What They Do

Powell Industries (POWL) develops, designs, manufactures and services custom-engineered equipment and systems for the distribution, control and monitoring of electrical energy for the oil and gas refining, offshore oil and gas production, petrochemical, pipeline, terminal, mining and metals, light rail traction power, electric utility, pulp and paper industries and other heavy industrial markets.

Short-Term Target

My short-term target for the stock is $34.37, with an initial trailing stop set at $25.19. With a current price of $25.57, upward price movement will find resistance at $27.62 and again at $29.63 with final resistance found at $31.59. Downward price movement will find no support.

Momentum Target

My momentum target for the stock is $(7). Momentum targets are determined by overlaying a company's most recent annual EPS, its year-over-year earnings growth, and the current yield of a 10-year treasury. As a value investor, the central issue that I have using momentum targets is that they require investors to trade in stocks that have already enjoyed significant gains while making no allowances for the sustainability of a company's earnings.

Growth Target

My growth target for the stock is $25. Growth targets are determined using a company's year-over-year earnings growth, year-over-year PE growth, and year-over-year price growth.

Fair Value Investing

Fair value investing requires investors to consider a company's overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. For many fair value investors, the minimum required hold is five (5) years. What follows are some of the metrics I use to determine my fair value estimates. They are presented only to assist investors considering an investment in Powell Industries.

Average Volume

The average volume number is simply an average of the number of shares traded over a specific period of time, in this case, the prior 50 days. The lower the number the greater the volatility the markets can impact on the stock price. For Powell Industries the most recent ADV number is 0.038 million shares.

Days to Cover

The most recent days to cover number is 6. The days to cover number is a measure of the company's outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is updated twice per month and is sometimes used along with the beta ratio as a volatility precursor for a stock.

Beta Ratio

The beta ratio is a measure of the systemic risk of ownership of a particular stock as compared to the systemic risk of ownership of the market as a whole. The higher the beta ratio, the more volatile the stock. For Powell Industries the current beta ratio is 1.19.

Unrelated Income

Income unrelated to a company's day to day operation, such as income tax benefits or income from other sources can significantly distort a company's earnings and consequently its fair value. Investors should always explore the sources of a company's earnings to better understand potential valuation impacts. For Powell Industries 0% of the company's net income came from income tax benefits and 0% of net income came from "other" sources.

Insider Transactions

The SEC classifies insiders as the "management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their "insider" knowledge. In the past 12 months, the company has reported 26 insider trades involving 52,712 shares of stock. Of those 26 insider trades, 20 were Buys involving 36,000 shares of stock, and 6 were Sells involving 16,712 shares of stock, creating an insider buy to sell ratio of 2.2:1.

Year-Over-Year Metrics

Several year-over-year metrics that are of interest to many investors are revenue growth, earnings growth, free cash flow growth, debt growth, price growth, and price growth. For Powell Industries, revenue increased by 0.13%, earnings decreased by 1.6%, free cash flow decreased by 142%, debt decreased by 2.3%, and the stock price decreased by 2.3%. Year to date the stock price is down 2.4% and the S&P 500 is down 2.8%.

Minimum Rate of Return

I calculate the minimum rate of return for any equity investment by multiplying the company's stock specific beta by the yield for a 10-year treasury and then adding my equity risk premium to that result. The equity risk premium is the excess return I want to receive for investing in equity as opposed to a risk-free investment such as a treasury. My calculated rate of return for Powell Industries is 6.5%.

Other Value Considerations

Other value considerations that many investors like to consider include the PE Ratio, the PEG Ratio, Return on Assets, Return on Equity, Return on Capital Employed, Return on Invested Capital, Cash Flow From Invested Capital, Debt to Capital Ratio, Book Value, and Tangible Book Value. For Powell Industries, the PE Ratio is (43), the PEG Ratio is (20), Return on Assets is (1.6)%, Return on Equity is (2.3)%, Return on Capital Employed is (2.3)%, Return on Invested Capital is (2.4)%, Cash Flow From Invested Capital is 1.7%, Book Value is $26, and Tangible Book Value is $26.

Baseline and Fair Value

As an on-going concern, my current baseline valuation for the company is $6. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value estimate for the stock is $(7). The fair value estimate is my current valuation for a stock based on earnings, earnings growth, and the current 5-year yield of a AAA-rated corporate bond. Value investing initiate, reduce, and terminate targets are derivatives of fair value.

Future Value

My future (5-year hold) target price for the stock is $28, which is an average annual return of 2%. A prior five-year hold of the stock (FY2014- FY2018) would have returned an average of (8)% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Risk/Reward Ratio

The risk/reward ratio measures how much your potential reward is, for every dollar you put at risk. I determine my risk/reward ratio by subtracting the current stock price from my termination target (sell price) and then dividing that result by my initiate (buy) target. For Powell Industries my risk/reward ratio is (4.4), which means that for every dollar invested in this stock, I have the potential to lose $4.40.

My Investment Summary

My investment summary was determined to utilize that the financial information taken directly from the company's latest SEC 10-K filing and is based on a value investing philosophy which considers that price determines return.

Powell Industries, Inc. (Nasdaq: POWL) - FYE 09/2018 - OVERVALUED. The stock is currently trading at levels above my most recent $10 terminate target. Please See Linked PDF Worksheet