Record Profits, Falling Stock, And A Target I Cut
Record trailing profit, a multiple down by nearly a third, and a position underwater. One of those three is wrong.
The hardest position to hold is the one where the business keeps beating your model and the price keeps disagreeing with you.
A company I own reported last week. Net income doubled, and ROE comfortably cleared the 15% target they had set for themselves. TTM profit was a record. Book value per share grew 32%.
The stock sits 30% below its high and my position is 20% underwater.
The market fixed on one line in the release. Earnings fell 27% against the previous quarter, which had been the best in the company’s history, and that sequential dip got read as the end of the run. The multiple went from 21x forward earnings to under 14x. Over the same stretch, the company earned more in nine months than in any full year it has ever reported.
Two readings are available. Either the last year was a volatility windfall now unwinding, or a compounder is being priced off one soft comparison against its own record quarter. A single quarter doesn’t settle it, but it does show how much the business gives back when conditions calm, and that is the number the thesis turns on.
I rebuilt the model on the new figures and revised the target. The analysis, the valuation and what I’m doing with the position are below.
