When Analysts Disagree on a Stock, Do Your Own Math

One of the most frustrating things for equity investors is seeing different analysts give different price projections on the same stock. If the experts hold such varied opinions, how can you know which one is most likely to turn out correct? In times like that I use a valuation measure that is typically not at the top of my list, yet is very good when confirming what a share is truly worth. My example today is Farmers National Banc Corp. . I wrote favorably about the shares last October. Back then the stock was as $12.77, and Value Line thought FMNB's 2022 would close with EPS of $1.90. and last year final dividend would be 64 cents. Both of those numbers proved a tad inaccurate. Final earnings per share for 2022 came in at $1.79. That was a record, but eleven-cents shy of $1.90. A one cent dividend increase in the fourth-quarter brought total distributions to 65 cents, while setting up 2023 for at least 68 cents annualized. Value Line now sees FMNB's 2023 earnings per share dipping slightly, to $1.71. Here is an adjusted growth table, which accounts for the changes, which occurred since October. FMNB continue to show it is a fine left to right growth vehicle. By January of 2023, the shares had recovered to over $15. When fourth-quarter results were slightly below estimates the stock tanked once again to sub-$13 in what appears to have been an overreaction. Corporate insiders took advantage, buying up 10,368 shares at an average cost of $13.41. There were prohibited from trading in the first 48-hours after the earnings report or would have been able to buy a bit cheaper. Company officers certainly have the best feel for the true value of their own shares. They would not have been buying in the mid-$13s unless they felt FMNB was worth much more. Here is the current array of analyst projections for FMNB. Research house Morningstar provided an uninspiring $15.16 present-day fair value estimate for FMNB. It implied just 5.64% plus dividends for buyers at last week's close of $14.35. That seems especially conservative as it assumes FMNB will stay a just 8.9-times Value Line's already revised 2023 EPS estimate. That is a discount of 33.9% compared with a historically normal price-to-earnings of 13.2-times. Guru Focus was a bit more optimistic on FMNB calling current fair value as $16.30. Still, if you believe they right, year-ahead total return would be a less than stellar 13.6% or so. As with Morningstar, Guru Focus' goal price represents an extremely low, by historical standards, forward price-to-earnings of less than 9.6-times FAST Graphs calls FMNB's average P/E as 13.2-times. They see the company earning only $1.32 in 2023, well below all other analysts. FAST Graphs gives no reasoning for why its projected profits are so low compared with all other sources. Based on Farmers' previous history that pessimistic assumption appears questionable. Even so, At a normalized multiple of 13.2-times Fast Graphs still figures an end of the year target price of $17.42. They then see an earnings rebound to $1.65 per share in 2024 leading them to an end of 2024 goal price of $22.57. for FMNB. This is my updated look at what I see coming for FMNB this year. I produced the identical historically normal multiple of 13.2-times that FAST Graphs did. Based on that while using Value Line's $1.71 EPS estimate my 12-month target price for FMNB come to $22.57. Note that the data boxes below show FMNB's Price to year-end book value rather than it P/E at various great previous buying opportunities (green-starred) and its should have sold moments (red-starred). I will have more to say about that later. I summarized the various goal prices for FMNB in the table below. With such a large spread from low to high it is time to bring in the tie-breakers before deciding which is most likely to be on target. My first tie-breaker is reverse engineering the dividend. That first requires knowing the average dividend for FMNB over time. Value Line's data says that the bank paid an average yield of 2.40% since 2014. The you divide the current annual dollar rate of $0.68 (4 x 17-cents) by 0.024 to get a price goal based on seeing that yield revert to normal. Next: $0.68 divided by 0.024 = $28.33 per share. Reaching that price level anytime soon appears to be a stretch. It does, however, let us know that the lowball goal prices are probably way too conservative. The second tie-breaker is much more exacting. I mentioned earlier that the Value Line mock up showed FMNB's price to book value ratios (P/BV) over the years. Since 2014 the stock's average P/BV at terrific entry points was 0.92-times. At times when FMNB share price was over-extended that figure had ramped up to about 1.53-times. FMNB was offered Friday at close to the low end of the range. Split the difference between the average low P/BV and average high P/BV and you come up with a normalized 1.225-times P/BV ratio. Apply that ratio to expected year-end 2023 book value and you get a calculated Dec. 31, 2023 goal price for FMNB of $19.73. Add the two new tie-breaker goals of $28.23 and $19.73 to the previous mix of potential results. That skews the range of expectations to above all the target prices from Morningstar, Guru Focus and FAST Graphs. Then apply the common-sense technique of seeing where FMNB traded at peaks since 2014. FMNB consistently topped out above the crazy-low goal prices of both Morningstar and Guru Focus on fundamentals which were far inferior to what is now in place. The stock exceeded FAST Graphs projected price by quite a bit during both 2021 and 2022. Future stock price action can never be guaranteed. Now that you have seen all the facts, though, I would bet you'll see my target price as more realistic than those of other experts. Disagreeing with the consensus views, and being proved correct, is the key to making outsized gains over time. Insider buying in January of this year and from 2022 tell us that they agree with my logic regarding FMNB. Using tie-breakers as a component of decision making helps you get things right.

When Analysts Disagree on a Stock, Do Your Own Math

Here's how to figure out what to do with disagreeing price targets, using a name I recently discussed as an example.

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