Our Exec Comp Aligned with ROIC Model Portfolio (+6.3%) outperformed the S&P 500 (+3.9%) from August 16, 2019 through September 11, 2019. The best performing stock in the portfolio was up 20%. Overall, 10 out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P 500.
This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating and align executive compensation with improving ROIC. We 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: Insight Enterprises (NSIT: $53/share)
Insight Enterprises (NSIT) is the featured stock in September’s Exec Comp Aligned with ROIC Model Portfolio. We made NSIT a Long Idea in August 2018 and the stock has underperformed (-5% vs. S&P 500 +4%) since the report. Now, the stock looks even more undervalued.
Since 2015, NSIT has grown after-tax operating profit (NOPAT) by 25% compounded annually. NOPAT over the trailing twelve months (TTM) is up 17% over the prior TTM period. Profit growth has been driven by 10% compound annual revenue growth and rising NOPAT margins, which have increased from 2% in 2015 to 3% TTM.
Figure 1: NSIT Revenue and NOPAT Since 2015
Sources: New Constructs, LLC and company filings
Executive Compensation Plan Helps Drive Shareholder Value Creation
NSIT added ROIC to its executive compensation plan in 2011. The company awards long-term restricted stock units based on the achievement of adjusted ROIC targets. Performance-based RSU’s made up 36% of NSIT’s CEO pay and 29% of other executives’ pay last year. Since 2015, NSIT has improved its ROIC from 7% to 10% TTM.
NSIT’s executive compensation plan lowers the risk of investing in this stock because we know executives’ interests are tied to shareholders’ interests.
NSIT Remains Undervalued
At its current price of $53/share, NSIT has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects NSIT’s NOPAT to permanently decline by 10%. This expectation seems pessimistic given NSIT has grown NOPAT by 25% compounded annually since 2015 and 12% compounded annually over the past two decades.
If NSIT can maintain 2018 NOPAT margins (2.4%) and grow NOPAT by just 3% compounded annually over the next decade, the stock is worth $67/share today – a 26% upside. See the math behind this dynamic DCF scenario.
As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings. Below are specifics on the adjustments we make based on Robo-Analyst findings in Insight Enterprises’ 2018 10-K:
Income Statement: we made $61 million of adjustments, with a net effect of removing $7 million in non-operating expenses (1% of revenue). You can see all the adjustments made to NSIT’s income statement here.
Balance Sheet: we made $602 million of adjustments to calculate invested capital with a net increase of $494 million. One of the largest adjustments was $432 million in accumulated asset write-downs. This adjustment represented 35% of reported net assets. You can see all the adjustments made to NSIT’s balance sheet here.
Valuation: we made $110 million of adjustments with a net effect of decreasing shareholder value by $110 million. There were no adjustments that increased shareholder value. The largest adjustment to shareholder value was $110 million in total debt, which includes $63 million in operating leases. This lease adjustment represents 3% of NSIT’s market cap. See all adjustments to NSIT’s valuation here.