Investment Jungle

Thanks to Phil Town for pointing us towards 3 companies which he feels qualify as a Rule #1 business. One company, Walgreen Company (WAG), was already on my watch list. I have now added the other 2 companies as well.

Getting back to my own Rule #1 stock screen, next up is SEI Investments Company which trades on the NASDAQ under the symbol SEIC.

Company Profile:

From Yahoo Finance

SEI Investments Company provides investment processing, fund processing, and investment management business outsourcing solutions to corporations, financial institutions, financial advisors, and affluent families in the United States, Canada, the United Kingdom, and continental Europe. It operates in six segments: Private Banking and Trust, Investment Advisors, Enterprises, Money Managers, Investments in New Businesses, and LSV Asset Management.

SEIC has a market capitalization of $5.88B.

Financial Analysis:

Boo-yah! (Ok. Ok. I couldn’t resist. I just saw the ROIC numbers and couldn’t control myself!)

The return on invested capital is absolutely amazing. Management has been able to maintain a 30%+ ROIC over the whole 10 year period! The 5 year average is an amazing 38.90%!

And looking at the return on equity (ROE), I see a 10 year average of 50.49% and a 5 year average of 41.06%. Absolutely rock solid, consistent numbers being produced by management! Why did it take me so long to get to this baby?

Looking at the equity growth rate, management has not let me down. Over the 10 year period, earnings growth rate has been 34.43%. The 5 year rate is 19.38% and the 3 year rate is 20.96%. And last year in 2006, the equity growth rate was a whopping 48.95%.

Earnings per share growth rate follows the trend with 25.65% over the 10 year period. Over 5 years, the earnings per share growth rate has been 16% and 20.42% over 3 years.

Strangely enough, sales growth rate has been the laggard of the Big Five. Some very sub par numbers show up from 2001 right through until 2004. In 2005, the sales growth rate got above 10% and 2006 was a rocket at 51.49%. I am concerned over the sales growth rate numbers. Not much consistency over the 10 year period.

Cash flow growth rate has been solid throughout the 10 year period except in 2003 where it was a paltry 1.34%. However, the average over the 10 years was a fantastic 20.94%.

Other than the sales growth rates, the other Big Five (especially the ROIC) have been monsters. Let’s see what the price should be on this stock.

Stock Analysis:

The P/E has been fairly consistent over the 10 year period. The 10 year average is 27.14, the 5 year average is 22.07 and the current P/E is 24.39. Being conservative, I will take the lowest which would be the 5 year average at 22.07.

To determine the forward EPS growth rate, let’s have a look at the equity growth rate. The 10 year average is 38.96%, the 5 year average is 21.67% and last year’s rate was 48.95%. Taking the lowest value, I would guess a forward EPS growth rate of 21.67%.

Let’s see what the analysts have to say. The analysts come in at 15%. Ok. They are more conservative than my numbers have shown, but let’s go with their estimate.

So using a P/E of 22.07, a forward EPS growth rate of 15% and of course, we demand a 15% rate of return as Rule #1 investors, that leads me to a sticker price of $53.62. At close of Thursday, the current price was $59.26. That gives us a premium of 10.52% over stick price. Unfortunately, that means we are no where near the MOS price of $26.81.

See my calculations here.

Conclusion:

Although the inconsistent sales growth rates do concern me, I think that management has definitely proven their skill with their amazing returns on invested capital. I do consider this to be a Rule #1 business. Unfortunately, it is not selling at a discount. I will add this company to my watch list in the hopes that I will get a chance to purchase it at some point in the future.

Disclosure: I do not currently own any shares of SEI Investments Co (SEIC)

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