HD: Financial Gauge Analysis for the July 2009 Quarter

In an earlier post, we examined The Home Depot's (NYSE: HD) Income Statement for the second quarter of 2009 and compared it to our "look-ahead" estimates.  Earnings in this period, which ended 2 August, fell from $0.71 to $0.66 per share.

Home Depot is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products.

We have since mined Home Depot's financial statements in the earnings announcement to update the metrics we use to assess Cash Management, Growth, Profitability and Value. This post reports on these metrics and the Financial Gauge scores.

Read the rest of this article

NVDA: Financial Gauge Analysis for the July 2009 Quarter (Update)

We previously posted NVIDIA's (NASDAQ: NVDA) preliminary Financial Gauge scores for the July 2009 quarter. 

Data from NVIDIA's latest earnings announcement were used to calculate the scores, but NVIDIA later filed a more complete 10-Q report.  For our purposes, Balance Sheet details and a Cash Flow statement, which was not included in the original report, were the most important additions. 

We have now updated the financial metrics that determine our scores to take advantage of the new information.

Read the rest of this article

WMT: Financial Gauge Analysis for the July 2009 Quarter

In an earlier post, we examined Wal-Mart Stores (NYSE: WMT) Income Statement for the second quarter of fiscal 2010 and compared the figures to our "look-ahead" estimates.   Earnings in this period, which ended 31 July 2009, rose from $0.87 to $0.88 per share.


The retailing behemoth sold more than $400 billion last year at its discount stores.

We have since mined Walmart's financial statements in the earnings announcement to update the metrics we use to assess Cash Management, Growth, Profitability and Value. This post reports on these metrics and the Financial Gauge scores.

When Walmart files a 10-Q, with more complete financial statements and notes, we will re-examine the analysis and make any necessary adjustments. 

In the mean time, Walmart's estimated GCFR gauge scores are as follows:

• Cash Management: 6 of 25 (down from 9 in April)
  
• Growth: 1 of 25 (down from 10)
• Profitability: 6 of 25 (down from 8)
• Value: 10 of 25 (up from 9)

• Overall: 29 of 100 (down from 36)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash Management	Jul 2009	Apr 2009	Jul 2008	5-Yr Avg
Current Ratio	0.9	0.8	0.9	0.9
LTD/Equity	48.8%	50.8%	51.2%	46.0%
Debt/CFO (years)	1.8	1.7	1.7	1.9
Inventory/CGS (days)	41.8	41.9	42.5	46.5
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	3.1	3.0	2.8	2.5
Working Capital/Invested Capital	-8.0%	-8.9%	-5.3%	-8.3%
Cash Conversion Cycle Time (days)	9.3	10.3	10.2	13.3
Gauge Score (0 to 25)	6	9	10	7

The Cash Conversion Cycle Time hit a record low for Walmart in the recent period, according to our calculations.  Walmart, already the epitome of efficiency, has become more so by this measure.

We need to reconsider the penalty for negative Working Capital.   Operating profitably with negative Working Capital is another sign of efficiency in handling cash.

Growth	Jul 2009	Apr 2009	Jul 2008	5-Yr Avg
Revenue growth	1.6%	4.5%	9.3%	7.7%
Revenue/Assets	239.9%	245.4%	244.9%	245.3%
Operating Profit growth	5.2%	5.8%	9.4%	6.9%
CFO growth	-7.0%	1.6%	30.3%	10.7%
Net Income growth	-0.5%	1.7%	7.3%	6.7%
Gauge Score (0 to 25)	1	10	16	8

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.  The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Walmart has been performing better than other retailers during the recession, but its Revenue, CFO and Net Income are either declining or growing much slower. 

The small drop this quarter in the Revenue/Assets ratio had a significant negative effect on the gauge score because the ratio had been improving.

Profitability	Jul 2009	Apr 2009	Jul 2008	5-Yr Avg
Operating Expenses/Revenue	94.3%	94.4%	94.2%	94.2%
ROIC	14.8%	15.1%	15.4%	15.7%
Free Cash Flow/Invested Capital	10.5%	11.4%	11.8%	6.9%
Accrual Ratio	1.5%	1.0%	1.1%	3.6%
Gauge Score (0 to 25)	6	8	11	7

It's remarkable that Wal-Mart has been able to keep Operating Expenses so steady given the change in economic conditions.  ROIC and FCF, which have mostly held up well, weakened a little in the latest quarter. 

The Accrual Ratio increase could be signaling a degradation in Earnings Quality.  However, potentially anomalous Cash Flow results in 2008, exceptionally bad in one quarter and exceptionally good in the next, is muddying this calculation.  The 10-Q may clear this up.

Value	Jul 2009	Apr 2009	Jul 2008	5-Yr Avg
P/E	14.5	14.8	17.3	17.2
P/E vs. S&P 500 P/E	0.6	0.7	1.0	1.0
PEG	2.8	2.5	1.8	1.6
Price/Revenue	0.5	0.5	0.6	0.6
Enterprise Value/Cash Flow (EV/CFO)	10.0	10.1	10.8	11.6
Gauge Score (0 to 25)	10	9	4	12

Wal-Mart's share price slipped 1.1 percent during the quarter, from $50.40 to $49.88, but the recent market rally then helped the shares retake the $50 level. The PEG ratio (note that our calculation for this ratio is non-standard) will become a concern if earnings growth doesn't rebound.

Wal-Mart's valuation ratios can be compared with other Discount and Variety Retailers.
 

Overall	Jul 2009	Apr 2009	Jul 2008	5-Yr Avg
Gauge Score (0 to 100)	29	36	34	36

The Growth gauge was most affected, in this case to the downside, by the data characterizing the second quarter.  Cash Management and Profitability slipped by lesser amounts, but Value managed to eke out a 1 point gain.  These results caused the Overall gauge to fall rather substantially.

We will make any necessary adjustments to the scores after Walmart files a 10-Q, with more complete financial statements and notes.


Full disclosure: Long WMT at time of writing.

EIX: Financial Gauge Analysis through the June 2009 Quarter

In an earlier post, we examined Edison International's (NYSE: EIX) Income Statement for the June quarter and compared the figures to our "look-ahead" estimates.  Edison lost $0.05 per share on a GAAP basis in the second quarter of the year. 

"Core" earnings slipped from $0.79 to $0.78 per share.  GAAP results, unlike Core, include a $262 million "charge from finalizing a global settlement with the Internal Revenue Service in May 2009 and the related termination of cross-border, leveraged leases."

We have since mined Edison's 10-Q financial statements to update the metrics we use to assess Cash Management, Growth, Profitability and Value. This post reports on these metrics and the Financial Gauge scores.

In summary, Edison International's latest GCFR gauge scores are as follows:

• Cash Management: 8 of 25 (up from 5 in March)
  
• Growth: 1 of 25 (unchanged)
  
• Profitability: 4 of 25 (up from 2)
  
• Value: 10 of 25 (down from 16)
  

• Overall: 28 of 100 (down from 34)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash Management	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Current Ratio	1.5	1.2	0.9	1.2
LTD/Equity	107.4%	104.9%	99.1%	113.8%
Debt/CFO (years)	5.1	5.7	4.0	4.7
Inventory/CGS (days)	N/A	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	29.8	26.2	29.7	32.2
Working Capital/Invested Capital	9.5%	4.6%	-3.2%	5.8%
Cash Conversion Cycle Time (days)	12.8	15.8	11.4	11.9
Gauge Score (0 to 25)	8	5	7	6

The three-point rise in the Cash Management gauge score was due to improved liquidity, as seen with the higher Current Ratio and the greater amount of Working Capital (i.e., Current Assets - Current Liabilities).  The rise in Long-term Debt was one source of funds.  Edison's Cash Flow from Operations was $2.36 billion in the last year, which was 10 percent less than in the previous four quarters.

The efficiency metrics have stabilized, with Days of Sales Outstanding now almost exactly the same as in June 2008.

Growth	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Revenue growth	-5.1%	2.9%	6.6%	5.6%
Revenue/Assets	32.1%	33.1%	36.0%	34.1%
Operating Profit growth	-3.2%	-0.6%	11.7%	7.8%
CFO growth	-9.7%	-24.2%	-31.6%	9.9%
Net Income growth	-29.0%	1.6%	5.7%	-2.6%
Gauge Score (0 to 25)	1	1	6	8

1. Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters. 
2. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.


Lower demand for power and the resulting lower prices for energy products have cut deeply into Edison's top-line Revenue and Cash Flow.  The decline in Net Income was exacerbated by charges "from finalizing a global settlement with the Internal Revenue Service in May 2009 and the related termination of cross-border, leveraged leases."

Profitability	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Operating Expenses/Revenue	80.5%	81.8%	82.1%	80.5%
ROIC	8.0%	9.1%	9.6%	10.3%
Free Cash Flow/Invested Capital	-2.9%	-3.1%	-1.9%	1.3%
Accrual Ratio	0.5%	4.1%	3.8%	0.7%
Gauge Score (0 to 25)	4	2	3	6

Returns are down, despite the reduction in operating costs to normal levels.  The improved Accrual Ratio (lower is better) is anomalous because it was due to non-cash charges reducing reported earnings.

Value	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
P/E	11.6	8.1	13.7	12.2
P/E vs. S&P 500 P/E	0.5	0.4	0.7	0.7
PEG	N/A	N/A	1.2	1.0
Price/Revenue	0.8	0.7	1.2	1.1
Enterprise Value/Cash Flow (EV/CFO)	8.1	8.2	10.0	8.5
Gauge Score (0 to 25)	10	16	1	4

Edison's stock price increased 9.2 percent during the second quarter, from $28.81 to $31.46.  This was a little too much for the Value gauge, and it responded negatively. 

Edison's valuation ratios can be compared with other Electric Utilities.

Overall	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Gauge Score (0 to 100)	28	34	12	21

The Value gauge's decline pushed the already weak Overall gauge score down another 6 points.  The Growth and Profitability scores are in the poorest condition of the category gauges.



Full disclosure: Long EIX at time of writing.

MSFT: Financial Gauge Analysis for the June 2009 Quarter (Update)

We previously posted Microsoft's (NASDAQ: MSFT) preliminary Financial Gauge scores for the June 2009 quarter. 

Data from Microsoft's latest earnings announcement were used to calculate the scores, but Microsoft later filed a more detailed 10-K report for the fiscal year.

The description of the company's various business areas, challenges, and future opportunities, as it sees them, is quite a good read (see below).  However, there was nothing in the 10-K that changed the preliminary gauge scores or financial metrics. 

We also didn't find any discrepancies between the results reported via press release and the results filed with the SEC.  This is something to which we're particularly attentive.

In summary, Microsoft's latest GCFR gauge scores are as follows:

• Cash Management: 21 of 25 (up from 16 in March)
  
• Growth: 1 of 25 (down from 5)
• Profitability: 12 of 25 (down from 13)
• Value: 18 of 25 (down from 25)

• Overall: 61 of 100 (down from 69)

Since no number crunching was required, we used the time to create a word cloud of the "Business" section of the 10-K, using the strangely addictive Wordle web site.

When reading this section of the 10-K, it seemed as if Microsoft was stressing their powers of innovation.  But, we must have been confused because "innovation" can barely be seen (above "server").



 Full disclosure: Long MSFT at time of writing.

INTC: Financial Gauge Analysis for the June 2009 Quarter (Update)

We previously posted Intel Corporation's (NASDAQ: INTC) preliminary Financial Gauge scores for the June 2009 quarter.

Data from Intel's latest earnings announcement were used to calculate the scores, but Intel later filed a more detailed 10-Q report.  For our purposes, the Cash Flow statement, which was not included in the original announcement, was the most important addition. 

We have now updated the scores to take advantage of the new information.


The Cash Flow numbers were somewhat better than our estimates.  As a result, the actual data in the 10-Q increased the Profitability gauge score from 6 to 10 points.  The Overall gauge rose by 5 points, from 22 to 27.

• Cash Management: 13 of 25 (up from 10 in March)
  
• Growth: 0 of 25 (unchanged)
• Profitability: 10 of 25 (down from 8)
• Value: 3 of 25 (down from 7)

• Overall: 27 of 100 (down from 30)

For the record, the latest financial metrics are listed below.

Cash Management	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
Current Ratio	2.6	2.9	2.5	2.5
LTD/Equity	3.0%	3.0%	4.7%	4.0%
Debt/CFO (years)	0.1	0.1	0.2	0.2
Inventory/CGS (days)	69.6	71.2	74.6	74.3
Finished Goods/Inventory	43.2%	40.0%	40.7%	36.9%
Days of Sales Outstanding (days)	23.5	25.0	22.5	30.2
Working Capital/Invested Capital	39.8%	39.8%	38.6%	45.0%
Cash Conversion Cycle Time (days)	44.7	50.5	48.8	57.0
Gauge Score (0 to 25)	13	10	15	11

Growth	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
Revenue growth	-15.9%	-10.5%	11.1%	-1.5%
Revenue/Assets	66.3%	68.8%	77.8%	75.2%
Operating Profit growth	4.8%	2.9%	9.1%	-1.6%
CFO growth	-29.4%	-31.6%	24.2%	0.1%
Net Income growth	-65.1%	-34.0%	24.3%	-13.4%
Gauge Score (0 to 25)	0	0	18	9

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Although the Cash Flow rate of decline wasn't as bad as we first estimated, it was still pretty steep.  Cash Flow and the Net Income were both adversely affected by the $1.45 billion fine levied by the European Commission.

Profitability	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
Operating Expenses/Revenue	78.7%	77.2%	74.2%	75.9%
ROIC	15.9%	19.8%	23.2%	22.9%
Free Cash Flow/Invested Capital	13.6%	11.2%	30.0%	9.6%
Accrual Ratio	-4.1%	-0.2%	0.6%	7.3%
Gauge Score (0 to 25)	10	8	21	12

Better-than-estimated Cash Flow improved the FCF/IF and Accrual Ratios.

Value	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
P/E	37.4	18.9	17.5	19.4
P/E vs. S&P 500 P/E	1.6	1.0	1.0	1.2
PEG	7.7	6.6	1.9	1.8
Price/Revenue	2.8	2.4	3.1	3.5
Enterprise Value/Cash Flow (EV/CFO)	8.5	8.3	8.4	25.8
Gauge Score (0 to 25)	3	7	10	10

Overall	Jun 2009	Mar 2009	Jun 2008	5-yr Avg
Gauge Score (0 to 100)	27	30	61	44

Although the Overall score wasn't quite as bad as first calculated, it did not escape very weak territory.  This was due mostly to poor comparisons with last year's second quarter, but the $1.45 billion fine from the Europeans for antitrust violations was also harmful.




Full disclosure: Long INTC at time of writing.

PG: Financial Gauge Analysis for the June 2009 Quarter (Updated)

We previously posted Procter & Gamble's (NYSE: PG) preliminary Financial Gauge scores for the June 2009 quarter.  We also listed the financial metrics that determined the scores.  The results took into account the financial statements in P&G's earnings announcement. 

P&G later filed a 10-K annual report with much more detail, including a complete Balance Sheet and the first characterization of P&G's inventory at the end of June 2009.  We used this additional information to recompute the scores and metrics.

As it happens, the data in the 10-K did not change the gauge scores from our initial report.

• Cash Management: 5 of 25 (down from 6 in March)
  
• Growth: 1 of 25 (down from 6)
  
• Profitability: 6 of 25 (down from 7)
  
• Value: 20 of 25 (down from 23)
  

• Overall: 44 of 100 (down from 52)

However, some of the financial metrics did change by minor amounts.  The 10-K also gave us a chance to collect some historical figures that were restated after the sale of the Folgers coffee business to J.M. Smucker (NYSE: SJM).

For the record, the latest set of data is listed below.

Cash Management	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Current Ratio	0.7	0.7	0.8	0.9
LTD/Equity	32.7%	33.7%	33.9%	46.1%
Debt/CFO (years)	2.5	2.8	2.4	2.8
Inventory/CGS (days)	71.8	72.8	70.3	68.5
Finished Goods/Inventory	67.6%	66.7%	64.0%	66.4%
Days of Sales Outstanding (days)	29.1	28.5	29.9	30.0
Working Capital/Invested Capital	-9.4%	-11.4%	-6.3%	-5.8%
Cash Conversion Cycle Time (days)	38.6	51.9	44.8	52.8
Gauge Score (0 to 25)	5	6	5	3

	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Revenue growth	-3.3%	1.4%	6.9%	9.1%
Revenue/Assets	56.7%	58.5%	58.0%	67.1%
Operating Profit growth	9.9%	13.6%	19.1%	14.4%
CFO growth	-0.6%	-6.9%	11.9%	16.2%
Net Income growth	-4.3%	5.9%	14.1%	18.4%
Gauge Score (0 to 25)	1	6	13	10

1. Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.  The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Profitability	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Operating Expenses/Revenue	79.6%	80.0%	79.6%	80.2%
ROIC	12.0%	12.5%	12.6%	14.4%
Free Cash Flow/Invested Capital	11.8%	10.5%	12.0%	13.6%
Accrual Ratio	0.6%	2.1%	-0.3%	-0.1%
Gauge Score (0 to 25)	6	7	9	9

Value	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
P/E	11.8	10.5	16.5	20.4
P/E vs. S&P 500 P/E	0.5	0.6	0.9	1.2
PEG	1.2	0.8	0.8	1.1
Price/Revenue	2.0	1.8	2.4	2.7
Enterprise Value/Cash Flow (EV/CFO)	12.8	13.1	15.5	16.7
Gauge Score (0 to 25)	20	23	12	6

Overall	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Gauge Score (0 to 100)	44	52	40	27

Full disclosure: No position in PG at time of writing.