Not as much of a moat as it once had, competition, losing market share, weakening margins?

3.35 EPS x 5 years @ 10% $5.4 x 20 PE $108, 12% desired return equates to $61 today. Seems fairly valued?


I don't know enough about their business to say, but at first glance, the 10% growth seems a bit pessimistic, as they have been growing >15% in the last few years. But
the big question I would have about them would be, how have they invested what must be an enormous pile of dormant cash owned by their account holders? Like a bank, they can invest this prudently if they know there is very little turnover (I'm thinking of the $200-300 in my account which I rarely use, and can't be bothered having sent back to me.) If it has been in treasury bonds with low average duration (say, less than a year), then their revenue and earnings growth may not be from organic growth at all, but just the ability they have had recently to reinvest bonds as they come due, at much higher rates. This is unlikely to be a sustainable source of growth (rates won't keep going up forever.) On the other hand, if they, like many banks, were stretching for yield by going out further along the duration curve, sa 4-5 years, then this would have been a serious error, in retrospect, but it might mean their earnings will keep getting substantially higher until all these bonds have been replaced at much higher yields.


As for the valuation, if it turns out that 10% is a realistic estimate of future growth, here's how I would invert the data you presented:

Share price $61
EPS 3.35
So, trailing PE: 18

My estimate of growth rate in value in the next 5y: 10% (based on increase in EPS)
My guess at their PE in 5y: 20
So, my expected return: 10%+(20/18)^(1/5)=10+2.1%=12.1%

You might consider this 'fair value' if your measure of fair value is that it provides for a 12% return. Others may define 'fair value' differently. But obviously, the key estimate here is earnings growth, and I think their fixed income investment profile is a big part of understaning whether 10% is too optimistic or, perhaps, if the duration is long, too pessimistic.

DTB