million (6% of reported net assets) in asset write downs. You can see all the adjustments made to Boise Cascade’s balance sheet here.

Valuation: I made $904 million in adjustments with a net effect of decreasing shareholder value by $329 million. Apart from total debt, the most notable adjustment to shareholder value was $287 million in excess cash. This adjustment represents 14% of Boise Cascade’s market cap. See all adjustments to Boise Cascade’s valuation here.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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