A Quality Exec Comp Plan Lowers The Risk Of Investing In Insight Enterprises

Four new stocks make January’s Exec Comp Aligned with ROIC Model Portfolio, available to members as of January 14, 2021.

Recap from December’s Picks

My Exec Comp Aligned with ROIC Model Portfolio (+2.5%) outperformed the S&P 500 (+2.3%) from December 16, 2020 through January 12, 2021. The best performing stock in the portfolio was up 12%. Overall, nine out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P from December 16, 2020 through January 12, 2021.

The best fundamental data in the world, proven in The Journal of Financial Economics, drives my firm’s research. My firm’s proprietary Robo-Analyst technology[1] scales my firm’s forensic accounting expertise (featured in Barron’s) across thousands of stocks to produce an unrivaled database of fundamental data[2].

This Model Portfolio only includes stocks that earn an attractive or very attractive rating and align executive compensation with improving ROIC. I think this combination provides a uniquely well-screened list of long ideas because return on invested capital (ROIC) is the primary driver of shareholder value creation.[3]

New Stock Feature for January: Insight Enterprises NSIT


Insight Enterprises Inc (NSIT) is the featured stock in January’s Exec Comp Aligned with ROIC Model Portfolio.

I made Insight Enterprises a Long Idea in August 2018. Since then, the stock is up 46% while the S&P 500 is up 35% over the same time.

Insight has grown revenue by 10% compounded annually since 2015 and net operating profit after tax (NOPAT) by 23% compounded annually over the same time, per Figure 1. NOPAT margin increased from 1.6% in 2015 to 2.5% over the trailing twelve months (TTM).

Figure 1: Consistent NOPAT Growth

Performance-Based Pay Properly Incentivizes Executives

Insight’s executive compensation plan aligns executives’ interests with shareholder’s interests by tying compensation to return on invested capital (ROIC). Apart from base salaries and short-term incentives, Insight’s executives receive long-term equity compensation in the form of RSUs that are tied to a non-GAAP adjusted ROIC goal.

Insight’s inclusion of ROIC as an executive compensation metric has helped drive shareholder value creation and economic earnings, per Figure 2. Insight’s ROIC has improved from 7% in 2015 to 8% TTM while its economic earnings improved from $13 million to $68 million over the same time.

Figure 2: Long-term Improving Economic Earnings: 2015-TTM

NSIT Is Undervalued

At its current price of $81/share, NSIT has a price-to-economic book value (PEBV) ratio of 0.8. This ratio means that the market expects Insight’s NOPAT to permanently decline by 20%. This expectation seems overly pessimistic for a firm that has grown NOPAT by 10% compounded annually over the past two decades.

Even if Insight’s NOPAT margin falls to 2.2% (equal to its five-year average vs. 2.5% TTM) and the firm grows NOPAT by just 1% compounded annually over the next 10 years, the stock is worth $106/share today – a 31% upside. See the math behind this reverse DCF scenario.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Fact: My firm provides superior fundamental data and earnings models – unrivaled in the world.

Proof: Core Earnings: New Data & Evidence, forthcoming in The Journal of Financial Economics.

Below are specifics on the adjustments I make based on Robo-Analyst findings in Insight’s 10-K and 10-Qs:

Income Statement: I made $57 million of adjustments, with a net effect of removing $41 million in non-operating expenses (<1% of revenue). You can see all the adjustments made to Insight’s income statement here.

Balance Sheet: I made $1.2 billion of adjustments to calculate invested capital with a net decrease of $213 million. One of the largest adjustments was $520 million for midyear acquisitions. This adjustment represented 23% of reported net assets. You can see all the adjustments made to Insight’s balance sheet here.

Valuation: I made $418 million of adjustments with a net effect of decreasing shareholder value by $418 million. There were no adjustments that increased shareholder value. Apart from total debt, one of the largest adjustments to shareholder value was $37 million in deferred tax liabilities. This adjustment represents 1% of Insight’s market cap. See all adjustments to Insight’s valuation here. Despite these subtractions from shareholder value, NSIT remains undervalued.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

[1] Harvard Business School features my firm’s research automation technology in the case Disrupting Fundamental Analysis with Robo-Analysts.

[2] Three independent studies from respected institutions prove the superiority of my firm’s data, models, and ratings.

[3] See how my firm’s models and financial ratios are superior to Bloomberg and Capital IQ’s (SPGI) analytics in the detailed appendix of this paper.

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