ConocoPhillips reported its preliminary financial results for the quarter ending 31 December 2006. The report included an Income Statement, some useful Cash Flow data, and several pages of supplemental data giving insight into the company's operations. A Balance Sheet, however, was lacking. While we can assume that the Balance Sheet for this corporate giant didn't change greatly during the last three merger-free months, the omission adds uncertainty to our analysis. We will have to revisit the analysis when ConocoPhillips submits a Form 10-K to the SEC containing a full set of financial data.
Cash Management. Since the Balance Sheet is the principal source of the data needed to compute a Cash Management score, we merely note now that the score was 5 at the end of September 2006. The Current Ratio was 0.9 then, and Long-Term Debt/Equity was 30 percent. The debt ratio ameliorated our concern that COP might have overextended itself with mergers. Accounts Receivable were 24.6 days of Revenue, up from 22.7 in September 2005. Note that Inventory/CGS and Finished Goods to Total Inventory -- two of the five Cash Management score components -- don't have the significance they do for a product manufacturer.
The Growth gauge now stands at 8 (out of 25) points, which is four less than its value at the end of September. Revenue growth has tailed off significantly: sales in the four quarters of 2006 were only 2 percent above those in 2005. Net Income year-over-year increased a more respectable 14 percent, but the growth rate is much less than it had been the previous few years. Similarly, CFO grew by 22 percent -- healthy but decelerating. The story repeats yet one more time with Revenue/Assets, now 112 percent. This ratio was 168 percent at the conclusion of 2005. We suspect that the merger with Burlington Resources increased the asset base more than it did revenues.
We estimate that the Profitability gauge score is 6 (out of 25 possible) points, down 2 points from the previous quarter. This value was determined without the benefit of a year-end Balance Sheet. The Return on Invested Capital was about 13 percent, off from 19 percent in 2005. FCF/Equity was 7 percent, which is at the lower end of its historic range and down from 11 percent one year ago. Operating expenses/Revenue has declined to 86 percent (a welcome achievement) from 89 percent a year ago. The slight reduction in the Accrual Ratio from 7 to 6 percent is a good development, but a negative Accrual Ratio (i.e., Cash Flow exceeding Net Income) would be even better.
With the year-end stock price of $71.95 -- much above the current level -- the Value gauge dropped all the way down to 4 points. The P/E ratio was still a modest 8, about half the equivalent value of the S&P 500. The PEG ratio moved up to 0.55 from figures in the deep-deep value 0.1 to 0.2 range. Price/Revenue has also edged up to 0.7.
The Overall gauge dropped to about 22 points (out of 100) because growth and profitability fundamentals have weakened. Although the value characteristics aren't as compelling as they were a year ago, a trailing P/E of 8 and a PEG of 0.55 will still get the attention of investors looking for companies selling at a discount relative to other alternatives.
27 January 2007
26 January 2007
MSFT: Analysis through Dec 2006
Microsoft has just reported its financial results for the quarter that ended on 31 December 2006. This was the second quarter of the company's fiscal 2007. We used the new results to update the analysis we performed after the quarter that ended in September 2006.
Cash Management. This gauge held steady from September to December. It isn't particularly meaningful for Microsoft because Inventory doesn't have the same significance for a software company that it has for a manufacturer. Long-Term Debt is negligible. The Current Ratio is an ideal 2.0; it has come down from previous unnecessarily high levels. The only interesting ratio in this category is Accounts Receivable/Revenue, which increased to a record high 78 days. We suspect that this is because new products began to ship at the end of the quarter.
Growth. This gauge slipped a notch from September. Revenue growth was 11 percent year over year; it has been holding steady at this level for the last four quarters. Net Income, on the other hand, decreased by 9 percent; this was the first time in four years that Net Income showed a year-over-year drop. Cash Flow from Operations (CFO) also declined by 10 percent on a year-over-year basis. Revenue/Assets held at a historically high 69 percent. It had been increasing when stock buybacks were reducing assets.
Profitability. This gauge also dropped a notch from September. The Return on Invested Capital (ROIC) slipped to 36 percent, but it was still 8 percentage points above last year's value. Free Cash Flow (FCF) to Equity held at 33 percent, which is about where it has been for the last seven quarters. Operating Expenses as a proportion of Revenue moved up from 63 percent to 66 percent, which is due to a decline in Gross Margin. The Accrual Ratio held at zero percent, which tells us that the company is no longer brings in more CFO than Net Income.
Value. This gauge dropped sharply from a healthy 15 points in September. Due to the reduction in Net Income, the Price/Earnings ratio moved up to 25. The P/E ratio is now an expensive 53 percent above the S&P 500 market multiple. The PEG ratio became meaningless because earnings didn't grow, they contracted. The Price/Revenues ratio was a seemingly scary 6.5, but this is actually a tad lower than historic values.
Now at 37 out of 100 possible points, the Overall gauge registered its sixth consecutive decline. The score was a fabulous 70 in mid 2005, which might have foretold subsequent gains in the stock price. If we believe in the gauge's predictive powers, consistency would suggest that we now accept that the recent score decline is telling us that the price gains have run their course.
We had decided ahead of time to give special attention to certain facets of the December results:
Revenue growth: We wanted to see if revenue growth would maintain a double-digit pace, and it did. Revenue for the quarter exceeded all estimates.
Operating Expenses: We wanted to see if the company would hold spending in check enough to keep the ratio of Operating Expenses to Revenues below 63 percent. Instead, these expenses increased to 66 percent of Revenue.
Net Income, which dropped to $0.26 per share, still exceeded the market estimate of 23 cents per share for the quarter. It fell below our estimate of a more robust 33 cents.
CFO: We said we wanted to see CFO start growing again. It didn't come close.
- Cash Management: 9/25
- Growth: 11/25
- Profitability: 10/25
- Value: 8/25
- Overall: 37/100
Cash Management. This gauge held steady from September to December. It isn't particularly meaningful for Microsoft because Inventory doesn't have the same significance for a software company that it has for a manufacturer. Long-Term Debt is negligible. The Current Ratio is an ideal 2.0; it has come down from previous unnecessarily high levels. The only interesting ratio in this category is Accounts Receivable/Revenue, which increased to a record high 78 days. We suspect that this is because new products began to ship at the end of the quarter.
Growth. This gauge slipped a notch from September. Revenue growth was 11 percent year over year; it has been holding steady at this level for the last four quarters. Net Income, on the other hand, decreased by 9 percent; this was the first time in four years that Net Income showed a year-over-year drop. Cash Flow from Operations (CFO) also declined by 10 percent on a year-over-year basis. Revenue/Assets held at a historically high 69 percent. It had been increasing when stock buybacks were reducing assets.
Profitability. This gauge also dropped a notch from September. The Return on Invested Capital (ROIC) slipped to 36 percent, but it was still 8 percentage points above last year's value. Free Cash Flow (FCF) to Equity held at 33 percent, which is about where it has been for the last seven quarters. Operating Expenses as a proportion of Revenue moved up from 63 percent to 66 percent, which is due to a decline in Gross Margin. The Accrual Ratio held at zero percent, which tells us that the company is no longer brings in more CFO than Net Income.
Value. This gauge dropped sharply from a healthy 15 points in September. Due to the reduction in Net Income, the Price/Earnings ratio moved up to 25. The P/E ratio is now an expensive 53 percent above the S&P 500 market multiple. The PEG ratio became meaningless because earnings didn't grow, they contracted. The Price/Revenues ratio was a seemingly scary 6.5, but this is actually a tad lower than historic values.
Now at 37 out of 100 possible points, the Overall gauge registered its sixth consecutive decline. The score was a fabulous 70 in mid 2005, which might have foretold subsequent gains in the stock price. If we believe in the gauge's predictive powers, consistency would suggest that we now accept that the recent score decline is telling us that the price gains have run their course.
We had decided ahead of time to give special attention to certain facets of the December results:
Revenue growth: We wanted to see if revenue growth would maintain a double-digit pace, and it did. Revenue for the quarter exceeded all estimates.
Operating Expenses: We wanted to see if the company would hold spending in check enough to keep the ratio of Operating Expenses to Revenues below 63 percent. Instead, these expenses increased to 66 percent of Revenue.
Net Income, which dropped to $0.26 per share, still exceeded the market estimate of 23 cents per share for the quarter. It fell below our estimate of a more robust 33 cents.
CFO: We said we wanted to see CFO start growing again. It didn't come close.
25 January 2007
TDW: Analysis through Dec 2006
Tidewater leases ships to support offshore energy production. As we noted previously, the company signaled that earnings for the quarter ending 31 December 2006, which is the 3rd period of their 2007 fiscal year, would exceed Wall Street expectations. Tidewater has now released the income and other financial statements for the quarter, and, yes, they show that the company is exhibiting strong earnings growth.
When we last analyzed TDW, after the September 2006 quarter, the company logged an impressive Overall score of 73 points. Believe it or not, it rates even higher now.
Cash Management. This gauge moved up from 10 points from September. We actually suspect TDW has too much cash because the Current Ratio is an oddly high 4.8. It has been in the stratosphere for a long time, and we continue to wonder why. Long-term debt is a worry-free 17% of equity, so there isn't a compelling reason to use excess cash to pay down debt. Accounts Receivable are 91 days worth of Revenues, which would be high for most industries, but receivables have been coming down.
Growth. This gauge came down one point from September, but it is still at a lofty level. Revenue growth is a healthy 33 percent year-over-year. Net Income growth is robust 49 percent (actually down from unsustainable rates of previous quarters). Growth in Cash Flow from Operations is a remarkable 87%. Revenue/Assets keeps increasing; it is now 43 percent.
Profitability. This gauge edged up one point from September. Return on Invested Capital, which has now moved up for 8 straight quarters, is 16 percent. Free Cash Flow/Equity, which is also on a long upswing, is now 12 percent. Operating Expenses/Revenue, at 67 percent, is at its lowest level since 1998. While we would rather see a negative Accrual Ratio, the drop to 5 percent from last year's 7 percent, is indicative of improvements to earnings quality.
Value. This gauge, based on the 31 December stock price of $48.36, held constant at a strong 20 points. The Price/Earnings ratio is a mere 8.1, which is only about half of the S&P 500's P/E . The PEG ratio is a minuscule 0.16, suggesting great value. Price/Revenue, at 2.5, is less than its median of 2.7.
With robust scores showing on each category-specific gauge, readers won't be surprised to learn that the Overall score increased to a superlative 75 points.
When we last analyzed TDW, after the September 2006 quarter, the company logged an impressive Overall score of 73 points. Believe it or not, it rates even higher now.
- Cash Management: 15/25
- Growth: 22/25
- Profitability: 17/25
- Value: 20/25
- Overall: 75/100
Cash Management. This gauge moved up from 10 points from September. We actually suspect TDW has too much cash because the Current Ratio is an oddly high 4.8. It has been in the stratosphere for a long time, and we continue to wonder why. Long-term debt is a worry-free 17% of equity, so there isn't a compelling reason to use excess cash to pay down debt. Accounts Receivable are 91 days worth of Revenues, which would be high for most industries, but receivables have been coming down.
Growth. This gauge came down one point from September, but it is still at a lofty level. Revenue growth is a healthy 33 percent year-over-year. Net Income growth is robust 49 percent (actually down from unsustainable rates of previous quarters). Growth in Cash Flow from Operations is a remarkable 87%. Revenue/Assets keeps increasing; it is now 43 percent.
Profitability. This gauge edged up one point from September. Return on Invested Capital, which has now moved up for 8 straight quarters, is 16 percent. Free Cash Flow/Equity, which is also on a long upswing, is now 12 percent. Operating Expenses/Revenue, at 67 percent, is at its lowest level since 1998. While we would rather see a negative Accrual Ratio, the drop to 5 percent from last year's 7 percent, is indicative of improvements to earnings quality.
Value. This gauge, based on the 31 December stock price of $48.36, held constant at a strong 20 points. The Price/Earnings ratio is a mere 8.1, which is only about half of the S&P 500's P/E . The PEG ratio is a minuscule 0.16, suggesting great value. Price/Revenue, at 2.5, is less than its median of 2.7.
With robust scores showing on each category-specific gauge, readers won't be surprised to learn that the Overall score increased to a superlative 75 points.
NOK: Analysis through Dec 2006
Nokia, this morning, reported financial results for the 4th quarter and 2006 annual results. We analyzed the financial statements in our usual way. In addition, we checked to see how Nokia's performance in the 4th quarter measured up against certain critical parameters, which we identified in advance.
Our Cash Management gauge for Nokia now displays 16 (up from 7!) out of 25 total points. The Current Ratio inched up to 1.83. Long-Term Debt to Equity remains inconsequential at 1 percent. In a dramatic improvement, completely reversing an earlier troubling trend, Inventory was cut to a record low level of 20 days (measured by Cost of Goods Sold). The Inventory level was 31 days at the end of the 3rd quarter and 27 days on 31 December 2006. We can now see that Nokia built up its inventory in anticipation of strong holiday sales, and then exceeded these expectations. Unfortunately, Nokia does not identify the proportion of inventory made up of Finished Goods; the missing information would give us more insight. Accounts Receivable were 52 days of Revenue; this parameter continues to be stable.
The Growth gauge now shows a strong 20 points (up from 16). Revenue growth reached 20 percent year over year for the first time in more than 6 years. Net Income growth increased to 19 percent, a considerable improvement over the year-earlier 13 percent. Cash Flow from Operations (CFO) was up a modest 8 percent, but any CFO growth is still a step in the right direction. Revenue/Assets, now at 1.82, edged down from 1.84 last quarter, but it still outclasses last year's 1. 53 by a wide margin.
Profitability held at 11 of 25 points. The Return on Invested Capital (ROIC) is an impressive 39 percent, up from the year-earlier 31 percent. Free Cash Flow (FCF) to Equity grew from 29 percent to 32 percent. With increased competition, Gross Margin has been trending down from percent values in the upper 30's to today's 33 percent. The company has, by and large, compensated for this by cutting R&D or other operating expenditures. These Operating Expenses as a proportion of Revenue have stayed in the 86-87 percent range for the last two years. The failure to increase CFO as much as Net Income has pushed up the Accrual Ratio, which hit +2 percent from zero the previous year. This potentially signifies lower-quality earnings.
The Value gauge reads a tepid, but improving, 7 points. The Price/Earnings ratio at the end of December was 19. The P/E is a little lower than it had been, but not enough to get more than a point in our scoring system. The P/E ratio was an 18 percent premium to the market as represented by the S&P 500. The premium hasn't come down enough to merit significant value points. The PEG ratio is just under 1.0, which is a sign of good value. The story is basically the same for the Price/Revenues ratio, stable at 2.0.
Rolling up all of the above, the Overall gauge displays a score of 45 out of 100 points. It was only 33 after the September quarter, and the current score is the highest it has been in 3 years. The first signs of an upswing are becoming apparent.
Before the 4th quarter results were published, we said we would look for the following:
Revenue: Did holiday sales cause a noticeable bounce in sales? Absolutely. Revenue growth was 13 percent over the December 2005 quarter. The Wall Street estimate was 11.2 billion Euro for the most recent quarter. Our model predicted a more modest 10.6 billion Euro. At 11.7 billion Euro, actual results substantially exceeded both estimates.
Gross Margin: We were hoping to see a Gross Margin of 35 percent or more as a sign the company has regained pricing power. However, the Gross Margin fell short at 33 percent. Instead of regaining pricing power, we now conclude that the company has (at long last) adapted to the more competitive environment.
Net Income: The market estimate was 0.26 Euro per share for the quarter. Our estimate was 0.25 Euro. The actual value was a strong 32 Euro cents.
Inventory: We hoped merely to see Inventory/CGS drop to 27 days. Instead, it was cut all the way to 20 days, far exceeding our most optimistic expectations.
CFO: We wanted to see positive CFO growth (it came in at +8 percent) on par with Net Income (it wasn't).
Our Cash Management gauge for Nokia now displays 16 (up from 7!) out of 25 total points. The Current Ratio inched up to 1.83. Long-Term Debt to Equity remains inconsequential at 1 percent. In a dramatic improvement, completely reversing an earlier troubling trend, Inventory was cut to a record low level of 20 days (measured by Cost of Goods Sold). The Inventory level was 31 days at the end of the 3rd quarter and 27 days on 31 December 2006. We can now see that Nokia built up its inventory in anticipation of strong holiday sales, and then exceeded these expectations. Unfortunately, Nokia does not identify the proportion of inventory made up of Finished Goods; the missing information would give us more insight. Accounts Receivable were 52 days of Revenue; this parameter continues to be stable.
The Growth gauge now shows a strong 20 points (up from 16). Revenue growth reached 20 percent year over year for the first time in more than 6 years. Net Income growth increased to 19 percent, a considerable improvement over the year-earlier 13 percent. Cash Flow from Operations (CFO) was up a modest 8 percent, but any CFO growth is still a step in the right direction. Revenue/Assets, now at 1.82, edged down from 1.84 last quarter, but it still outclasses last year's 1. 53 by a wide margin.
Profitability held at 11 of 25 points. The Return on Invested Capital (ROIC) is an impressive 39 percent, up from the year-earlier 31 percent. Free Cash Flow (FCF) to Equity grew from 29 percent to 32 percent. With increased competition, Gross Margin has been trending down from percent values in the upper 30's to today's 33 percent. The company has, by and large, compensated for this by cutting R&D or other operating expenditures. These Operating Expenses as a proportion of Revenue have stayed in the 86-87 percent range for the last two years. The failure to increase CFO as much as Net Income has pushed up the Accrual Ratio, which hit +2 percent from zero the previous year. This potentially signifies lower-quality earnings.
The Value gauge reads a tepid, but improving, 7 points. The Price/Earnings ratio at the end of December was 19. The P/E is a little lower than it had been, but not enough to get more than a point in our scoring system. The P/E ratio was an 18 percent premium to the market as represented by the S&P 500. The premium hasn't come down enough to merit significant value points. The PEG ratio is just under 1.0, which is a sign of good value. The story is basically the same for the Price/Revenues ratio, stable at 2.0.
Rolling up all of the above, the Overall gauge displays a score of 45 out of 100 points. It was only 33 after the September quarter, and the current score is the highest it has been in 3 years. The first signs of an upswing are becoming apparent.
Before the 4th quarter results were published, we said we would look for the following:
Revenue: Did holiday sales cause a noticeable bounce in sales? Absolutely. Revenue growth was 13 percent over the December 2005 quarter. The Wall Street estimate was 11.2 billion Euro for the most recent quarter. Our model predicted a more modest 10.6 billion Euro. At 11.7 billion Euro, actual results substantially exceeded both estimates.
Gross Margin: We were hoping to see a Gross Margin of 35 percent or more as a sign the company has regained pricing power. However, the Gross Margin fell short at 33 percent. Instead of regaining pricing power, we now conclude that the company has (at long last) adapted to the more competitive environment.
Net Income: The market estimate was 0.26 Euro per share for the quarter. Our estimate was 0.25 Euro. The actual value was a strong 32 Euro cents.
Inventory: We hoped merely to see Inventory/CGS drop to 27 days. Instead, it was cut all the way to 20 days, far exceeding our most optimistic expectations.
CFO: We wanted to see positive CFO growth (it came in at +8 percent) on par with Net Income (it wasn't).
21 January 2007
MSFT: Analysis through Sept 2006
Since the fiscal year for software colossus Microsoft ends on 30 June, the quarter that ended on 31 December 2006 was the second quarter of fiscal 2007. Microsoft will report their results for this quarter on 25 January. We are preparing for this report by reviewing the analysis we performed last October after Microsoft issued their data for the fiscal 2007's first quarter. We will also identify data in the 2nd quarter results that would provide an initial indication into the strength or weakness of Micosoft's performance.
With the data for the quarter ending 30 September, our Cash Management gauge for Microsoft displayed 9 out of 25 total points. However, this gauge isn't particularly meaningful for Microsoft because Inventory has only recently become consequential (mostly xboxes?) and Long-Term Debt is neglible. The Current Ratio was an ideal 2.1; it has come down from previous ridiculously high levels as cash was spent on stock buybacks. Accounts Receivable were 55 days of Revenue, a little less that its long-term average.
The Growth gauge showed 12 points. Revenue growth was 12 percent year over year, after having slumped to single-digit percentage points in 2005. Net Income growth, on the other hand, has continued to spiral downward to an anemic 1 percent. The pressure on Net Income appears to be due, in part, to higher income taxes and less interest income (since cash that was earning interest has been spent on stock buybacks). Cash Flow from Operations (CFO) has actually declined by a substantial 16 percent on a year-over-year basis. Revenue/Assets moved up to 69 percent. This also appears to be the result of the company drawing down its cash levels to buy shares of its common stock.
Profitability scored 11 of 25 points. The Return on Invested Capital (ROIC) skyrocketed to 43 percent, its highest level in 6 years; the increase is also partly explained by reduction in stockholders equity after share repurchases. Free Cash Flow (FCF) to Equity edged up to 34 percent. Since CFO and FCF have been decreasing, as mentioned in previously,the FCF/Equity performance must be attributed to the reduction in the number of shares outstanding. Operating Expenses as a proportion of Revenue has been a stable 63 percent, as a slight downtrend in Gross Margin has been compensated by reduced SG&A expenditures. The Accrual Ratio moved above zero percent for the first time in more than a decade. This unhappy result, signifying lower-quality earnings, is because the decline in CFO means that a growing proportion of Net Income has been due to non-operating factors (i.e., changes in accruals).
The Value gauge read a healthy 15 points. The Price/Earnings ratio at the end of September was 21. This is a much lower than its historical average, suggesting greater value. Similarly, with the P/E ratio at a value that is 36 percent above the S&P 500 market multiple, we see a much lower premium. On the other hand, the PEG ratio has soared because earnings growth was a mere 1 percent. The Price/Revenues ratio was a seemingly scary 6.0, but this is actually a tad lower than historic values.
Rolling up all of the above, the Overall gauge came in with a score of 50 out of 100 points. In other cases, this would be a good, if not very good, score; however, the score was a fabulous 70 in mid 2005. We'd like to think that last year's scores foretold recent gains in the stock price. But, if we believe this, we shouldn't expect the gains to continue for long.
Things to look for in the results for the quarter ending 31 December:
Revenue: Is revenue growth maintaining a double-digit pace? The Wall Street estimate is $12.1 billion for the quarter. Our model predicts a more modest $11.9 billion. The lower value would still result in a 10 percent year-over-year revenue growth.
Operating Expenses: Has increased spending degraded the ratio of operating expenses to revenues below 63 percent.
Net Income: The market estimate is 23 cents per share for the quarter, which is a significant drop. We suspect the market is aware of non-recurring expenses (stock-option expenses????) depressing net income. Our estimate is a more robust 33 cents. We'll carefully scrutinize the new financial report to figure out why the market expects such weak earnings -- and yet it has been pushing up the stock price.
CFO: We'd like to see CFO start growing again.
With the data for the quarter ending 30 September, our Cash Management gauge for Microsoft displayed 9 out of 25 total points. However, this gauge isn't particularly meaningful for Microsoft because Inventory has only recently become consequential (mostly xboxes?) and Long-Term Debt is neglible. The Current Ratio was an ideal 2.1; it has come down from previous ridiculously high levels as cash was spent on stock buybacks. Accounts Receivable were 55 days of Revenue, a little less that its long-term average.
The Growth gauge showed 12 points. Revenue growth was 12 percent year over year, after having slumped to single-digit percentage points in 2005. Net Income growth, on the other hand, has continued to spiral downward to an anemic 1 percent. The pressure on Net Income appears to be due, in part, to higher income taxes and less interest income (since cash that was earning interest has been spent on stock buybacks). Cash Flow from Operations (CFO) has actually declined by a substantial 16 percent on a year-over-year basis. Revenue/Assets moved up to 69 percent. This also appears to be the result of the company drawing down its cash levels to buy shares of its common stock.
Profitability scored 11 of 25 points. The Return on Invested Capital (ROIC) skyrocketed to 43 percent, its highest level in 6 years; the increase is also partly explained by reduction in stockholders equity after share repurchases. Free Cash Flow (FCF) to Equity edged up to 34 percent. Since CFO and FCF have been decreasing, as mentioned in previously,the FCF/Equity performance must be attributed to the reduction in the number of shares outstanding. Operating Expenses as a proportion of Revenue has been a stable 63 percent, as a slight downtrend in Gross Margin has been compensated by reduced SG&A expenditures. The Accrual Ratio moved above zero percent for the first time in more than a decade. This unhappy result, signifying lower-quality earnings, is because the decline in CFO means that a growing proportion of Net Income has been due to non-operating factors (i.e., changes in accruals).
The Value gauge read a healthy 15 points. The Price/Earnings ratio at the end of September was 21. This is a much lower than its historical average, suggesting greater value. Similarly, with the P/E ratio at a value that is 36 percent above the S&P 500 market multiple, we see a much lower premium. On the other hand, the PEG ratio has soared because earnings growth was a mere 1 percent. The Price/Revenues ratio was a seemingly scary 6.0, but this is actually a tad lower than historic values.
Rolling up all of the above, the Overall gauge came in with a score of 50 out of 100 points. In other cases, this would be a good, if not very good, score; however, the score was a fabulous 70 in mid 2005. We'd like to think that last year's scores foretold recent gains in the stock price. But, if we believe this, we shouldn't expect the gains to continue for long.
Things to look for in the results for the quarter ending 31 December:
Revenue: Is revenue growth maintaining a double-digit pace? The Wall Street estimate is $12.1 billion for the quarter. Our model predicts a more modest $11.9 billion. The lower value would still result in a 10 percent year-over-year revenue growth.
Operating Expenses: Has increased spending degraded the ratio of operating expenses to revenues below 63 percent.
Net Income: The market estimate is 23 cents per share for the quarter, which is a significant drop. We suspect the market is aware of non-recurring expenses (stock-option expenses????) depressing net income. Our estimate is a more robust 33 cents. We'll carefully scrutinize the new financial report to figure out why the market expects such weak earnings -- and yet it has been pushing up the stock price.
CFO: We'd like to see CFO start growing again.
20 January 2007
NOK: Analysis through Sept 2006
Mobile phone giant Nokia will report 4th quarter and annual results for 2006 on 25 January. We are preparing for that event by reviewing the analysis we performed last October after Nokia issued their data for the 3rd quarter of 2006. We will also identify data in the 4th quarter results that would provide an initial indication into the strength or weakness of Nokia's performance.
First of all, readers should be aware that Nokia's financial statements are prepared in accordance with International Accounting Standards (IAS), rather than U.S. Generally Accepted Accounting Principles (GAAP). Fortunately, IAS and GAAP are similar enough that we can apply our analytical methodology without difficulty. [Alas, this is not the case with UK accounting standards.] Secondly, Nokia's financial statements use Euros as their currency; not that it matters, but when we first analyzed Nokia we had to make conversions from the now retired Finnish Markka.
After the third quarter, our Cash Management gauge for Nokia displayed 7 out of 25 total points. The Current Ratio was 1.79; it had been over 2.0 almost every quarter between December 2002 and December 2005, but below 2.0 in the first three quarters of 2006. Long-Term Debt to Equity was an inconsequential 1 percent, probably a remnant of the late 1990s when money came in so fast the company was able to pay off the debt it had accumulated during its startup phase. Inventory had backed up to 31 days (measured by Cost of Goods Sold). Inventory levels have been trending higher -- they were in the 25-27 day range for a long time. We fear that the increased inventory is an indication of less demand for the company's products due to increased competition. It might also be that the company intentionally built up inventory in anticipation of strong holiday sales. Unfortunately, the company does not identify the proportion of inventory made up of Finished Goods. (Perhaps this is one difference between IAS and US GAAP.) Accounts Receivable were 51 days of Revenue; because this parameter has been relatively stable, there's no indication that the company is having any problems get paid.
The Growth gauge showed a healthy 16 points. Revenue growth was 19 percent year over year. Revenues had stagnated or slumped in 2002-2004 after the go-go 1990s, but they have been growing at double-digits rates for the last year and a half. The same pattern can be seen with Net Income growth, which was 13 percent after the 3rd quarter 2006. Cash Flow from Operations (CFO) took a deeper dive in this decade; we can take faint comfort that CFO stopped dropping. Nevertheless, we are concerned that CFO in the four quarters ending September 2006 was essentially identical to the CFO in the four previous quarters. Revenue/Assets was the good news story indicating improved efficiency; now at 1.85, it was much higher during the last two quarters than any prior periods. This appears to be the result of the company drawing down its cash levels to buy shares of its common stock.
Profitability scored 11 of 25 points. The Return on Invested Capital (ROIC) jumped up to an impressive 44 percent; this is also partly explained by reduction in stockholders equity after share repurchases. Free Cash Flow (FCF) to Equity, at 29 percent, has been stable. Since CFO, as mentioned in the previous paragraph, hasn't been growing, the FCF/Equity performance must be attributed to scaled back capital spending and the number of shares outstanding. With increased competition, Gross Margin has been trending down from percent values in the upper 30's to the lower 30's. The company has, by and large, compensated for this by cutting R&D expenditures. Therefore, Operating Expenses as a proportion of Revenue, recently 86 percent, have been relatively stable. But, one can see that this value has edged up a couple of points over the last few years. The failure to increase CFO means that a growing proportion of Net Income has been due to non-operating factors (i.e., changes in accruals). This is seen in the Accrual Ratio hitting +4 percent. Some would say that is an indication of lower-quality earnings.
The Value gauge read a weak 5 points. The Price/Earnings ratio at the end of September was 19. This is a little lower than it had been, but not enough to get more than a point in our scoring system. The P/E ratio was about a 25 percent premium to the market as represented by the S&P 500. Since the premium has not come down, it doesn't get value points. We note a small drop in the PEG ratio, caused by the 13 percent earnings growth, to 1.47. The story is basically the same for the Price/Revenues ratio, stable at 2.0 -- not a drop that would make us think the stock is undervalued.
Rolling up all of the above, the Overall gauge came in with a score of 33 out of 100 points. The value is low enough to worry us, and we're not seeing any increases to make us think the company is on the upswing.
Things to look for in the 4th quarter:
Revenue: Did holiday sales cause a noticeable bounce in sales? Nokia's robust sales in the 4th quarter of 2005 set a high threshold for the company to meet in 2006. The Wall Street estimate is 11.2 billion Euro for the quarter. Our model predicts a more modest 10.6 billion Euro. A value lower than this latter value would signify trouble.
Gross Margin: 35+ percent would signify that company is regaining pricing power.
Net Income: The market estimate is 0.26 Euro per share for the quarter. Our estimate is 0.25 Euro.
Inventory: We'd like to see Inventory/CGS drop to 27 or so days. More than 30 days would be problematic.
CFO: Positive CFO growth is a must, and will, hopefully be on par with Net Income.
First of all, readers should be aware that Nokia's financial statements are prepared in accordance with International Accounting Standards (IAS), rather than U.S. Generally Accepted Accounting Principles (GAAP). Fortunately, IAS and GAAP are similar enough that we can apply our analytical methodology without difficulty. [Alas, this is not the case with UK accounting standards.] Secondly, Nokia's financial statements use Euros as their currency; not that it matters, but when we first analyzed Nokia we had to make conversions from the now retired Finnish Markka.
After the third quarter, our Cash Management gauge for Nokia displayed 7 out of 25 total points. The Current Ratio was 1.79; it had been over 2.0 almost every quarter between December 2002 and December 2005, but below 2.0 in the first three quarters of 2006. Long-Term Debt to Equity was an inconsequential 1 percent, probably a remnant of the late 1990s when money came in so fast the company was able to pay off the debt it had accumulated during its startup phase. Inventory had backed up to 31 days (measured by Cost of Goods Sold). Inventory levels have been trending higher -- they were in the 25-27 day range for a long time. We fear that the increased inventory is an indication of less demand for the company's products due to increased competition. It might also be that the company intentionally built up inventory in anticipation of strong holiday sales. Unfortunately, the company does not identify the proportion of inventory made up of Finished Goods. (Perhaps this is one difference between IAS and US GAAP.) Accounts Receivable were 51 days of Revenue; because this parameter has been relatively stable, there's no indication that the company is having any problems get paid.
The Growth gauge showed a healthy 16 points. Revenue growth was 19 percent year over year. Revenues had stagnated or slumped in 2002-2004 after the go-go 1990s, but they have been growing at double-digits rates for the last year and a half. The same pattern can be seen with Net Income growth, which was 13 percent after the 3rd quarter 2006. Cash Flow from Operations (CFO) took a deeper dive in this decade; we can take faint comfort that CFO stopped dropping. Nevertheless, we are concerned that CFO in the four quarters ending September 2006 was essentially identical to the CFO in the four previous quarters. Revenue/Assets was the good news story indicating improved efficiency; now at 1.85, it was much higher during the last two quarters than any prior periods. This appears to be the result of the company drawing down its cash levels to buy shares of its common stock.
Profitability scored 11 of 25 points. The Return on Invested Capital (ROIC) jumped up to an impressive 44 percent; this is also partly explained by reduction in stockholders equity after share repurchases. Free Cash Flow (FCF) to Equity, at 29 percent, has been stable. Since CFO, as mentioned in the previous paragraph, hasn't been growing, the FCF/Equity performance must be attributed to scaled back capital spending and the number of shares outstanding. With increased competition, Gross Margin has been trending down from percent values in the upper 30's to the lower 30's. The company has, by and large, compensated for this by cutting R&D expenditures. Therefore, Operating Expenses as a proportion of Revenue, recently 86 percent, have been relatively stable. But, one can see that this value has edged up a couple of points over the last few years. The failure to increase CFO means that a growing proportion of Net Income has been due to non-operating factors (i.e., changes in accruals). This is seen in the Accrual Ratio hitting +4 percent. Some would say that is an indication of lower-quality earnings.
The Value gauge read a weak 5 points. The Price/Earnings ratio at the end of September was 19. This is a little lower than it had been, but not enough to get more than a point in our scoring system. The P/E ratio was about a 25 percent premium to the market as represented by the S&P 500. Since the premium has not come down, it doesn't get value points. We note a small drop in the PEG ratio, caused by the 13 percent earnings growth, to 1.47. The story is basically the same for the Price/Revenues ratio, stable at 2.0 -- not a drop that would make us think the stock is undervalued.
Rolling up all of the above, the Overall gauge came in with a score of 33 out of 100 points. The value is low enough to worry us, and we're not seeing any increases to make us think the company is on the upswing.
Things to look for in the 4th quarter:
Revenue: Did holiday sales cause a noticeable bounce in sales? Nokia's robust sales in the 4th quarter of 2005 set a high threshold for the company to meet in 2006. The Wall Street estimate is 11.2 billion Euro for the quarter. Our model predicts a more modest 10.6 billion Euro. A value lower than this latter value would signify trouble.
Gross Margin: 35+ percent would signify that company is regaining pricing power.
Net Income: The market estimate is 0.26 Euro per share for the quarter. Our estimate is 0.25 Euro.
Inventory: We'd like to see Inventory/CGS drop to 27 or so days. More than 30 days would be problematic.
CFO: Positive CFO growth is a must, and will, hopefully be on par with Net Income.
BUD and PEP
This blog has already discussed two beverage companies: PepsiCo and Anheuser Busch. PEP's corporate reports were used as examples in the earliest postings to explain financial statements and our approach for analyzing them. BUD was the subject of a separate analysis. Considering the small set of companies we analyze regularly, the fact that we track two huge beverage companies could reflect our tendency to adhere to Peter Lynch's famous maxim to "invest in what you know."
Morningstar.com analyst Matthew Reilly recently issued an insightful report on "Which Beverage Stock Makes the Best Investment?" He addressed the domestic and international earnings potential of Coca-Cola, PepsiCo, Anheuser-Busch, and Diageo. Whereas we analyze dry accounting data, without looking into how the company actually works, Mr. Reilly evaluated how the marketing strategies and management agility of the four companies drive their long-term performance.
We wondered how the Morningstar approach stacked up to our own. We liked how Morningstar tied the managerial performance to corporate growth potential, but we would have preferred to see greater discussion of stock price valuation. Sales and earnings increases are wonderful, be we don't want to overpay for them -- see Growth at a Reasonable Price (GARP). To be fair, Mr. Reilly was considering investments for a ten-year time frame; this would be a valid reason to give less weight the current stock price when making an investment decision.
On our gauge-based scoring system, using PepsiCo's financial results through 9 September 2006, we reported that the company earned a tepid Overall score of 29 points out of 100. We noted approvingly that the Growth gauge had picked up, but we were concerned that the Value was low because of a too-lofty stock price. We indicated that we would wait for the stock price to drop before re-assessing the company. For the record, PEP's stock price was $64.73 on 9 September, and it is $64.82 today; given that the S&P 500 index moved up almost five percent during this period, it appears that our stated concerns about PEP's value were not unique.
Mr. Reilly noted that Pepsico is growing at Coca-Cola's expense -- a tribute to superior management.
Our evaluation of BUD, using data for the quarter ending 30 September 2006, gave the company an overall score of 21 out of 100 possible points. We caustically (and perhaps undeservedly) noted that their products are a better value than the stock. In this case, the market had a different view, since BUD's stock price is up about 7 percent from 30 September.
Morningstar indicated that BUD management was less nimble (i.e., more reactive) than its competitors, or, in other words, more like Coca-Cola than PepsiCo. He rated PepsiCo as the one beverage company worth holding for the next decade.
Morningstar.com analyst Matthew Reilly recently issued an insightful report on "Which Beverage Stock Makes the Best Investment?" He addressed the domestic and international earnings potential of Coca-Cola, PepsiCo, Anheuser-Busch, and Diageo. Whereas we analyze dry accounting data, without looking into how the company actually works, Mr. Reilly evaluated how the marketing strategies and management agility of the four companies drive their long-term performance.
We wondered how the Morningstar approach stacked up to our own. We liked how Morningstar tied the managerial performance to corporate growth potential, but we would have preferred to see greater discussion of stock price valuation. Sales and earnings increases are wonderful, be we don't want to overpay for them -- see Growth at a Reasonable Price (GARP). To be fair, Mr. Reilly was considering investments for a ten-year time frame; this would be a valid reason to give less weight the current stock price when making an investment decision.
On our gauge-based scoring system, using PepsiCo's financial results through 9 September 2006, we reported that the company earned a tepid Overall score of 29 points out of 100. We noted approvingly that the Growth gauge had picked up, but we were concerned that the Value was low because of a too-lofty stock price. We indicated that we would wait for the stock price to drop before re-assessing the company. For the record, PEP's stock price was $64.73 on 9 September, and it is $64.82 today; given that the S&P 500 index moved up almost five percent during this period, it appears that our stated concerns about PEP's value were not unique.
Mr. Reilly noted that Pepsico is growing at Coca-Cola's expense -- a tribute to superior management.
Our evaluation of BUD, using data for the quarter ending 30 September 2006, gave the company an overall score of 21 out of 100 possible points. We caustically (and perhaps undeservedly) noted that their products are a better value than the stock. In this case, the market had a different view, since BUD's stock price is up about 7 percent from 30 September.
Morningstar indicated that BUD management was less nimble (i.e., more reactive) than its competitors, or, in other words, more like Coca-Cola than PepsiCo. He rated PepsiCo as the one beverage company worth holding for the next decade.
17 January 2007
TDW: Comments on Brokerage Downgrade
We previously reported the very positive results of an analysis of Tidewater's financial data through the third quarter of calendar year 2006.
It was, therefore, painful when the influential Goldman Sachs firm initiated coverage of TDW on 11 January 2007 with a rare "Sell" recommendation. The stock price dropped that day from $46.50 to $43.78.
We spent the next few days licking our wounds and wondering where we went wrong. Perhaps, it is foolhardy to apply our analysis methodology using historic data when the performance of the subject company is driven by one parameter: the current price of oil. This might be true, but we felt redeemed when Tidewater issued a press release on 16 January announcing that earnings in the quarter ending 31 December 2006 would substantially exceed Wall Street expectations.
By the close of today's trading, the stock price stood at $47.58.
Goldman probably had great reasons for their recommendation, and the recent bounce back might be short lived. Time will tell. In any event, we make investment choices based on quantitative analyses using proven data.
It was, therefore, painful when the influential Goldman Sachs firm initiated coverage of TDW on 11 January 2007 with a rare "Sell" recommendation. The stock price dropped that day from $46.50 to $43.78.
We spent the next few days licking our wounds and wondering where we went wrong. Perhaps, it is foolhardy to apply our analysis methodology using historic data when the performance of the subject company is driven by one parameter: the current price of oil. This might be true, but we felt redeemed when Tidewater issued a press release on 16 January announcing that earnings in the quarter ending 31 December 2006 would substantially exceed Wall Street expectations.
By the close of today's trading, the stock price stood at $47.58.
Goldman probably had great reasons for their recommendation, and the recent bounce back might be short lived. Time will tell. In any event, we make investment choices based on quantitative analyses using proven data.
16 January 2007
INTC: Analysis through Dec 2006
On Christmas Day, we studied Intel's financial results through September 30, hoping unsuccessfully as it turned out, to find some reason to believe the stock price might bounce back from its dismal, worst-in-the-Dow performance in 2006.
Today, Intel reported preliminary results for the 4th quarter of 2006. While some of the talking heads on CNBC and Bloomberg claimed otherwise, we saw little in these results to foretell an Intel stock price recovery. Note that the preliminary results are incomplete; for example, they included only a few elements needed to construct a Cash Flow Statement. Our analysis will remain incomplete until Intel submits, in late February or early March, a comprehensive year-end 10-K report to the SEC.
First, the good news. Progress was made on Cash Management. The Current Ratio is back above a healthy 2.0, and Long Term Debt to Equity is a minuscule 5 percent. Accounts Receivable are down to 28 days of Revenue, which we believe to be the lowest level ever for this parameter. The Inventory level is 92 days (measured by Cost of Goods Sold), down from recent, vertigo-inducing levels above 100 days, but Inventory is still way above historic norms. More worrisome, Finished Goods are up to 39 percent of Inventory, which suggests that the company is still having significant problems matching production to demand. Given the limited life-cycle of semiconductor products, we worry that the further price discounts (compressing the already shrinking Gross Margin) are in the offing.
Growth continues to be non-existent. Revenue is down 9 percent year over year. Net Income is down a whopping 42 percent. We're not sure about Cash Flow from Operations, but our back-of-the-envelope estimate has CFO matching the off-the-table fall in Net Income. Revenue/Assets is down to 73 percent, continuing a multi-quarter drop in efficiency.
Profitability? The Return on Invested Capital is 15 percent, down from 2005's value of 27 percent. The weakening of the Gross Margin contributed to the soaring Operating Expenses to Revenue, which is now up to 82 percent. We're not sure about Free Cash Flow/Equity, but we suspect it is less than half of what it was one year ago. We'll defer consideration of the Accrual Ratio until complete financial results are available.
The Valuation numbers are too depressing to review them all. We'll simply say that a company with decreasing Net Income somehow manages to maintain a Price/Earnings ratio better than the S&P 500.
Today, Intel reported preliminary results for the 4th quarter of 2006. While some of the talking heads on CNBC and Bloomberg claimed otherwise, we saw little in these results to foretell an Intel stock price recovery. Note that the preliminary results are incomplete; for example, they included only a few elements needed to construct a Cash Flow Statement. Our analysis will remain incomplete until Intel submits, in late February or early March, a comprehensive year-end 10-K report to the SEC.
First, the good news. Progress was made on Cash Management. The Current Ratio is back above a healthy 2.0, and Long Term Debt to Equity is a minuscule 5 percent. Accounts Receivable are down to 28 days of Revenue, which we believe to be the lowest level ever for this parameter. The Inventory level is 92 days (measured by Cost of Goods Sold), down from recent, vertigo-inducing levels above 100 days, but Inventory is still way above historic norms. More worrisome, Finished Goods are up to 39 percent of Inventory, which suggests that the company is still having significant problems matching production to demand. Given the limited life-cycle of semiconductor products, we worry that the further price discounts (compressing the already shrinking Gross Margin) are in the offing.
Growth continues to be non-existent. Revenue is down 9 percent year over year. Net Income is down a whopping 42 percent. We're not sure about Cash Flow from Operations, but our back-of-the-envelope estimate has CFO matching the off-the-table fall in Net Income. Revenue/Assets is down to 73 percent, continuing a multi-quarter drop in efficiency.
Profitability? The Return on Invested Capital is 15 percent, down from 2005's value of 27 percent. The weakening of the Gross Margin contributed to the soaring Operating Expenses to Revenue, which is now up to 82 percent. We're not sure about Free Cash Flow/Equity, but we suspect it is less than half of what it was one year ago. We'll defer consideration of the Accrual Ratio until complete financial results are available.
The Valuation numbers are too depressing to review them all. We'll simply say that a company with decreasing Net Income somehow manages to maintain a Price/Earnings ratio better than the S&P 500.
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