ADP: Financial Analysis through September 2007

We have analyzed ADP's (ADP) preliminary financial results for the quarter that ended on 30 September 2007. This post reports on our evaluation. For our purposes, the financial statements had two shortfalls: the Balance Sheet was abbreviated and the Cash Flow Statement was missing. Our evaluation will be updated after the company formally submits a complete 10-Q report to the SEC.

ADP, which is one of a mere handful of U.S. companies with a AAA bond rating, is a top provider of payroll and other personnel-related IT services to corporate customers. It also publishes the monthly ADP National Employment Report(SM) that reports changes in total non-farm private employment.

ADP has been restructuring. It spun off its Brokerage Services Group business on 30 March 30 2007. The divested company was renamed Broadridge Financial Solutions, and it now trades publicly under the ticker symbol BR. On 6 July 2007, ADP sold an airline ticket-clearing business based in Spain, which had annual revenues of about $75 million. The company also changed the way it accounts for Depreciation and Amortization expenses; this change led to restatements of Costs of Revenue and Sales, General, and Administrative (SG&A) expenses.

As a result of these corporate changes, we didn't publish an analysis of ADP after the June quarter. We were doubtful we had the data needed to make a fair comparison of the company's current performance with its historical norms. We knew that ADP's past financial statements needed to be modified, but we weren't sure how significant the changes would be. Our concerns were recently eased, at least partially, because ADP has now made two years of updated Income Statements available on its web site. We would have preferred more data, but the new data gave us some consistent figures with which we could work.

Employing the available data from the September 2007 quarter, our gauges display the following scores:

• Cash Management: 16 of 25
• Growth: 18 of 25
• Profitability: 15 of 25
• Value: 5 of 25
  

• Overall: 45 of 100

Keep in mind that these scores were computed without the benefit of complete balance sheet and cash flow information.

Before we examine the factors that affected each gauge, let's review the latest quarterly Income Statement.

($ M)		September 2007 (actual)	September 2006 (actual)
Revenue (1)		1992	1755
Op expenses
	CGS (2)	(908)	(804)
	Depreciation (3)	(59)	(50)
	R&D (4)	(124)	(114)
	SG&A	(534)	(493)
	Other	0	(0)
Operating Income		366	295
Other income
	Investments	0	0
	Interest, etc.	15	55
Pretax income		382	349
Income tax		(141)	(130)
Net Income		240	219
		$0.45/sh	0.39/sh
Discontinued operations		57	38

<sup>1. Total revenues includes interest on funds held for clients and Professional Employer Organization revenues.
2. Operating expenses
3. Depreciation and amortization.
4. System development and programming</sup>


ADP's Revenue in the recent quarter was 13.5 percent greater than in the year-earlier period. The Cost of Goods Sold (CGS) was 45.6 percent of Revenue, just a tad below the 45.8 percent in September 2006. Depreciation expenses were 3 percent of Revenue, up a little from the year-earlier value of 2.9 percent. Research and Development (R&D) expenses were 6.2 percent of Revenue, compared to 6.5 percent in September 2006. Sales, General, and Administrative (SG&A) expenses were 26.8 percent of Revenue; SG&A expenses were a significantly greater 28.1 percent of Revenue one year ago.

The net effect of the higher Revenue and good cost control was Operating Income a substantial 24.3 percent above the amount attained in September 2006.

Non-operating income was $40 million less in the recent quarter than the year-earlier quarter. The difference was the result of a one-time $38.6 million gain in the earlier quarter on the sale of an investment.

The Income Tax Rate in the recent quarter was 37.0 percent, compared to 37.2 percent. Net Income from continuing operations exceeded the level attained a year ago by 9.8 percent. Overall Net Income surpassed the year-earlier figure by 15.6 percent.


Cash Management. This gauge now reads 16 points, but this value is suspect because of the missing Balance Sheet detail. It will almost certainly come down when complete data becomes available.

• Current Ratio =1.6; down from 1.9 in June 2007 and 1.8 in Sept 2006
• LTD/Equity = <1>
• Debt/CFO = nil
  

We don't have sufficient data to calculate the following metrics:

• Days of Sales Outstanding (DSO) = N/A days, compared to 42 days in June and 58 days in Sept 2006
• Working Capital/Market Capitalization = N/A percent, compared to 7.5 percent one year ago.
• Cash Conversion Cycle Time (CCCT) = N/A days, compared to 36.7 days, for this measure of efficiency.
  

Growth. This gauge now reads 18 points.

The following measures all helped the gauge:

• Revenue growth = 13.8 percent year-over-year, making up for last year's -9 percent
• Revenue/Assets = 96.9 percent, up dramatically from 73.5 percent in a year; sales efficiency is improving
• Net Income growth = 17.4 percent year-over-year, up from -9.2 percent.
  

Net income benefited from a change in the income tax rate from 38 to 37 percent

By our estimate, Cash Flow from Operations might have declined a little. But we don't have the data to be sure.

• CFO growth = N/A percent year-over-year, compared to 0.3 percent

Profitability. This gauge now reads 15 points.

The measures that helped the gauge were:

• ROIC = 28.7 percent, up from 18.1 percent in a year
• FCF/Equity = 26.1 percent, up from 22.9 percent in a year
• Operating Expenses/Revenue = 80.4 percent, down from last year's 81.4 percent.
  

The measures that hurt the gauge were:

• Accrual Ratio = -3.2 percent, up from -4.7 percent in a year.
  

Value. ADP's stock price fell from $48.47 to $45.93 over the course of the quarter -- it has since rebounded. The Value gauge, based on the latter price, is at 5 points.

The measures that helped the gauge were:

• Enterprise Value/Cash Flow = 15.5, essentially unchanged from September 2006
• P/E = 23.6, down from a 5-year median of 26.5
  
• P/E to S&P 500 average P/E = 46 percent premium, a little less than the five-year median
  
• Price/Revenue ratio = 3.1, compared to a five-year median of 3.3.
  

The average P/E for the Business Services industry is currently 23.5. The average Price/Revenue for the industry is currently 2.6.

If it holds up, 45 out of 100 possible points for the Overall gauge would be the best score for ADP in four years. The stock price rallied nicely after that earlier event.

COP: Financial Analysis through September 2007

We have analyzed ConocoPhillips's (COP) preliminary financial results for the quarter that ended on 30 September 2007.

The initial results include a myriad of financial and operational data, but, as is typically the case with Conoco, no Balance Sheet. Since the GCFR methodology requires Asset and Liability data to compute gauge scores, our analysis simply assumed that the Balance Sheet did not change materially from the end of June. We will update the analysis with actual data after Conoco submits a complete 10-Q report to the SEC.

Prior to the release of the preliminary results, COP announced that production was down and refining margins were "significantly lower" in the third quarter.

With worldwide oil, gas, and chemical operations, ConocoPhillips is the third-largest integrated energy company based in the U.S. Among international energy giants, it ranks fifth by Revenue and eighth by Market_Capitalization. Holding the sixth spot on the Fortune 500, Conoco's heft was achieved with mergers and acquisitions. Most notably, Conoco, Inc., and Phillips Petroleum combined in August 2002. The resulting behemoth in March 2006 purchased Burlington Resources, which had extensive natural gas operations in North America, for $33.9 billion.

The oil industry operates on a global scale, and Conoco's international holdings have become problematic. A disagreement with the Venezuelan government caused Conoco to record in its second-quarter financial results "a complete impairment of its entire interest in its oil projects in Venezuela of approximately $4.5 billion, before- and after-tax." A $4.5 billion write-off for a company with $170 billion in assets is not a cause for panic, but it is worrisome.

Conoco shares surged in the first half of the year and have been bouncing between $80 and $90 recently. Super-investor Warren Buffett must be pleased since the company he runs, Berkshire Hathaway, owns about 18 million shares of Conoco. Of course, $80 for a barrel of oil didn't hurt.

When we analyzed Conoco after the June quarter, the Overall score was a weak 27 points. Of the four individual gauges that fed into this composite result, Cash Management was the strongest at 16 points. Value was weakest at 0 points, which really worried us (unnecessarily as it has turned out so far) at the time.

Now, with the available data from the September 2007 quarter, our gauges display the following scores:

• Cash Management: 14 of 25
• Growth: 3 of 25
• Profitability: 10 of 25
• Value: 0 of 25
  

• Overall: 24 of 100

Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously communicated expectations.

($M)		Sept 2007 (actual)	Sept 2007 (predicted)	Sept 2006 (actual)
Revenue (1)		46062	50000	48076
Op expenses
	CGS (2)	(33482)	(36000)	(33191)
	Depreciation	(2052)	(2225)	(2137)
	Exploration	(218)	(240)	(197)
	SG&A (3)	(5152)	(5500)	(5503)
	Other	(249)	(150)	(291)
Operating Income		4909	6010	6757
Other income
	Equity income (4)	1289	1150	1175
	Interest, etc. (5)	166	100	5
Pretax income		6364	7110	7937
Income tax		(2691)	(2915)	(4061)
Net Income		3673	4195	3876
		$2.23/sh	2.55/sh	2.31/sh

<sub>1. Revenue = Sales and other operating revenues.
2. CGS = Purchased crude oil, natural gas and products + Production and operating expenses
3. SG&A = SG&A expenses + Taxes other than income taxes
4. Equity income = Equity in earnings of affiliates - Minority interests
5. Interest, etc. = Other income - Interest and debt expense</sub>


Revenue fell below our admittedly shaky expectations. We forecast Revenue to be 4 percent greater than in the year-earlier quarter, whereas Revenue actually decreased by 4.2 percent. Operating costs as a percentage of revenue were fractionally higher than we expected. We thought the Cost of Goods Sold (CGS) would be 72 percent of Revenue, and the actual value was 72.7 percent. Depreciation expenses were 4.5 percent of Revenue, matching our estimate. Sales, General, and Administrative (SG&A) expenses were 11.2 percent of Revenue, compared to our forecast of 11 percent.

The net effect of much less revenue, and slightly higher costs, was Operating Income 18.3 percent below the forecast value. [We should mention at this point that our definition of Operating Income, which we use for all the companies we analyze, is not identical to Conoco's definition. The differences can be discerned from the footnotes above.]

Greater than expected Non-Operating Income, by $205 million, helped close the gap. On the other hand, a slightly higher Income Tax Rate, 42.3 percent vs. 41 percent forecast) hurt Conoco's bottom line. As a result, Net Income fell below our prediction by 12.4 percent.


Cash Management. This gauge declined from 16 points in June to 14 points now. However, this gauge is driven by Balance Sheet data, for which we don't have up-to-date figures.

The measures that helped the gauge were:

• LTD/Equity = 25.6% manageable, down from 29.5 percent in Sept 2006
• Cash Conversion Cycle Time (CCCT) = 0.5 days, down from 3.0 days in Sept 2006, for this measure of efficiency.
• Debt/CFO = 1.0 year compared to 1.4 years 12 months ago
  
• Working Capital/Market Capitalization = 0.3 percent, up from -2.2 percent.
  

The measures that hurt the gauge were:

• Days of Sales Outstanding (DSO) = 28.3 days, substantially above the 22.1-day level one year earlier
• Current Ratio =1.0; weaker than we like, but matching the historic average.
  

Growth. This gauge didn't change from June's 3 points.

None of our measures helped the gauge that much.

• Revenue growth = -8.9 percent year-over-year, down sharply from +15.4 percent
• Revenue/Assets = 103.2 percent, down significantly from 118.1 percent in a year; sales efficiency is worsening
• Net Income growth = -33.6 percent year-over-year, down from +31 percent (hurt substantially by the Venezuelan impairment charge).
• CFO growth = 13.2 percent year-over-year; not bad, but down from 27 percent

Profitability. This gauge maintained the 10 points it achieved in June.

The measures that helped the gauge were:

• FCF/Equity = 13.3 percent, up from 7.4 percent in a year
• Accrual Ratio = -0.3 percent, down (a good thing) from +6.2 percent in a year.
  

The decreasing Accrual Ratio tells us that more of the company's Net Income is due to CFO, and, therefore, less is due to changes in non-operational Balance Sheet accruals.

The measures that hurt the gauge were:

• ROIC = 10.2 percent, down from 13.3 percent in a year
• Operating Expenses/Revenue = 87.4 percent, up from 86.7 percent in a year.
  

Higher Depreciation expenses were the main reason Operating expenses rose over the course of the last year.

Value. Conoco's stock price rose over the course of the quarter from $78.50 to $87.77. The combination of lackluster operating performance and a soaring stock price is the reason why the Value gauge is stuck at 0 points.

• Enterprise Value/Cash Flow = 7.1, not expensive, but up from 6.2 in Sept 2006
• P/E = 13.5, up from 6.2
  
• P/E to S&P 500 average P/E = 17 percent discount, compared to a 60 percent discount one year ago
  
• Price/Revenue ratio = 0.8, compared to 0.5 one year ago.
  

The average P/E for the Integrated Oil and Gas industry is also 12.3. The average Price/Revenue for the industry is currently 1.2.

One reason why Conoco shares appear overvalued relative to historic norms is the termination of operations in Venezuela. Net Income would have been 43 percent higher if we had ignored the $4.5 billion impairment charge, and even more if Venezuelan operations were continuing to contribute to revenue and earnings. In the September 2006 quarter, about 9 percent of Conoco's crude-oil production came from Venezuela.

We don't have a sufficient understanding of company operations to perform a rigorous what-if analysis, but we backed out the impairment charge to see how this factor alone would change the analysis. The gauge scores barely budged. We were initially mystified, but a closer look provides the explanation. Instead of Net Income dropping by 33.6 percent, year-over-year, it would have dropped by only 5 percent. This difference is huge, but a drop, irrespective of magnitude, isn't going to stir the Growth gauge. Similarly, instead of the P/E soaring to 13.5, this ratio would be a seemingly inexpensive 9.4 if the Venezuelan charge is ignored. However, the P/E would still be up substantially from where it had been over the last few years.

More important to Conoco than Venezuela is the refining margin (gasoline prices have not kept up with crude oil costs), a recovery in the price of natural gas, and improved operational efficiency.

TDW: Financial Analysis through September 2007

We have analyzed Tidewater's (TDW) preliminary financial results for the quarter that ended on 30 September 2007. Tidewater's report seems very complete, more so than after recent quarters. When the company submits a 10-Q report to the SEC, we will determine if the form contains additional data relevant to our analysis.

Tidewater owns a large fleet of vessels serving the global offshore energy industry. Once focused on the Gulf of Mexico, international operations comprised almost 80 percent of Tidewater's business in fiscal 2007.

When energy prices are rising, which has been the case for some time now, offshore production becomes increasingly profitable. The demand for maritime services to support this production has grown correspondingly, which has enabled Tidewater to lease its vessels for inflated rates. If changing economic conditions cause energy demand to soften and production to slow, rates will obviously decline and some vessels might have to be idled. Because each production area has its own unique challenges, which change over time, demand is not uniform across the world. Since Tidewater's assets are mobile, the company can shift vessels to the regions where activity is greatest and leasing rates are highest.

However, even the good times aren't perfect. Tidewater recently warned that its earnings will fall short of expectations because of regulatory dry-dockings, which cut into revenue growth and increase operating costs. In addition, fewer vessels were sold at a profit during the quarter, compared to the previous quarter.

When we analyzed Tidewater after the June quarter, which was actually the first of their fiscal year, we noted that the Overall score had declined to 45 points from earlier superlative levels in the 60's and 70's. Of the four individual gauges that fed into June's composite result, Growth was the strongest at 16 points. Profitability was weakest at 7 points.

Now, with the available data from the September 2007 quarter, our gauges display the following scores:

• Cash Management: 5 of 25
• Growth: 11 of 25
• Profitability: 4 of 25
• Value: 13 of 25
  

• Overall: 35 of 100
  

Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations. These expectations were established prior to Tidewater's warning of an earnings shortfall.

($M)		Sept 2007 (actual)	Sept 2007 (predicted)	Sept 2006 (actual)
Revenue		319	311	274
Op expenses
	CGS (1)	(162)	(146)	(125)
	Depreciation	(30)	(31)	(29)
	SG&A	(31)	(28)	(24)
Operating Income		97	106	97
Other income
	Asset sales (2)	2	5	28
	Interest, etc.	7	5	5
Pretax income		105	116	130
Income tax		(19)	(24)	(26)
Net Income		86	91	104
		$1.56/sh	1.63/sh	1.86/sh

<sub>1. CGS=Vessel operating costs + Costs of other marine revenues
2. Tidewater considers gains on asset sales to be an operating item.</sub>


Revenue exceeded our expectations. We forecast Revenue to be 13.5 percent greater than in the year-earlier quarter, and the actual increase was 16.4 percent. However, costs as a percentage of revenue were also higher than we expected. We thought the Cost of Goods Sold (CGS) would be 47 percent of Revenue, and the actual value was a heftier 50.7 percent. Depreciation expenses were 9.4 percent of Revenue, a little less than our 10 percent estimate. Sales, General, and Administrative (SG&A) expenses were 9.6 percent of Revenue, compared to our forecast of 9 percent.

To summarize, costs outpaced revenues. The net effect was Operating Income 8.5 percent below the forecast value.

Non-operating income was only $1 million less than expected. The Income Tax Rate was a mere 18.0 percent, instead of the predicted 21 percent. As a result, Net Income fell below our prediction by only 5.5 percent.


Cash Management. This gauge decreased from 11 points in June to 5 points now.

The measures that helped the gauge were:

• LTD/Equity = 15.7%, compared to 17.7 percent a year ago
• Current Ratio =3.1; down to a more normal range from 4.6.
  

Cash being spent on new vessels or stock repurchases is not putting the company in financial straps.

The measures that hurt the gauge were:

• Working Capital/Market Capitalization = 11.8 percent, down from 16.2 percent.
• Cash Conversion Cycle Time (CCCT) = 56 days, up from 46 days, for this measure of efficiency
  
• Debt/CFO = 0.8 years, compared to 0.7 years 12 months ago
  
• Days of Sales Outstanding (DSO) = 85.1 days, essentially matching last year's 85.3 days.
  

Growth. This gauge decreased from 16 points in June to 11 points.

The measures that helped the gauge were:

• Net Income growth = 18.2 percent year-over-year, commendable but down from 63.9 percent.
• Revenue growth = 17.7 percent year-over-year, very good but down from 34.2 percent.
• Revenue/Assets = 43.9 percent, up from 42.3 percent in a year; sales efficiency is improving.
  

The measure that hurt the gauge were:

• CFO growth = 5.9 percent year-over-year, down from 106.5 percent.
  

Net income benefited from a change in the income tax rate from 23 to 19 percent The tax rate decreased as a result of a continuing shift to more operations outside the U.S.

Profitability. This gauge decreased from 7 points in June to xx points now.

The measures that helped the gauge were:

• ROIC = 16.4 percent, up sharply from 14.6 percent in a year
• Operating Expenses/Revenue = 67.2 percent, down from 67.7 percent in a year.
  

The measures that hurt the gauge were:

• FCF/Equity = 6.0 percent, down from 11.4 percent in a year (capital investments are eating into FCF)
  
• Accrual Ratio = 8.7 percent, up from +4.4 percent in a year.
  

The increasing Accrual Ratio tells us that less of the company's Net Income is due to CFO, and, therefore, more is due to changes in non-operational Balance Sheet accruals.

Value. Tidewater's stock price dropped sharply over the course of the quarter from $70.88 to $62.84. The Value gauge, based on the latter price, held steady at the 13 points achieved three months ago.

The measures that helped the gauge were:

• Enterprise Value/Cash Flow = 8.0, up from 6.1 in Sept 2006
  
• P/E = 9.8, up from 8.3 a year ago
  
• P/E to S&P 500 average P/E = 39 percent discount, compared to a 47 percent discount one year ago.
  

The measures that hurt the gauge were:

• Price/Revenue ratio = 2.9, matching the five-year median value.
  

The average P/E for the Oil Well Services and Equipment industry is currently a more expensive 20. The average Price/Revenue for the industry is currently 4.0.

Now at a modest 35 out of 100 possible points, the Overall gauge has fallen from lofty levels in the 60s. We can attribute the drop to slowing growth and higher costs. The earnings drop was cushioned by a lower tax rate, which can't fall much lower. Capital investing will be beneficial in the long run, but it cuts into working capital and free cash flow.

MSFT: Financial Analysis through September 2007

We have analyzed Microsoft's (MSFT) financial results, as reported to the SEC on Form 10-Q, for the quarter that ended on 30 September 2007. This post reports on our evaluation.

We really appreciate it when a company submits a 10-Q on the same day that they announce their results to the public.

Not satisfied by selling operating systems, server applications, business solutions, video game consoles, music players, and computer peripherals, Microsoft is determined to be a major player in the online advertising business. This puts the company in direct competition with Google and Yahoo. Earlier this year, Microsoft paid $6 billion for the aQuantive advertising network. The $240 million spent to acquire an 1.6 percent stake in Facebook, a company with minimal revenues, was a strategic investment. Of course, for Microsoft, $240 million is walking-around money; earlier this year they set aside $1 billion to repair faulty Xbox games

In January of this year, Microsoft finally launched the consumer version of the Vista operating system. Not surprisingly, first quarter revenues surged. Microsoft shares, after years of stagnant performance, moved up nicely in anticipation of the Vista release and in response to massive stock repurchases. But, the rally faltered, and the January highs merely established the top of new trading range for the company shares. (A new, higher trading range will probably be established tomorrow.

When we analyzed Microsoft after the June quarter, the Overall score was a solid 46 points. Of the four individual gauges that fed into this composite result, Growth was the strongest at 22 points. Cash Management was weakest at 7 points.

Now, with the available data from the September 2007 quarter, our gauges display the following scores:

• Cash Management: 10 of 25
• Growth: 23 of 25
• Profitability: 18 of 25
• Value: 10 of 25

• Overall: 55 of 100

Before we examine each gauge, let's compare the latest Income Statement to our expectations, which were based on company guidance and trend analysis.

($M)		Sept 2007 (actual)	Sept 2007 (predicted)	Sept 2006 (actual)
Revenue		13762	12500	10811
Op expenses
	CGS	(2675)	(2125)	(1696)
	R&D	(1837)	(1750)	(1786)
	SG&A	(3332)	(3750)	(2855)
	Other	0	0	0
Operating Income		5918	4875	4474
Other income
	Investments	0	0	0
	Interest, etc.	298	350	567
Pretax income		6216	5225	5041
Income tax		(1927)	(1568)	(1563)
Net Income		4289	3658	3478
		$0.45/sh	0.38/sh	0.35/sh

Microsoft's Revenue in the September 2007 quarter was an amazing 27.3 percent greater than in the year-earlier quarter, on brisk sales of the new "Halo 3" video game, Windows and Office. The company had forecast Revenue growth between 14.7 percent and 16.6 percent. We expected Cost of Goods Sold (CGS) to equal 17 percent of Revenue, and the actual value was 19.4 percent. Research and Development (R&D) expenses were 13.3 percent of Revenue, a shade less than our 14 percent estimate. Sales, General, and Administrative (SG&A) expenses were 24.2 percent of Revenue percent, much less than the typical value of 30 percent.

The win-win combination of higher revenue and lower costs resulted in Operating Income more than 21 percent above the forecast value.

Non-operating income was $52 million less than expected. The Income Tax Rate matched the predicted 31 percent. Net Income exceeded our prediction by 17 percent.


Cash Management. This gauge increased from 7 points in June to 10 points now.

The measures that helped the gauge were:

• Cash Conversion Cycle Time = 12.2 days, down from 45.6 days in Sept 2006.
• Debt/CFO = 0
• LTD/Equity = 0%
  
• Current Ratio =1.6, a little low, but it doesn't matter

The measures that hurt the gauge were:

• Accounts Receivable/Revenue =53.5 days, up from 51 days a year ago
• Working Capital/Market Capitalization = 4.7 percent, down from 8.5 percent.

Growth. This gauge increased from 22 points in June to 23 points now.

To get that score, all relevant measures helped the gauge:

• Revenue growth = 19.2 percent year-over-year, up from 12.4 percent
• Revenue/Assets = 82.4 percent, up from 69.4 percent (buyback aided)
• Net Income growth = 15 percent year-over-year, up from 0.5 percent
• CFO growth = 38.7 percent (!) year-over-year, up from -16.5 percent

Profitability. This gauge increased from 15 points in June to 18 points.

The measures that helped the gauge were:

• ROIC = 55 percent (!), up from 43 percent in Sept 2006
• FCF/Equity = 54 percent, up from 34 percent in a year
• Accrual Ratio = -3.6 percent, down from +0.9 percent one year ago.

The decreasing Accrual Ratio tells us that more of the company's Net Income is due to Cash Flow from Operations (CFO), and, therefore, less is due to changes in non-operational Balance Sheet accruals.

The measures that hurt the gauge were:

• Operating Expenses/Revenue = 62.8 percent, essentially matching last year's 62.7 percent

Since operating expenses include a huge repair charge related to the Xbox, other expenses must have come done by an equal amount.

Value. Microsoft's stock price lost a penny over the course of the quarter, changing from $29.47 to $29.46. The Value gauge, based on the latter price, increased to 10 points, compared to 8 points three months ago (and 13 points twelve months ago).

The measures that helped the gauge were:

• Enterprise Value/CFO = 13.2, down from 17.1 in September 2006
• P/E = 18.8, down from 21.2 a year ago
  
• P/E to S&P 500 average P/E = 17 percent premium, down from a five-year median over 40 percent
  
• Price/Revenue ratio = 5.2, down from a five-year median of 6.8.

The average P/E for the Software and Programming industry is a more expensive 29. The average Price/Revenue for the industry is 7.5.

Now a very good 55 out of 100 possible points, the Overall gauge is up 9 points from June. The September quarter was excellent by any measure, and Microsoft shares appear to hold significant value.

BUD: Financial Analysis through September 2007

We have analyzed Anheuser-Busch's (BUD) preliminary financial results for the quarter that ended on 30 September 2007. Our evaluation will be updated after the company formally submits a 10-Q report to the SEC.

BUD is the well-known brewer and, yes, theme park operator. The company is making a determined effort to expand its "Rest of World (ROW)" non-U.S. operations, most notably including China. Some say that BUD might buy Belgian brewer InBev (INB) as part of this strategy. In the U.S., the nation's second and third-largest brewers, Miller and Coors, are teaming up to compete against BUD.

Nevertheless, BUD announced last July that "it was on track for earnings to accelerate in the second half of the year, and maintained that 2007 earnings growth would be higher than its long-term target of 7 percent to 10 percent." A similar statement was made in early September, with the added tidbit that sales are accelerating.

Berkshire Hathaway (BRK-A) owned almost 36 million BUD shares as of 31 December 2006.

When we analyzed BUD after the June quarter, the Overall score was 23 points. Of the four individual gauges that fed into this composite result, Growth and Profitability were strongest at 12 points each. Value was weakest at 0 points.

Now, with the available data from the September 2007 quarter, our gauges display the following scores:

• Cash Management: 3 of 25
• Growth: 13 of 25
• Profitability: 12 of 25
• Value: 2 of 25

• Overall: 25 of 100

Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously announced expectations.

($M)		Sept 2007 (actual)	Sept 2007 (predicted)	Sept 2006 (actual)
Revenue		4617.7	4632	4281
Op expenses
	CGS	(2868.5)	(2918)	(2645)
	SG&A	(777.4)	(787)	(738)
	Other	26.5	0	0
Operating Income		998.3	926	898
Other income
	Equity income	185.2	188	157
	Interest, etc.	(126.8)	(110)	(105)
Pretax income		1056.7	1004	949
Income tax		(350.0)	(311)	(312)
Net Income		706.7	693	638
		0.95/sh	0.91/sh	0.82/sh

BUD's Revenue in the September 2007 quarter was 7.9 percent greater than in the year-earlier quarter; our estimate for revenue growth was 8.2 percent. In addition, we thought the Cost of Goods Sold (CGS) would be 63 percent of Revenue, and the actual value was 62.1 percent. Sales, General, and Administrative (SG&A) expenses were 16.8 percent of Revenue, compared to our forecast of 17 percent.

The lower costs, coupled with an unexpected $26.5 million gain on the sale of distribution rights, resulted in Operating Income 7.8 percent above the forecast value.

Non-operating income was $19.6 million below our estimate. The Income Tax Rate (not adjusted for equity income) was 33 percent, instead of the predicted 31 percent. As a result, Net Income exceeded our prediction by only 2 percent. Without the special gain mentioned above, the BUD's net income in the quarter would have fallen below our prediction.

Cash Management. This gauge decreased from 4 points in June to 3 points now.

The measures that helped the gauge were:

• Cash Conversion Cycle Time (CCCT) = -3.0 days, down from -1.3 days one year ago, for this measure of efficiency.
• Inventory/CGS = 22.7 days, compared to 23.7 and 24.4 days 3 and 12 months ago, respectively.

The measures that hurt the gauge were:

• Current Ratio =0.9; weaker than we like, but matching the 5-year median value
• LTD/Equity = 235.9%; highly leveraged and becoming more so
• Debt/CFO = 2.9 years, compared to 2.7 years 3 and 12 months ago
  
• Days of Sales Outstanding (DSO) = 21.7 days, up from 20 days one year earlier
• Working Capital/Market Capitalization = -0.5 percent, about the same as -0.7 percent one year earlier

Growth. This gauge increased from 12 points in June to 13 points now.

• Revenue/Assets = 97.0 percent year-over-year, up from 92.8 percent; sales efficiency is improving
• Revenue growth = 4.8 percent year-over-year, up from 4.1 percent
• Net Income growth = 5.9 percent year-over-year, up from 1.0 percent
• CFO growth = 5.6 percent year-over-year, up from 3.2 percent

Net income benefited a little from a change in the income tax rate from 32 to 31 percent.

Profitability. This gauge didn't change from 12 points in June.

The measures that helped the gauge were:

• FCF/Equity = 57.8 percent, up from 45.6 percent in a year (excellent)
• ROIC = 16.5 percent, up from 16.3 percent in a year.

The measures that hurt the gauge were:

• Accrual Ratio = +0.3 percent, down from 0.0 percent in a year
• Operating Expenses/Revenue = 82.9 percent, up from 82.2 percent in a year.

Value. BUD's stock price dropped over the course of the quarter from $52.16 to $49.99. The Value gauge, based on the latter price, increased to a still-weak 2 points, compared to 0 points three months ago (and 4 points twelve months ago).

• Enterprise Value/Cash Flow = 15.8, down slightly from 15.9 in September 2006
• P/E = 18.3, down slightly from 18.7 one year ago
  
• P/E to S&P 500 average P/E = 11 percent premium, matching its five-year median
  
• Price/Revenue ratio = 2.3, a little lower than its five-year median of 2.6.

The average P/E for the Alcoholic Beverages industry is 20.5. The average Price/Revenue for the industry is currently 2.2.

Now at 25 out of 100 possible points, the Overall gauge remains weak. We give BUD credit for making good progress reducing operating costs, but the quarter appears better than it might otherwise have because of a large one-time gain. The growth and profitability scores are decent, but we don't see why this company trades at a premium to the market multiple with below average Net Income and Cash Flow growth.