For investors looking to balance the search for growth with a degree of caution, the "Growth at a Reasonable Price" (GARP) method presents a practical middle path. This method looks for companies with good growth paths but trading at prices that do not completely account for that possibility, steering clear of the high prices often seen with top performers. A useful method to apply this is by filtering for stocks with good fundamental growth marks, along with reliable profitability and sound finances, while also checking that the price is still fair. Power Solutions International (NASDAQ:PSIX), a company that designs and makes power systems, recently appeared from such an "Affordable Growth" filter, offering an example of this investment thinking.
A Notable Fundamental Picture
A close fundamental review of PSIX shows a company performing well in several areas. ChartMill's own scoring method, which judges stocks on five main areas, gives PSIX a good overall fundamental mark of 8 out of 10. This mark comes from a comparison with 91 similar companies in the Electrical Equipment field, showing its relative position. The details of its marks are especially informative for a GARP method:
- Growth Mark: 8/10
- Valuation Mark: 9/10
- Profitability Mark: 8/10
- Health Mark: 8/10
This mix, high growth and valuation marks supported by good scores in profitability and financial soundness, is exactly the picture looked for in an affordable growth method. It points to a company that is growing quickly, creating earnings effectively, handling its finances responsibly, and yet is still priced well compared to its fundamentals.
Strong Growth Path
The growth story for PSIX is solid, marked by good recent results and positive future estimates. This is key for the GARP method, as continued growth is what creates future value for shareholders.
- Strong Recent Earnings: In the last year, the company's Earnings Per Share (EPS) has increased by a notable 150%. The average yearly EPS increase over recent years is a good 51.27%.
- Good Revenue Increase: Last year's revenue rose by 54.78%, a clear sign of good market need for its power generation and industrial engine solutions.
- Continuing Outlook: Maybe more key for investors, this growth is forecast to persist. Experts estimate an average yearly EPS increase of 46.10% and revenue increase of 24.87% in the next years. The report states that the revenue increase rate is in fact rising compared to its past pattern.
A Good Valuation Case
While growth is necessary, paying a fair price for it is the central idea of avoiding high cost. PSIX’s valuation numbers suggest the market may not be completely recognizing its growth picture, making it "affordable" within the GARP method.
- Lower than Market and Peers: PSIX trades at a Price-to-Earnings (P/E) ratio of 9.84, which is much lower than both the S&P 500 average (26.29) and its industry peer average (32.73). It is valued lower than 94.5% of its industry competitors.
- Future-Looking Numbers Are Also Low: The valuation case remains when looking forward. Its Price/Forward Earnings ratio of 8.84 is well under industry and broader market averages.
- Growth Adjustment: The PEG ratio, which modifies the P/E ratio for estimated growth, shows a low valuation. The analysis proposes that PSIX's very good profitability and high estimated earnings growth might even support a higher valuation multiple.
Base of Profitability and Soundness
A growth story is only lasting if built on a firm base. PSIX’s high profitability and health marks supply that important stability, reducing risk for investors.
Profitability is a clear advantage, with returns that lead its industry. Its Return on Invested Capital (ROIC) of 27.37% is better than 100% of its peers, showing very effective use of capital. Both its Profit Margin (17.94%) and Operating Margin (16.38%) are in the top group of the industry and have been getting better.
Financial Soundness is similarly good with a mark of 8. The company’s Altman-Z score indicates no bankruptcy danger, and its Debt-to-Free-Cash-Flow ratio of 1.92 is very good, meaning it could settle all debt with less than two years of cash flow. It keeps a sound current ratio and has a improving debt-to-assets position.
Locating More Affordable Growth Options
Power Solutions International shows the kind of chance a systematic, fundamentals-based filter can find: a company with clear and expected growth, trading at a price that does not require perfect results, and backed by a good operational and financial foundation. For investors curious about the GARP method, PSIX acts as a real example of its possibility.
This individual stock was found using a set "Affordable Growth" filter. Investors wishing to do their own study or find comparable companies that meet these standards of good growth, fair valuation, and acceptable profitability and health can examine the filter themselves.
You can find more stocks that match this Affordable Growth description by using this set stock filter.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any securities. Investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions. Past performance and fundamental ratings are not guarantees of future results.
