CSCO: Analysis through Jan 2007

Cisco Systems (CSCO) has a commanding, and highly profitable, position manufacturing and selling the equipment telecoms and other enterprises use to direct the Internet's traffic. After acquiring Linksys and, in February 2006, Scientific Atlanta, Cisco now also sells devices intended for home use.

After a phenomenal rise in 1990s, the price of Cisco Systems stock fell from over $80 in March 2000 to the low teens just over a year later. The price recovered into $20s in 2003, but it then fell back into the upper teens. Finally, last August, the price broke above $20, and Jim Cramer recommended it strongly. It has been in the upper $20s for the last three months.

When we analyzed Cisco after the quarter that ended in October 2006, the Overall score was a weak 24 points. Of the four individual gauges that fed into this overall result, Profitability was the strongest at 11 points. Value was weakest at 2 points.

We have since updated the analysis to incorporate Cisco's financial results for the latest quarter, which was the second of fiscal 2007. With the data available through 27 January 2007, our gauges now display the following scores:

• Cash Management: 9 of 25
• Growth: 14 of 25
• Profitability: 12 of 25
• Value: 1 of 25 (which drives down the overall score)

• Overall: 27 of 100

Cash Management. This gauge increased 3 points from 6 to 9. The Current Ratio is now 2.48 It has been stable, or perhaps inching up a little, for almost two years. We're very happy with it at this level. Long-Term Debt/Equity percent, is 24down from 25 percent the previous quarter. The debt ratio was 0 percent one year ago (prior to the Scientific Atlanta acquisition). Inventory/Cost of Goods Sold is now 52 days. The inventory level was 51 days at the end of the prior quarter, and it was 58 days at the end of the year-earlier quarter. The percentage of Inventory that is product ready for sale (i.e., Finished Goods) is 48 percent. This is the highest ratio in almost three years, and it suggests sales were less than expectations. Accounts Receivable/Revenues are 33 days. This is a couple days lower than recent levels, indicating the company is having greater success getting paid by its customers. However, the level is a little higher than the historic average.

Growth. This gauge increased 10 points from October. Revenue growth percent a year ago is now 23 percent year over year, up from 10and accelerating. Net Income growth is a vibrant 16 percent, up from 4 percent a year ago. The increase benefited from a change in the income tax rate from 28 to 24 percent. CFO growth is an impressive 26 percent, up from zero growth a year ago. Revenue/Assets is 69 percent; it is down from 77 percent. It suggests that the acquisition of Scientific Atlanta made the company less efficient at generating sales.

Profitability. This gauge increased one point from October. ROIC slipped to a healthy 21 percent. It was 30 percent a year ago. FCF/Equity edged up to 32 percent from 30 percent. Operating Expenses/Revenue percent to 74 moved up in the last year from 71 percent. The change was primarily due to a decline in Gross Margin of 3 percent. The Accrual Ratio, which we like to be both negative and declining, edged down to -5 from -4 percent. This tells us that slightly more of the company's Net Income is due to CFO, rather than changes in balance sheet accruals.

Value. This gauge, based on the stock price of $26.62 on 31 January, dropped to a horrid 1 point, compared to 2 and 12 points 3 and 12 months ago, respectively. The P/E at the end of the quarter was 26, up a little from recent quarters. The increase suggests the shares are becoming more expensive. The average P/E for the industry is 22. To remove the effect of overall market changes on the P/E, we note that the company's current P/E is at a 58 premium to the average P/E, using core operating earnings) for stocks in the S&P 500. This premium is significantly higher than it has been recently, but the premium was this high in the company's past. Companies tend to trade at a premium when their growth rates are greater than average, particularly when the growth rates seem more likely to be sustained. The PEG ratio of 1.62 is indicative of a somewhat expensive stock. The Price/Revenue ratio has increased to 5.2. The increase suggests the shares are becoming (more, less) expensive. The average Price/Sales for the industry is 3.5.

Now at a disappointing 27 out of 100 possible points, the Overall gauge been trending down after an extended period (July 2002 to Jan 2006) above 50 points -- once over 70 points. While the company's operational performance has been strong, the even faster paced increase in the stock price has made Valuation a significant concern.

COP: Analysis through Dec 2006

With worldwide oil, gas, and chemical operations, ConocoPhillips (COP) is the third-largest integrated energy company based in the U.S. Among international energy giants, COP ranks fifth by Revenues and eighth by Market Capitalization. ConocoPhillips holds down the sixth spot on the Fortune 500.

The first challenge facing an analyst of ConocoPhillips is that the company's financial record effectively begins with the merger of Conoco, Inc., and Phillips Petroleum in August 2002. Financial statements for the two predecessor companies are readily available, but it is not practical for independent parties to integrate the data because they would lack the means to test the validity of the many assumptions that would be required. To complicate matters more, ConocoPhillips purchased Burlington Resources for $33.9 billion in March 2006 for its extensive natural gas operations in North America. Therefore, the analyst's second challenge is to determine whether recent alterations in the company's financial data represent "real" operational changes or simply the effect of the Burlington purchase. The third challenge for the analyst is that ConocoPhillips's performance is driven, first and foremost, by the price of oil. If the latter rises, ConocoPhillips will look good irrespective of the financial artifacts we work so hard to uncover and assess.

When we analyzed ConocoPhillips after the quarter that ended in September 2006, the Overall score was a modest 38 points. Of the four individual gauges that fed into this overall result, Growth was the strongest at 12 points. Cash Management was weakest at 5 points.

We have since updated the analysis to incorporate COP's complete financial results for 2006. With the data available through 31 December 2006, our gauges now display the following scores:

• Cash Management: 5 of 25
• Growth: 8 of 25
• Profitability: 6 of 25
• Value: 4 of 25 (down substantially since the stock price rose to $71.95 from $59.53)
  

• Overall: 22 of 100

Cash Management. This gauge held steady at 5 points. The Current Ratio is now 0.95. It has been recovering since bottoming out at 0.80 in March 2006, when cash levels dropped to pay for the Burlington acquisition. We hope to see the increases continue. Long-Term Debt/Equity is 28 percent, up from 20 percent the year earlier, but down from 36 percent in the merger's aftermath. We're going to ignore Inventory levels, because our analytical techniques involving Inventory are geared towards manufacturers. (We're unsure that Inventory data on the Balance Sheet of an energy company provides useful information about current or prospective sales.) Accounts Receivable/Revenues are 28 days. This is several days higher than the historic value for the company, and it might indicate the company is having more trouble getting paid by its customers.

Growth. This gauge dropped 4 points from September. Revenue growth is now a tepid 2 percent year over year, down from a robust 33 percent a year ago. Net Income growth is a more encouraging 14 percent, although down from an unsustainable 68 percent a year ago. The increase was slowed by a change in the income tax rate from 42 to 45 percent. CFO growth is a solid 22 percent, down from a remarkable 47 percent a year ago. Revenue/Assets is 111 percent; it has been trending down. It indicates that the company is becoming less efficient at generating sales.

Profitability. This gauge dropped 2 points from September. ROIC slipped to a moderate 13 percent. It was 19 percent a year ago. FCF/Equity fell to 7 percent from 11 percent in a year. Operating Expenses/Revenue move down in the last year from 86 percent to 89 percent. The change was primarily due to an increase in Gross Margin. The Accrual Ratio, which we like to be both negative and declining, edged down from +7 to +6 percent. This tells us that slightly more of the company's Net Income is due to CFO, rather than changes in balance sheet accruals.

Value. This gauge, based on the stock price of $71.95 at year's end, dropped to a weak 4 points, compared to 11 and 14 points 3 and 12 months ago, respectively. The P/E at the end of the quarter was 7.8, up a little from recent quarters, but close to the longer-term average. The average P/E for the industry is 10.0. To remove the effect of overall market changes on the P/E, we note that the company's current P/E is only 48 percent of the average P/E, using core operating earnings) for stocks in the S&P 500. This discount to the market is consistent with the historical average for COP. The PEG ratio of 0.55 is indicative of a cheap stock. The ratio has increased from irrationally low levels. The Price/Revenue ratio has increased to 66 percent from about 50 percent. The increase suggests the shares are becoming more expensive. On the other hand, the average Price/Sales for the industry is almost 1.0.


Now at a disappointing 22 out of 100 possible points, the Overall gauge has fallen markedly. The Value score is telling us that a stock price increase to over $70 was too big a jump. The market said the same thing, as the price fell back into the mid $60's.

HD: Analysis through Jan 2007

Home Depot (HD) is the largest retailer of hardware and other merchandise, including large amounts of lumber, for home construction and improvements. It sells to do-it-yourself homeowners and professional contractors.

Former CEO Robert Nardelli was forced out because of an uproar over his hefty compensation, the company's weak performance relative to principal competitor Lowe's, and Home Depot's long-stagnant stock price. The furor intensified after his dismissal when word got out about how he left with a gargantuan golden parachute. To be fair, Mr. Nardelli also took actions -- share buybacks and dividend hikes -- generally considered to be investor-friendly. Nevertheless, conditions at Home Depot, and worries about how the company will handle the slowing of the housing market, morphed a premier growth company into a potential acquisition by a value-seeking hedge fund. More likely is the divestiture of the low-margin Home Depot Supply division, which serves contractors, and which was championed by Mr. Nardelli.

When we analyzed Home Depot after the quarter that ended in October 2006, the Overall score was a modest 34 points. Of the four individual gauges that fed into this overall result, Value was the strongest at 12 points. Cash Management and Growth were tied for weakest at 5 points.

We have since updated the analysis to incorporate Home Depot's financial results for the latest quarter, which was the fourth of fiscal 2006. (Since the press release announcing these results did not include all of the items that make up a Balance Sheet or Statement of Cash Flows, the analysis will need to be revised when the full set of financial statements is submitted to the SEC.) With data available through 28 January 2007, our gauges now display the following scores:

• Cash Management: 5 of 25
• Growth: 6 of 25
• Profitability: 10 of 25
• Value: 6 of 25
  

• Overall: 27 of 100

Cash Management. This gauge has flat-lined at 5 points for the last 10 quarters. The Current Ratio moved up from 1.2 to 1.4. We would prefer to see it a little higher. Long-Term Debt/Equity surged to 47 percent, up from 24 percent the previous quarter. The debt ratio was only 10 percent one year ago. (The company claims the debt rise "Increased the efficiency of its capital structure by increasing its financial leverage." We want to know if the funds received were used to buyback stock or to make productive investments.) Inventory/Cost of Goods Sold is now 76 days. The inventory level was 83 days at the end of the pre-holiday prior quarter, when inventory levels are always high. The inventory level was 77 days at the end of January 2006, and the current inventory level is very much consistent with typical January level for this company. The consistency suggests sales met internal expectations. Accounts Receivable/Revenues are 13 days. This is a little better than recent levels, but actually a bit higher than typical values at the end of January. A sustained increase would indicate the company is having more trouble getting paid by its customers.

Growth. This gauge increased one point from October. Revenue growth is now 11 percent year over year, down from 12 percent a year ago and 13 percent the year before that. (The fourth quarter was especially weak for Revenue, up only 4 percent from the previous fourth quarter.) Net Income growth didn't happen: Net Income declined by 1 percent, after having increased by 17 percent a year ago. Increased interest expenses and a 1 percent rise in the income tax rate hurt Net Income most. On the other hand, CFO growth appears to be -- without a CF statement, we can't be sure) an impressive 25 percent, whereas CFO contracted 6 percent a year ago. (Maybe an extraordinary charge to year-earlier CFO made current year comparisons easier.) Revenue/Assets is 174 percent; it is lower than after other January quarters. It indicates that the company is becoming less efficient at generating sales.

Profitability. This gauge increased 3 points from October. (The increase is counter-intuitive given the decline in Net Income, but it reflects the apparent increase in CFO. We wouldn't be surprised to see the gauge drop when full financial data becomes available in the upcoming 10-K submittal.) ROIC slipped to a still-healthy 17 percent. It was 19 percent a year ago. FCF/Equity jumped up to 18 percent from 10 percent. Operating Expenses/Revenue steadied at 89 percent. However, this masks a 1.2 percent decline in Gross Margin. The Accrual Ratio, which we like to be both negative and declining, fell from 7 to 2 percent. (If confirmed,) This tells us that more of the company's Net Income is due to CFO, in contrast to changes in balance sheet accruals.

Value. This gauge, based on the stock price of $40.74 on 31 January, dropped to a weak 6 points, compared to 12 and 9 points 3 and 12 months ago, respectively. The P/E at the end of the quarter was 14.2, about where it has been for the last year or so. The average P/E for the industry is 16. To remove the effect of overall market changes on the P/E, we note that the company's current P/E is at a 13.5 discount to the average P/E, using core operating earnings) for stocks in the S&P 500. A 9 percent discount to the market has been more common in recent years. (When HD was a growth company, its P/E had a 100 percent premium to the market.) Since Net Income declined, the PEG ratio is not applicable. The Price/Revenue ratio has declined to 90 percent from 106 percent. The decrease suggests the shares have become less expensive. The average Price/Sales for the industry is 103 percent, which would tend to confirm this view.


Now at a disappointing 27 out of 100 possible points, the Overall gauge is towards the lower end of its range over the last 10 quarters. The score hit 62 points after the July 2004 quarter, when the stock price was below $34. The stock price rebounded above $40 in a mere three months, but never got any higher.

WMT: Analysis through Jan 2007

Wal-Mart (WMT), based in Bentonville, AR, is the world's largest retailer. It operates the eponymous Wal-Mart Stores and the Sam's Club warehouses. Wal-Mart proudly claims to operate more than 6,700 stores (the eponymous Wal-Mart discount and super-center stores, plus Sam's Club warehouses) and serve more than 175 million customers around the globe each week.

With annual sales over $300 billion, earning it the number 2 rank on the Fortune 500 list of America's largest corporations, Wal-Mart is a major force in the U.S. economy. Wal-Mart's disruptive cost-cutting strategies have revolutionized the marketplace for better and for worse, depending on your point of view. Its visibility and role in advancing globalization have made Wal-Mart a lightning rod for criticism. Wal-Mart transformed retailing by using information technology to manage its supply chain and by pressuring manufacturers to squeeze every penny out of their costs. Rival discounters fell by the wayside, and manufacturers with higher costs suffered mightily. On the other hand, Wal-Mart's discounting is responsible for lower inflation (and thus interest rates), although this effect might not have been reflected fully in the published statistics. However, with the U.S. market now saturated, and the company continuing to slash prices, Wal-Mart's growth (as measured by same-store sales) has shrunk to the low single digits. Target, which appeals to a somewhat more affluent customer base, has been eroding Wal-Mart's market share from above. From below, high gas prices have taken a bite out of the wallets and pocketbooks of Wal-Mart's core customers. The stock price, with a few rare exceptions, has been between $43 and $50 per share since March 2005.

When we analyzed Wal-Mart after the quarter that ended in October 2006, the Overall score was a modest 32 points. At 11 points, Value was the attribute gauge with the highest score. Cash Management was weakest at 4 points.

We have since updated the analysis to incorporate Wal-Mart's financial results for the latest quarter, which was the fourth of fiscal 2007. With data through 31 January 2007, our gauges now display the following scores:

• Cash Management: 5 of 25
• Growth: 14 of 25 -- big change up
• Profitability: 5 of 25
• Value: 12 of 25
  

• Overall: 38 of 100

Cash Management. This gauge moved up one point from October to January. The Current Ratio is now 0.90, which is pretty much where it has been this entire decade. (Our scoring system treats more favorably companies with somewhat greater amounts of cash in the till, but Wal-Mart is the master at making do with less). Long-Term Debt/Equity is 44 percent, up 3 percent from the previous quarter, and down from an unusually high debt ratio was 50 percent one year ago. Inventory/Cost of Goods Sold is now 46.4 days. The inventory level (all, of course, finished goods ready for sale) is down from the prior quarter, which is meaningless because retailers always build inventory in the fall to sell during the holiday season. More significant is that the inventory level was a few days less the typical 49-50 day quantity at the end of January. This tells us that the company either became more efficient at managing inventory -- it's already world class -- or it sold more goods at Christmas that it expected. Accounts Receivable/Revenue is 3.0 days, up from 2.7 days in October, but the same as in January 2006. Taking a longer view, this value has been inching up since the summer of 2003. The increase, although small, indicates that the company's customers aren't quite as quick to pay.

Growth. This gauge increased a substantial 5 points from October. Revenue growth is now 11 percent year over year, up from 9 percent a year ago. Net Income growth is 7 percent; down from 10 percent one year ago. The income tax rate didn't change during this period, and, therefore, didn't have a material effect on the Net Income growth rate. CFO growth is a healthier 14 percent, but down from a 17 percent growth rate the year earlier. Revenue/Assets is 229 percent, a few percentage points above recent values. This increase accounted for most of the Growth gauge's rise. A sustained increase in Revenue/Assets would indicate that the company is becoming more efficient at generating sales.

Profitability. This gauge held steady from October's tepid value. ROIC stayed at a moderate 12 percent. It has been in the 12-13 percent range most of this decade. FCF/Equity is 7 percent, up one percent from a year ago. Operating Expenses/Revenue were 95 percent, which is pretty much where they have always been. Gross Margin and SG&A expenses have been remarkably constant. The Accrual Ratio, which we like to be both negative and declining, was constant at +5 percent. The lack of change in this value points to a steady balance between Net Income and CFO.

Value. This gauge, based on the stock price of $47.69 at the quarter's end on 31 January, edged up to a moderate 12 points, compared to 11 and 15 points three and twelve months ago, respectively. The P/E at the end of the quarter was 16.3, similar to recent quarters, but way below the 5-year median of 23.5. The average P/E for the industry is 20.7. To remove the effect of overall market changes on the P/E, we note that the company's current P/E is matches the average P/E (using core operating earnings) for stocks in the S&P 500. WMT's P/E had been at a premium when the company was growing at faster rate. The PEG ratio of 2.3 is indicative of a modestly expensive stock. It has been increasing slowly (i.e., becoming more expensive). The Price/Revenue ratio declined a little to 57 percent. The long-term trend is down, suggests the shares are becoming less expensive. The average Price/Sales for the industry is 77 percent.


The current Overall score of 38 out of 100 points isn't enough to going to excite anyone; this gauge for Wal-Mart has bounced around the 30's for most of the last four years. However, the six-point increase, from 32 to 38 points, in one quarter bears watching as a potential leading indicator of better news to come. The rise in the score reflects the encouraging data in the Wal-Mart's latest results. Sales were healthy, even a bit better than expected, and they were achieved without weakening the Gross Margin. Unsold inventory is not clogging warehouses, suggesting no need for a Spring fire sale. But, more top-line revenue needs to turn into bottom-line earnings to lift the Profitability measures from their present weak state. Should this happen, the Value gauge suggests there is plenty of room for stock price appreciation. The stock market reacted positively to the fourth quarter results because expectations were so low.

PEP: Analysis through Dec 2006

PepsiCo (PEP) is a leading global purveyor of beverages and snacks. In the North American markets, the Frito-Lay division takes in more revenue and contributes more to operating profit than the Pepsi Bottling division.

PepsiCo is known for good management, steady growth, the defensive characteristics of the food and beverage industries, and significant international exposure. While famously locked in a battle with Coca-Cola for market share, PepsiCo's snack food business results in a more diversified company.

We used PepsiCo's recent 10-K submittal for 2006 to update our earlier analysis of this company. With data through 30 December 2006, our gauges now display the following scores:

• Cash Management: 3/25
• Growth: 19/25
• Profitability: 10/25
• Value: 8/25

• Overall: 39/100

Cash Management. This gauge dropped one point from September to December. The Current Ratio held steady at 1.3, which is rather low, but typical for PepsiCo. LTD/Equity edged up to 17 percent, which is still ideal. Inventory levels, as measured by Cost of Goods Sold, dropped from 46.2 days to 44.6 days. In the December 2005 quarter, Inventory/CGS was 42.9 days. The percentage of Inventory that is product ready for sale (i.e., Finished Goods) stayed at 48 percent. Accounts Receivable/Revenues dropped from 44 to 39 days, which pretty much erased a concern we had after September.

Growth. This gauge maintained its excellent 19 point score. Year-over-year Revenue Growth slowed to 8 percent, but Net Income Growth surged to an impressive 38 percent. Net Income benefited significantly from income tax changes. Also impressive was an increase in Revenue/Assets, which jumped to 117 percent from 108 percent. The growth story was marred only by a tepid 4 percent increase in CFO.

Profitability. This gauge moved up one point from September. ROIC increased to 32 percent, significantly above the 22 percent at the end of December 2005. FCF/Equity is now 26 percent, up from recent quarters, but down from the year-earlier 29 percent. Operating Expenses/Revenue continued their 13-quarter run at 81 percent. The Accrual Ratio was +5 percent at the end of December, compared to 0 percent one year earlier. This highlights that Net Income increases are not, unfortunately, being driven by corresponding increases in Cash Flow.

Value. This gauge doubled in the last quarter, from 4 to 8 points. The score benefited from the Net Income increase, which was at least partially due to tax changes. The P/E at the end of the year was 18.6, down substantially from recent quarters and suggesting some room for expansion. The current P/E corresponds to a 15 percent premium relative to the S&P 500, much less than PEP's 30 percent historical premium. The PEG ratio of 0.5 is the kind of figure typical of a cheap stock. The Price/Revenue ratio has been steady at 3.0.

Overall. This summary gauge moved up from 29 points in Sept to 39 in December.

ADP: Analysis through Dec 2006

We have updated our analysis of ADP using the data in the 10-Q report for the quarter that ended 31 December 2006. This latest quarter was the second quarter of ADP's 2007 fiscal year. Our analysis after the September quarter is available for reference.

The disclosures in the recent 10-Q report exemplify the challenges faced by independent analysts. ADP has restated earlier financial statements to account for the sale of various business segments. In addition, the company has changed the way it accounts for Depreciation and Amortization expenses, and this change led to revisions of Costs of Revenue and Sales, General, and Administrative (SG&A) expenses. Unfortunately, there isn't a published library of consistently expressed results for previous quarters. Since our methodology looks for operationally significant changes in the financial results, inconsistent data can obscure the changes we want to find and make insignificant changes appear more important than they are.

These financial restatements will be dwarfed by those to come when ADP completes its previously reported plan to spin-off its Brokerage Services business into an independent publicly traded company ("Broadridge"). While pro forma financial data will be made available, it won't be enough for us to analyze the remaining elements of ADP or the new company to the depth we prefer.

For the record, and with the caveat that the aforementioned data inconsistencies might skew the results, we gauged ADP's financial condition to be the following after the quarter ending 31 December 2006:

Cash Management: 13/25
Growth: 17/25
Profitability: 8/25
Value: 2/25
Overall: 30/100

The solid Growth score was achieved despite a 16 percent drop in Cash Flow from Operations on a year-over-year basis. The score can be attributed to good increases in Revenue, Revenue/Assets, and Net Income.

Our most attentive readers will recall that we discount the significance of Net Income increases that can't be attributed to improved CFO. The Accrual Ratio is our indicator of this situation, and it is one of the reasons for the mediocre Profitability score.

The dreadfully weak Value score signals the stock price has become quite expensive. Does it merit a PEG over 2 and a P/E that is almost 50 percent above the S&P 500?

BEAS

BEA Systems develops integrated infrastructure software for large enterprises. Its products adhere to the promising service-oriented architecture (SOA) design methodology. BEA competes against powerhouses such as IBM and Oracle.

The company is currently facing two significant challenges. The first is that BEA is one of the companies alleged to have granted stock options improperly. As a result, BEA is conducting an internal review of how options were issued and dated. The BEA situation appears to be particularly serious because the company has chosen not to submit 10-Q reports while the probe is underway.

In general, a 10-Q must be submitted to the SEC within 35 days of the quarter's end, and failure to do so makes a company ineligible for stock exchange listing. Yet, BEAS still hasn't filed 10-Q reports for the quarters that ended 31 July and 31 October 2006. NASDAQ has warned the company twice that its share could be delisted from the national market system. The current agreement is that NASDAQ will allow the company to keep its listing on the condition that all financial statements and restatements, if needed, are submitted by 28 February 2007.

The other significant challenge facing BEA is operational. The preliminary (and incomplete) financial data released for the quarter ending 31 October 2006 led industry observers to fear that the company is losing market share to its well-heeled competitors.

The technology bubble that began in the late 1990's inflated BEAS's stock price to almost $90 per share in October 2000. When bubble burst, the price fell precipitously. By August 2002, the price was down to $5. The stock price rallied back to $15 in 2003, before collapsing again to $6 in 2004. By the fall of 2006, the stock price was $16 until the aforementioned market share concerns brought the price back down to about $12.

Our evaluation of BEA is obviously hampered by the lack of audited financial statements for recent periods and the distinct possibility that previously released financial statements will be materially revised. Although the historical financial statements cannot be considered reliable, they still still tell a story if we turn the clock back to 30 April 2006 -- the end-date of the last quarter for which a 10-Q was submitted. As shown below, our Overall gauge for BEA registered scores in the 60's from July 2004 through April 2005, signaling a recovery, but the score dropped to an discouraging 29 after the April 2006 quarter.


The individual gauge scores on 30 April 2006 were:

Cash Management: 11/25
Growth: 17/25 (strong)
Profitability: 12/25
Value: 0/25 (!)

Overall: 29/100


Cash Management: The Current Ratio was a reasonable 1.8, and the Long-Term Debt/Equity ratio was a comfortable 19 percent. Accounts Receivables were 71 days of Revenue and had been decreasing at a modest rate. Inventory is not a material measure for BEAS and has been excluded from the the scoring.

Growth: Revenue growth was 13 percent year over year, and CFO growth was a healthy 18 percent. However, Net Income growth was a tepid 3 percent. Revenue/Assets was 0.53, after several years under 0.50.

Profitability: ROIC was 18 percent and had moved up from 12 percent a couple of years earlier. Free Cash Flow to Equity was 24 percent, a level at which it had stabilized after earlier dropping into the teens. Operating Expenses had moved up to 84 percent of Revenue, hurt mostly by increasing R&D costs. The Accrual Ratio had moved down nicely to -6 percent, reflecting the strong Cash Flow from Operations.

Value: This gauge read a flat zero at the end of April 2006, when the stock price was $13.25, whereas the Value score had been a terrific 24 points a mere year earlier. The stock was up almost 100 percent over that period, which put great pressure on the valuation metrics. The P/E ratio was 37, more than double the P/E of the S&P 500 at that time. With Net Income up a mere 3 percent, the PEG ratio was a depressing 12. Price/Sales was up to 4.3