What Should Be Considered About The Stock Before The Purchase?

Key takeaways:
-Find out what the company is engaged in.
-Analyze the main financial indicators.
-Check whether shares are undervalued or overvalued.
-Explore the latest insights related to the company.

If you have already decided to invest in equities, but do not yet know what exactly you need to know before buying shares, this article will be useful.

Investments in public companies require detailed analysis of a large amount of information. After all, stock prices can be influenced by the company’s financial performance, news, and many different events. So where to start analyzing a company? Read the latest news? Or delve into financial documents? Or maybe a presentation for investors on the company’s website will be enough?

In this article, we will show the flow that we use ourselves at Eyestock making investment decisions every day. Our approach is systematic and structured, which means it allows us to save time and avoid reacting to moments distracting from the topic. As usual, we will tell the story using the example of a real company. Today the article will focus on Saia Inc. So what should we do to answer the question, is it worth investing in SAIA stock?

Step 1. Find Out What The Company Is Engaged In.

Even though we adhere to a quantitative approach to analysis rather than a fundamental one, knowing what the company we are reviewing does is extremely useful. At least this is logical, because you plan to become its co-owner. If you, for example, invest in pharmaceuticals or technology, but do not really understand how these industries work, then some trends and events may negatively affect the valuation of the company’s shares, and this may come as an unpleasant surprise for you.

That’s why we take the advice of financial gurus like Warren Buffett and Peter Lynch and prefer to buy shares of companies whose services we use or would become clients of if the need arose. What the company does should be clear to any of its investors.

What Does SAIA Do?

Saia Inc. operates as a transportation holding company. The firm provides less-than-truckload services in the US, Mexico and Canada. LTL refers to less-than-truckload. LTL is when multiple shippers’ freight is on the same trailer rather than having a single company’s freight exclusively on an individual trailer. Several LTL shipments are combined into one truck to fill it as near to capacity as possible.

Some number facts:
-Trucking is the most common type of transportation in the USA, accounting for 62% of shipments.
-Less-than-truckload occupies a share of 11.3% in the industry.
-LTL market had an estimated annual industry revenue of $52 billion in 2023
—SAIA is in the top-7 companies of the LTL industry having a revenue of $3.1 billion for the last 12 months, which means approximately 6% market share.
-While the industry is growing at 4.2% per year, SAIA`s revenue over 5 years has grown by 77% (Compound annual growth rate or CAGR is 12.1%)

Well, it is time-consuming, but this type of quick analysis allows us to understand what we are dealing with. Now we know what industry and what position SAIA with a market cap of $10 billion as of August 7th occupies.
Conclusion 1: the company is growing at a faster pace in a clear and developing industry.

Step 2. Evaluate The Company`s Financials.

Without a doubt, this is the most difficult and expensive part of any analysis, but it should be carried out no more than once a quarter. We previously published an article on a 10-step analysis of a company’s financial condition. We at Eyestock use a scoring system, and the final rating is the sum of 10 participating metrics points, taking into account the weight of each and the state relative to the standard (benchmark) we have set for an outstanding company. Of course, you can use any method; most importantly, do not forget about a comprehensive analysis of indicators. Trust in our expertise and the Eyestock Rating to navigate the complexities of financial data or gain an alternative perspective to complement and strengthen your own analyses.

SAIA`s Financial Performance.

The annual revenue (TTM) of Saia is $3.1b while the net profit is $378m.
High values ​​of Gross profit and Earnings quality indicate the benefits of economies of scale and competent work with cash flows. However, the company operates in a highly competitive business, and this affects the Net margin, which, although it has increased by 5% over the past 5 years, remains at a rather modest level of 12%.

In general, we can say that the company is profitable, but there is no way to say that it has any special competitive advantages.

SAIA`s Financial Position.

The shareholder`s equity of Saia is $2.1b while the total debt is only $180m.
Saia is very conservative in terms of borrowing and can, with a slight assumption, be called debt-free. Debt is only 4% of capital, and cash flows from operating activities for 12 months cover it 7 times. High current liquidity adds to the company’s stability.

The company is extremely solvent and its steadiness should not be a concern.

SAIA`s Management Efficiency.

Using 2 key indicators (ROE and ROIC) for assessing the quality of management, we can judge that the company is very close to the benchmarks we have set for an outstanding company.
You can read about how much Return on equity means for financial analysis in our DuPont method article. We wrote about the calculation and use of ROIC as well in Return on Invested Capital as an Investment Decision Tool insight.

SAIA`s Growth Sustainability.

Net profit growth in the last quarter was 12%. If we take the average values ​​for 2 and 5 years, they will be higher — 14% and 45%, respectively. To assess the stability of business development, we compare these values ​​with the deviation using a mathematical technique. Although both indicators are highlighted in red in the chart below, they are close to 1, which means that growth is quite stable. It’s just not perfect.

By aggregating all the parameters into one metric, the company scores 113 points according to our calculations, while an outstanding company suitable for investment needs to score 100.
Get details on SAIA`s company page.
As a result, conclusion 2: the company is a viable investment idea, based on a quantitative analysis of financials.

Step 3. Assess Whether The Shares Are Undervalued

To determine whether a company is undervalued, we compare its current value with its historical one over the previous five years (20 quarters) based on P/E ratio analysis. Our method for calculating fair value is described in Fair Value As A Basis For Investment Decision Making insight as openly and in detail as possible.

As of August,7 SAIA stock price is $381.15 per share and this corresponds to the price-to-earnings ratio of 27.4. The median meaning for the last 5 years is a little bit lower — 27.6. To get the quantitative fair value ($392.26) we conduct median P/E and current earnings per share (EPS) for the last 12 months (TTM).
It means that SAIA shares are undervalued but the upside is only 2.9% at the moment. The main strategy offered by Eyestock is to buy shares when they are at fair value or below and reduce the position when the price reaches the maximum valuation level. And in this scenario, SAIA has an upside of 31%.
Get minimum, fair and maximum value levels on SAIA`s price chart here.
Conclusion 3: the stock is undervalued and the current price may concern as a moderate risk entry point.

Step 4. Сomplement The Analysis By Assessing Additional Parameters

It is optional.
If you’re hunting for dividends, check the average annual dividend yield and the regularity of their payments. SAIA does not pay dividends but this does not affect our assessment of stock attractiveness.
You can study the news background and insider transactions, but this analysis will not directly tell you anything significant with a high probability.
As the final piece of the puzzle, you can look at the forecasts of Wall Street analysts to finally formulate your vision. SAIA’s average forecast has a 25% upside for price. It is close to our own valuation.

Bottom Line

In our minds, financial analytics is really like putting together a puzzle. When you understand what the company does and what its place in the market is, whether its financial performance is high, and whether its relative market valuation is low, it’s time to act.