Let’s have a look at this one after the whole subprime mess and see if it still deserves to be a Rule #1 stock!

Company Profile:

From Yahoo Finance

First Regional Bancorp operates as the bank holding company for First Regional Bank, which provides commercial banking services to professionals and businesses in California. The company accepts non-interest bearing demand deposits, savings and NOW accounts, money market accounts, and time certificates of deposits. It also offers real estate, government guaranteed, and real estate construction loans, as well as commercial loans for commercial and industrial borrowers, which includes equipment financing and short-term loans. In addition, the company provides telephone transfers, wire transfers, and travelers checks; and credit card deposit and clearing services for retailers and other businesses. Further, it provides administrative services for self directed retirement plans, as well as trust services for living trusts, investment agency accounts, IRA rollovers, and all forms of court-related matters.

This is a small cap stock with a market capitalization of $131.34M.

Financial Analysis:

Let’s trot out the Big Five for everyone to see starting with the Return on Invested Capital. Last year’s ROIC came in at 12.21%. It is lower than the 5 year average ROIC of 13.60%.

Looking at the return on equity, we can see that the ROE really picked up from 2001 where it was at 9.63% and skyrocketed up to 24.23% by 2006. Last year’s ROE came in at a very respectable 18.38%. The 10 year average ROE was 14.09% and the 5 year average ROE improved to 18.75%. Some very good numbers considering the year we had in 2007.

Equity growth rate remained very high at 21.88% for 2007. This is right around the 9 year rate of 23.64%. The 5 year growth rate was a very impressive 35.69% and the 3 year rate was 32.05%. Not the trend that Rule #1 investors want to see. We like to see the growth rates increasing or at least remaining steady. However, this is still an excellent growth rate.

Now, the first crack in the armour shows up in the earnings per share growth rate. The 9 year rate is an astounding 39.92%. The 5 year rate comes in at a blistering 56.61%. The 3 year rate dips to 41.79% and last year’s rate? It declined by 7.53%. I find it interesting that the EPS growth rate declined yet the equity growth rate was quite healthy. Seems to be a disconnect there.

Sales growth rates also show a massive drop off. The 9 year rate is 34.05%. The 5 year rate is 44.07%. The 3 year rate dips to 34.56% and last year’s rate came in at a mere 4.09%. At least it wasn’t negative!

But the cash flow growth rate was not as lucky. From its 5 year high rate of 55.18%, last year’s declined by 4.46%. The second negative number showing up in the Big Five.

Rule #1 investors like to see the growth rates remaining steady or preferably increasing. But negative growth rates definitely don’t figure in!

Stock Analysis:

Let’s calculate the sticker price for this stock.

First off, looking at the historical P/E. The 10 year average P/E is 11.84. The 5 year average P/E is 11.91. Wow. Talk about consistency. The current P/E? A bargain basement 4.82!

My initial estimate for the EPS growth rate comes from looking at the equity growth rates. And as you can see, those looked solid all the way through to last year. So my initial estimate comes in at a very aggressive 23.64% (or the 5 year average equity growth rate).

Analysts, however, predict an EPS growth rate of just 7.53%. So, I will of course take the more conservative estimate.

With this information, my sticker price works out to $5.59. At the current price of $10.94, that works out to a premium of 95.72%. That is a far cry from the original sticker price we calculated a year ago of $34.44!

Here is my stock analysis of FRGB.

Here is the 1 year stock price chart:

Steady decline over the last year.

Conclusion:

So, is FRGB still a Rule #1 stock? From the fundamental analysis, it doesn’t follow the strict rules of steady or increasing growth rates. I have a feeling that none of the financials will now pass the Rule #1 criteria after this subprime crisis.

It has definitely been interesting to look at this stock after having performed the analysis 1 year ago. The sticker price has fallen from $34.44 to $5.59. However, a lot of that can be attributed to the current P/E of 4.82!  Is that a fair P/E to use?  If I use the 5 year average P/E of 11.84, the sticker price jumps to $13.73 (or a 20% discount to the current price!).    But still a huge drop from the previously calculated sticker price.

Is this one a deal? Or is this one finished?

Full Disclosure: I do not own shares in FRGB.

Rule #1 Screen Results 05-12-2008

Quite a few financials showed up on this list. Although in my screen I did demand a 1 year growth rate greater than 10% in both Sales and EPS, I did not enforce that it should be higher than the longer term growth rates.

Let’s see how these candidates pan out. We can always tweak the criteria later.

Note that the symbols with the -T are for Canadian companies on the TSE.

What screening criteria did I use? Well, considering that I am still following the Rule #1 methodology, it is basically the same as it was the last time. Since it has been so long, let me recap the criteria:

Growth Rates:

• 10, 5, 3, 1 Yr Sales Growth Rates
• 10, 5, 3, 1 Yr EPS Growth Rates
• 10 Yr Book Value Growth Rate
• 10 Yr Cash Flow Growth Rate

All these growth rates had to be greater than 10%. For Sales and EPS growth rates, I further constrained these by enforcing that the 3 year growth rates were higher than the 5 year rates and that the 5 year rates were higher than the 10 year rates.
Consistency:

• R squared for 5 Yr Revenue Growth
• R Squared for 5 Yr EPS Growth

Both these coefficients had to be greater than 0.9. I was looking for consistent growth rates rather than irregular and uncertain rates.

Management:

• Average 5 Yr ROE

The average 5 year ROE had to be greater than 10%.

And lastly, I sorted this list of companies by their earnings yield.

With this screen, I identified 13 companies that met all these criteria! Not as many as I had hoped! But hopefully a good starting point.

Stay tuned for that list on my next post! (Don’t worry. I’ll post later in the week.)

You might think that a ‘Fun Ship’ would be overflowing with young people looking to party on a floating hotel. But you would be surprised. In fact, the ship seems to be more of a floating retirement home! This company just might be a great way to play the aging North American population.

Let’s get back in the groove and see if this stock is worthy of being considered a Rule #1 stock!

Company Profile:

From Yahoo Finance

Carnival Corporation operates as a cruise and vacation company. The company also markets and operates hotels or lodges in Alaska and the Yukon Territory of Canada; motorcoaches for sightseeing and charters in Washington, Alaska, and the Canadian Yukon Territory and the Canadian province of British Columbia; domed rail cars, which are run on the Alaska Railroad between Anchorage and Fairbanks, Whittier and Denali, and Whittier and Talkeetna; day boats in Alaska and on the Yukon River; and sightseeing packages. As of January 29, 2008, it operated 85 cruise ships with 158,352 passenger capacity in North America, Europe, Australia, and New Zealand. The company was founded in 1974 and is headquartered in Miami, Florida.

Market capitalization is $34.15B.

Fundamental Analysis:

Let’s have a look at the Big Five and see if this company has established a moat.

So how has management performed? Rule #1 investors look at the return on invested capital to judge management. Rule #1 investors also demand a minimum of 10% per year over the last 10 years. Unfortunately, management has not attained that desired return, although it has remained quite close. Clearly, the ROIC has been dropping from the loftier days in 1998-1999 of 15% down to the current 9.2%. However, management has been fairly consistent in staying close to the 10% minimum. The 5 year average ROIC comes in at a disappointing 8.60% (mostly hampered by the subpar ROIC in 2003 of 5.8%).

Return on equity has also been declining. The 10 year average ROE comes in at 13.87%. The 5 year average ROE drops to 11.55%. Debt currently makes up 30.7% of capital.

Equity growth rates have also been declining. The 9 year average equity growth rate is a decent 15.02%. That slips to 13.39% over 5 years and further declines to 9.01% over 3 years. Last year’s equity growth rate came in at 10.6%. Once again, this company seems to want to sit at the 10% mark.

Earnings per share growth rate has been a bit more volatile. The 9 year average EPS growth rate is 8.81%. The 5 year rate jumps up to 13.29%. But its all down hill from there. The 3 year rate falls to 8.77%. And last year’s EPS growth rate was a mere 6.12%.

Sales growth rates are not immune to this trend. The 9 year rate comes in at a whopping 19.82%. The 5 year rate increases to 23.18%. Unfortunately, the 3 year rate plummets to 9.89%. And last year’s rate stayed steady at 10.09%.

Cash flow growth rates are no different (and would we expect them to be?). The 9 year rate is 11.38%. The 5 year rate increases to 15.93%. The 3 year rate comes down to 9.42%. And last year’s cash flow growth rate was 7.96%.

Unfortunately, CCL does not exhibit the characteristics of a Rule #1 stock. However, it does seem to have stabilized into its current performance numbers.

Stock Analysis:

If you are still interested in owning this company, let’s calculate the sticker price.

For my future EPS growth rate, I chose 9.01%. This is the 3 year equity growth rate and seems to be in line with the last few years. Analysts have forecast 15%. That is significantly higher but I think too optimistic. I will stick with my 9.01% EPS growth rate.

The P/E has been compressing over the years. The 10 year average P/E is 19.11. The 5 year drops to 17.75. And the current P/E is 13.88. The default P/E (which is just twice the future EPS growth rate) would be 18.02. I will use the 5 year average P/E of 17.75 which is in line with our future EPS growth rate.

With this information, the sticker price works out to $30.57. At the current price of $40.81, Mr. Market is demanding a premium of 33.52%! Too rich for my blood.

Here is my Rule #1 analysis of CCL.

Here is the 1 year stock price chart:

Quite the choppy looking graph. The company has definitely had a nice run from its recent lows, but seems to be headed right back there.

Conclusion:

Hoping to find a long term play on the aging population, I thought it would be interesting to have a look at Carnival Corporation and its ‘Fun Ships.’ It does not exhibit the characteristics of a Rule #1 stock.

And unfortunately, it is not selling at an attractive price.

But it was a fun vacation!

Full Disclosure: I do not own shares in CCL.

Stay tuned as I get back to blogging regularly about Rule #1 stocks!

First up will be to evaluate the current list of Rule #1 stocks and make sure that they still belong.  After that, we’ll continue the search for more Rule #1 stocks.

Company Profile:

From Yahoo Finance

Danaher Corporation engages in the design, manufacture, and marketing of professional, medical, industrial, and consumer products. It operates through four segments: Professional Instrumentation, Medical Technologies, Industrial Technologies, and Tools & Components. The Professional Instrumentation segment produces and sells compact, professional electronic test tools and calibration equipment; water quality instrumentation and consumables, and ultraviolet disinfection systems; and retail/commercial petroleum products and services, including underground storage tank leak detection and vapor recovery systems. The Medical Technologies segment designs and manufactures critical care diagnostic instruments, high-precision optical systems for the analysis of microstructures, and a range of products used by dental professionals. The Industrial Technologies segment manufactures products and sub-systems that are incorporated by customers and systems integrators into production and packaging lines, and by original equipment manufacturers into various end-products and systems. It offers product identification equipment and consumables; motion, position, speed, temperature, level instruments, and sensing devices; power switches and controls; power protection products; liquid flow and quality measuring devices; aerospace safety devices and defense articles; and electronic and mechanical counting and controlling devices. The Tools & Components segment produces and distributes general purpose and specialty mechanics’ hand tools, as well as toolboxes and storage devices, diesel engine retarders, wheel service equipment, and drill chucks.

Market capitalization is $25.64B.

Fundamental Analysis:

Being a number cruncher, you know I like to start looking at the Big Five.

So how has management performed? Looking at the return on invested capital, DHR has managed to deliver our Rule #1 investor minimum of 10% ROIC each and every year for the last 10 years. They have been very consistent in the 12% range.

Return on equity shows management’s consistency. The 10 year average ROE is 15.34%. The 5 year average ROE comes in at 15.02%. Slightly down, but very consistent.

Equity growth rate has also been rock steady. The 9 year rate is 20.09%. The 5 year rate inches higher to 21.78%. The 3 year rate inches back down to 20.89%. And last year’s equity growth rate came in high at 29.66%.

Earnings per share growth rate has not been quite as consistent. The 9 year rate is 19.61%. The 5 year rate increases to 24.47%. The 3 year rate edges even higher to 25.29%. And last year’s EPS growth rate took a serious step back to 16.85%.

Sales growth rates once again come in consistent. The 9 year rate was 17.06%. The 5 year rate climbs higher to 20.71%. The 3 year rate continues on up to 21.31%. And last year’s sales growth rate dipped to 20.18%. Pretty solid consistency I must admit.

Cash flow growth rate - like EPS growth rate - isn’t quite as pretty. The 9 year rate is 16.45%. The 5 year rate climbs up to 19.82%. The 3 year rate jumps to 24%. But last year’s rate dropped to 15.95%.

All in all, some very consistent growth rates and management did deliver our required ROIC.

Stock Analysis:

Now on to the fun part - calculating a sticker price.

For my future EPS growth rate, I initially estimated 20.09% which comes from the 9 year equity growth rate. However, analysts have forecast only 15.8%. So I will go with their more conservative estimate.

For my future P/E, I took the 5 year average P/E of 21.53 which is slightly lower than the current P/E of 22.36. Even the 10 year average P/E isn’t too far off at 23.32. Pretty consistent P/E throughout the decade.

With this information, the sticker price worked out to $84.68. At the current price of $82.06, Mr. Market is selling this stock at a slight discount of 3.10%. Of course, that also means that he is selling this stock at a premium of 93.8% over the MOS price!

Here is my Rule #1 analysis of DHR.

Here is the 1 year stock price chart:

This is a very nice upward trending stock.

Conclusion:

Well, the Big Five look good to me. A bit of a concern over a drop in the EPS growth rate and the cash flow growth rates in 2006. So I would consider this a Rule #1 stock.

Unfortunately, it is not selling anywhere near its MOS price. Definitely one to watch.

Full Disclosure: I do not own shares in DHR.

Company Profile:

From Yahoo Finance

XTO Energy, Inc. and its subsidiaries engage in the acquisition, development, exploitation, and exploration of producing oil and gas properties in the United States. It also involves in the production, processing, marketing, and transportation of oil and natural gas. The company’s proved reserves are principally located in the Eastern region, including the East Texas basin, northwestern Louisiana, and Mississippi; North Texas region, including the Barnett Shale; San Juan region, including properties in the San Juan and Raton Basins of New Mexico and Colorado, as well as properties in the Uinta Basin of Utah; Permian and South Texas region with properties in West Texas, southeastern New Mexico, and South Texas; Mid-Continent and Rocky Mountain region with fields located in Wyoming, Kansas, Oklahoma, and Arkansas; and the Gulf Coast region.

Market capitalization is $24.6B.

Fundamental Analysis:

Let’s see what the Big Five have to say about the moat.

As Rule #1 investors, we are looking for a minimum 10% return on invested capital in each of the last 10 years. Unfortunately, XTO’s management did not deliver on this requirement. There were 4 years with sub 10% ROIC and that does not include 1998 when the ROIC was -6.2%! Now, the last 4 years have delivered 10%+ ROIC and it has been steadily increasing.

The Return on Equity shows this improving trend as the 10 year average ROE is 14.59% while the 5 year average ROE improves to 22.98%.

The equity growth rate has been surprisingly impressive and constant! The 9 year rate of equity growth is an astounding 44.53%! The 5 year rate stays close at 43.7%. The 3 year rate slightly improves to 50.77%! Last year’s rate has dropped off those significant rates to a mere 37.83%.

The earnings per share growth rate has delivered similar if not greater numbers. The 7 year rate is 61.27%. The 5 year rate drops to 41.41%. The 3 year rate skyrockets to 71.04%. And last year’s rate was a decent 36.71%.

And you can see why their equity growth rates have been so high because their sales growth rates are in the same ballpark. The 9 year rate is 41.9%. The 5 year rate increases to 46.58%. The 3 year rate further increases to 58.96%. Last year’s rate dropped back down to 30.24%.

And you guessed it, cash flow growth rates show similar numbers. The 9 year rate is 51.25%. The 5 year rate drops to 38.01%. The 3 year rate jumps right back up to 58.11%. And last year’s rate was 35.11%.

These are definitely some massive (and consistent) growth rates. The company fell short on the ROIC during the first part of the period, but have been improving ever since.

Stock Analysis:

Let’s put a sticker price on this stock.

For my future EPS growth rate, I typically look at the historical equity growth rates and take a fairly conservative growth rate. In this case, my initial estimate was 43.7%! That is the 5 year equity growth rate and is lower than the 9 year rate of 44.53%!

However, analysts have forecast a much more down to earth growth rate of 12.5%. So I’ll stick with that although by historical standards, it is quite low.

For my future P/E, I chose the 5 year average P/E of 12.93 which is slightly lower than the current P/E of 14.45.

With this information, my sticker price worked out to $45.67. At the current price of $63.58, Mr. Market is demanding a premium of 39.23%.

Here is my Rule #1 analysis of XTO.

Here is the 1 year stock price chart:

A nice up trending stock chart.

Conclusion:

Well, I am finding this a hard stock to put in perspective. From one side, it does not meet our Rule #1 criteria due to the ROIC in the early part of the decade. But things have definitely improved since then. Also, these growth rates are quite phenomenal and once again lean me towards wanting this stock to be a Rule #1 candidate.

What are your thoughts on this stock? Do you consider it a Rule #1 stock?

Full Disclosure: I do not own shares in XTO.

Let’s find out.

Company Profile:

From Yahoo Finance

NVIDIA Corporation offers programmable graphics processor technologies worldwide. The company creates various products for computing, consumer electronics, and mobile devices. It offers its products under four groups: graphics processing units (GPUs), media and communications processors (MCPs), handheld GPUs, and consumer electronics. GPU product group includes products that support desktop personal computers, notebook personal computers, professional workstations, and other GPU-based products.

Market capitalization of $17.66B.

Fundamental Analysis:

Let’s bring out the Big Five for some show and tell!

The return on invested capital (ROIC) does not meet our standards as Rule #1 investors. there are many years ( 4 in fact) where the ROIC was below 10%. There were also 5 years where the ROIC was well above this mark. Inconsistency.

And the return on equity clearly shows a down trend. The 10 year average ROE is 17.01%. The 5 year rate drops to 12.93%. Not the trend I want to see.

Equity growth rate has been rather spectacular over all. The 8 year rate is a whopping 40.55%. The 5 year rate plummets to 15.87%. The 3 year rate bounces back to 20.54%. And last year’s rate was a healthy 27.48%. Nice uptrend over the last 5 years.

Earnings per share growth rate has been quite stellar. The 8 year rate is a phenomenal 42.91%. The 5 year rate drops to a respectable 25.86%. The 3 year rate skyrockets to 79.88%. And last year’s rate comes in at a great 40.35%. Lots of volatility in these numbers.

Sales growth rates show that same significant decline in 2003 and 2004. The 5 year rate is 14.87%. The 3 year rate climbs to 18.88%. And last year’s rate jumps to 29.17%.

Cash flow growth rates exhibit the same behaviour. Start off very strong, drop during the 5 year rate and then climb back up. In this case, the 8 year rate is 41.47%. The 5 year rate drops to 21.64%. The 3 year rate skyrockets to 53.6%. And last year’s rate was 35.23%. All very decent numbers.

These numbers all look pretty good. But they don’t exhibit the Rule #1 characteristics of trending upwards or at least maintaining their own. In 2003 and 2004, the company experienced issues which are reflected in the 5 year rate. This is consistent in all the growth rates.

Stock Analysis:

Let’s put a sticker price on this one if we can.

For the future EPS growth rate, I went with the conservative 5 year rate of 15.87% as my initial guess. The analysts are backing me up by forecasting 15.8%. I’ll use their slightly more conservative estimate.

For my future P/E, I will use the current P/E of 27.85. That is significantly lower than the historical 5 year average P/E of 38.67. With the drop in growth rates has come a compression of the P/E.

With this information, the sticker price works out to $35.05. At today’s price of $32.68, that works out to a slight discount of 6.75%. Of course, that also implies a premium of 86.5% over the MOS price.

Here is my Rule #1 analysis of NVDA.

Here is the 1 year stock price chart:

NVDA has had a very nice run over the last year.

Conclusion:

Does this meet our Rule #1 criteria? I would argue no. The consistency in the growth rates are not there. Does that mean this is a bad company. Absolutely not. It seems to have rebounded very nicely from the 2003 and 2004 lows. I am sure that there are other methodologies that will like this stock.

Full Disclosure: I do not own shares in NVDA.

Company Profile:

From Yahoo Finance

Watson Wyatt Worldwide, Inc. provides human capital and financial management consulting services worldwide. It designs, develops, and implements human resource strategies and programs in five principal practice areas, which include benefits; technology and administration solutions; human capital; investment consulting; and insurance and financial services group.

Market capitalization is $2.09B.

Fundamental Analysis:

The Big Five don’t lie. So let’s have a look and see if this company has a MOAT! One caveat is that I do not have 10 years worth of data for this company.

Starting with the return on invested capital, I can see that it clearly meets the 10% minimum ROIC that Rule #1 investors demand. However, it has been steadily trending downwards from the lofty 45% ROIC in 2000 to the 12%-13% ROIC attained each of the last 2 years. Very sharp decline. The 5 year average ROIC is 16.5%.

Return on equity bears this out as well. It has dropped from 38.12% in 2001 to 13.96% in 2007. The 5 year average ROE is a healthy 20.36% but that has not been achieved in either of the last 2 years.

The equity growth rates have been very erratic over the last 6 years. From a high of 113.23% in 2006 to negative growth rates in 2003 (-4.83%) and 2005 (-5.29%). Of course, averaging these peaks and valleys over the whole period shows a much more consistency. I prefer to see more consistency which makes our estimates that much more reliable.

The 5 year equity growth rate is an amazing 34.15%. The 3 year rate is even better at 42.2%. Last year’s rate drops down to 21.64%.

Earnings per share growth rate has been trending upwards. The 5 year rate is 12.26%. The 3 year rate almost doubles to 21.58%. And last year’s rate was 31.98%.

Sales growth rates were non-existent over a 3 year period (2002 - 2004). The average growth rates look great thanks to a sales growth rate of 72.47% in 2007. That of course skews our averages.

Cash flow growth rates in 2002 and 2004 were negative while the last two years have experienced amazing growth rates of 37.14% and 33.46% respectively.

Overall, I find the Big Five are very erratic. Moving from a large growth rate to a negative growth rate and then back again. I would presume that this stock has a significant amount of volatility to it. Not the kind of stock that I would be looking to hold for the next 10 years.

Stock Analysis:

Although I don’t consider this a Rule #1 stock, let’s see if we can put a sticker price on this company.

Looking at the historical equity growth rate, it is tough to pick a future EPS growth rate. It has been so volatile over the last 6 years. There were 2 negative years and 3 years of 20%+ growth rates. I feel that skews the averages. The analysts have forecast 11%. That seems reasonable so why argue.

For a future P/E, I compared the 5 year average P/E of 15.74 and the current P/E of 17.24. I’ll take the more conservative value of 15.74. That is also lower than the default P/E which is 22 (11% future EPS growth rate x 2).

With this information, my sticker price works out to $31.15. At the current price of $48.61, Mr. Market is demanding a premium of 56.03%!

Here is my Rule #1 analysis of WW.

Here is the 1 year stock price chart:

The last two years have shown excellent growth rates in the Big Five and that is reflected in last year’s stock price chart.

Conclusion:

Is this a Rule #1 stock? I would argue no. Much too erratic from year to year. Would I be comfortable holding this stock for a 10 year period? No.

Full Disclosure: I do not own shares in WW.

I apologize for my lack of posts.  Things have been hectic at home and at work plus my doctor suggested that I exercise a little more frequently than I have been.  So all that has taken its toll on my blogging time.

But things have settled down and I am back into a routine, so I hope to post regularly 3 times a week (Monday, Wednesday, Friday).

So stick around.  If you have any leads on a Rule #1 stock, please feel free to drop me a line and we’ll have a look together!