Every portfolio manager should know how the work from home wave impacts their investments. Today’s FA Alpha is tackling one company that helps support this movement.
FA Alpha Daily:
Thursday – Uniform accounting analysis
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The COVID-19 pandemic sparked volatility in the market in ways we have not experienced for over a decade. Since the market collapsed in March 2020, it has rebounded to new highs.
In order to drive this increased productivity, human capital is needed. And yet, employees had to adapt to a remote working environment on the fly.
Many companies still understand just how important collaboration and an in-person work environment is, and have been clamoring for a return to office.
For companies that have major headcounts, the decision is all the more pivotal. There is greater transmission risk with a return to office that is too hasty. Companies such as Microsoft (MSFT), Alphabet (GOOGL), Citi (C) and Lyft (LYFT), have all had to change their plans significantly.
Management teams of these companies first announced that they wanted employees to return in the middle of 2020, then pushed back to late 2020. This of course then got pushed back to early, mid, and then late 2021.
With Omicon seemingly past its peak, companies are aiming for March 2022 to be the point when work from home transitions more towards a hybrid work environment.
While work productivity remained in a remote environment, companies have had to deal with other logistical headaches. For example, when people moved to different locations, companies needed to deal with tax implications on where they have to pay employee and employer taxes.
Companies also had to manage human capital remotely, along with recruiting from online applicants without face-to-face meetings. Most importantly, they needed to keep their employees engaged and in tune with their company culture.
Managing these logistical nightmares is where companies like Workday (WDAY) become so important, as handling these logistics snags are its bread and butter.
And yet, according to the as-reported metrics, it doesn’t appear that the company has taken advantage of these tailwinds. Rather, Workday has reported negative profitability in the past two years, along with the entirety of its existence.
However, Uniform Accounting tells a bit of a different story.
With a closer look, Uniform metrics show that Workday’s ROA has steadily been rising and even flipped positive in 2018, surpassing historical returns for the company. With remote working going strong in 2021, Workday realized its all-time peak returns of 5%.
Surging demand means that Uniform ROA is forecasted to continue to rise as they are finally taking advantage of the demand for its products.
While their ROA is still weak as a start-up, they are clearly positioning themselves to benefit from the tailwinds in their industry. The as-reported metrics are masking the tailwinds for now, but it is only a matter of time before they are too strong to ignore.
SUMMARY and Workday, Inc. Tearsheet
As the Uniform Accounting tearsheet for Workday, Inc. (WDAY:USA) highlights, the Uniform P/E trades at 149.9x, which is well above the global corporate average of 24.0x, but below its own historical P/E of 172.6x.
High P/Es require high EPS growth to sustain them. In the case of Workday, the company has recently shown a 121% Uniform EPS growth.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Workday’s Wall Street analyst-driven forecast is a 96% EPS growth in 2022 and a 37% EPS decline in 2023.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Workday’s $237 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to grow by 64% annually over the next three years. What Wall Street analysts expect for Workday’s earnings growth is above what the current stock market valuation requires in 2022 and but below in 2023.
Furthermore, the company’s earning power in 2021 is below the long-run corporate average. Moreover, cash flows and cash on hand are almost 2x its total obligations. Additionally, intrinsic credit risk is 40bps above the risk-free rate, signaling low credit and dividend risk.
Lastly, Workday’s Uniform earnings growth is above its peer averages and the company is trading above its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
The Uniform Accounting insights in today’s issue are the same ones that power some of our best stock picks and macro research, which can be found in our FA Alpha Daily newsletters.