BP: Financial Analysis through December 2007

We have analyzed BP p.l.c's (BP) financial results for the quarter that ended on 31 December 2007.

BP, the former British Petroleum, is the Integrated Oil and Gas company with the third-most sales and the fourth largest market capitalization in the world. BP became a behemoth, in part, by acquiring Amoco and Arco.

Significant problems over the last few years have tarnished BP's reputation. Tragically, an explosion killed 15 workers at their Texas City refinery in 2005. This calamity was followed by a major leak and pipeline corrosion in Alaska, where BP operates the Prudhoe Bay field. These events led to allegations BP was not adequately maintaining its properties and equipment. The bad news also did much damage to the green image the company has been cultivating in its marketing.

BP is trying to put these and other problems behind it by acknowledging errors, settling lawsuits, and improving safety. It agreed to pay $373 million to settle charges related to market manipulation, the refinery explosion, and the pipeline leak. Sadly, another fatal accident recently occurred at the Texas City refinery. This tragedy has led to new concerns about the effectiveness of BP's actions.

Investors seem to be worried that the economy will slow in industrial nations, which would lower the demand for energy products and cause prices for crude oil and natural gas to decline. BP investors, in particular, have been concerned by reduced production and lower refining margins. Perhaps a signal of a turnaround can be seen in news of a new gas discovery in Egypt and more oil found in Angola.

In 2006, BP began reporting its results in accordance with International Financial Reporting Standards (IFRS) as adopted for use by the European Union. Previous financial statements complied with UK Generally Accepted Accounting Principles. The differences between these two approaches makes it difficult to identify historic norms to which current results can reasonably be contrasted. Comparability is also complicated by significant corporate acquisitions and divestitures during the last few years.

When we analyzed BP after the September quarter, the Overall score was a dismal 19 points. Of the four individual gauges that fed into this composite result, Cash Management was the strongest at 10 points. Growth was weakest at 0 points. [The BP score for the September quarter was bumped up a couple points by a recent change in our scoring algorithm.]

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

• Cash Management: 10 of 25
• Growth: 1 of 25
• Profitability: 4 of 25
• Value: 3 of 25
  

• Overall: 17 of 100
  

Before we examine the factors that affected each gauge, let's look at the latest quarterly Income Statement. We did not predict BP's results for this quarter.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		Dec 2007 (actual)	Dec 2006 (actual)
Revenue (1)		79852	61946
Op expenses
	CGS (2)	(65421)	(51563)
	Depreciation (3)	(3020)	(2441)
	Exploration	(201)	(408)
	SG&A (4)	(4212)	(4205)
	Other (5)	(1331)	236
Operating Income		5667	3565
Other income
	Investments (6)	1149	409
	Asset sales (7)	270	300
	Interest, etc. (8)	(21)	28
Pretax income		7065	4302
Income tax		(2561)	(1347)
Net Income		4504	2955
		$1.42/ADS	$0.90/ADS

<sup>1. Sales and other operating revenues
2. Purchases + Production and manufacturing expenses + Production and similar taxes
3. Depreciation, depletion and amortization
4. Distribution and administration expenses
5. Impairment and losses on sale of businesses and fixed assets + Fair value (gain) loss on embedded derivatives
6. Earnings from jointly controlled entities + Earnings from associates
7. Gain on sale of businesses and fixed assets
8. Interest and other revenues - Finance costs + Other finance income</sup>


Revenue was 29 percent more than in the year-earlier quarter. This broke a string of five consecutive quarters of weak Revenue Growth. The Cost of Goods Sold (CGS) was 81.9 percent of Revenue, which is consistent with most recent quarters. There were increased costs due, among other things, to greater refinery outages and repairs. CGS/Revenue was unusually high at 83.2 percent in the December 2006 quarter.

Depreciation was 3.8 percent of Revenue, compared to 3.9 percent last year. Exploration costs were 0.3 percent of Revenue, up/down from 0.7 percent in the December 2006 quarter. Sales, General, and Administrative (SG&A) expenses were 5.3 percent of Revenue, compared to 6.8 percent last year.

The recent quarter included two other charges that totaled a massive $1.33 billion. The first charge, $872 million, was for "impairment and losses on sale of businesses and fixed assets." It appears that the lion's share of this charge can be attributed to the company's decision to sell convenience stores in the U.S. The second charge, $459 million, reflects a "fair value ... loss on embedded derivatives" related to North Sea gas contracts.

The higher Revenue won out over the higher costs, resulting in Operating Income 59 percent above last year's value.

Earnings from joint ventures and associates, which we label as gains on investments, were $740 million higher than in the December 2006 quarter. As a result, pre-tax income was up 64 percent, and Net Income grew by 52 percent. The tax rate for the quarter increased from 31.3 percent to 36.2 percent.


Cash Management. This gauge didn't change from 10 points in September.

The measures that helped the gauge were:

• LTD/Equity = 16.7 percent; quite manageable, but up from 13.1 percent in December 2006
• Debt/CFO = 1.3 years; also easily affordable, but an increase from 0.9 years the previous December
• Days of Sales Outstanding (DSO) = 49.2 days, nicely below the 54.6-day level one year earlier.
  

Note that the DSO change indicates the company is having more success getting its customers to pay their bills; rapid collection is a sign of efficiency because the payments received can be re-invested sooner.

The measures that hurt the gauge were:

• Current Ratio = 1.0; weaker than we like, but typical for BP.
• Working Capital/Market Capitalization = +0.6 percent, down from -0.4 percent.
• Cash Conversion Cycle Time (CCCT) = 19.8 days, up from 15.5 days, for this measure of efficiency.
  

Growth. This gauge increased by one point from 0 in September.

None of these measures helped this gauge:

• Revenue growth = 6.9 percent year-over-year, down from 10.9 percent
• Revenue/Assets = 120.5 percent year-over-year, down from 122.2 percent; sales efficiency is worsening
• Net Income growth = -5.1 percent year-over-year, down from -0.6 percent
• CFO growth = -12.3 percent year-over-year, down from 5.4 percent.
  

The quarter showed signs of Revenue acceleration, but it wasn't enough to pump up the year-over-year growth rate to an acceptable level.

Profitability. This gauge remained unchanged from 4 points in September.

The one measure that helped the gauge was:

• ROIC = 14.9 percent, decent but down from 16.2 percent in the last year.
  

The measures that hurt the gauge were:

• FCF/Equity = 7.3 percent, less than half of 15.4 percent in December 2006
• Accrual Ratio = +6.1 percent, up from +4.3 percent in a year
• Operating Expenses/Revenue = 90.5 percent, up from 90.0 percent in the last year
  

Value. The price of BP ADRs rose over the course of the quarter from $69.35 to $73.17. The Value gauge, based on the latter price, decreased from 4 points to 3 points.

The only measure that helped the gauge was:

• Price/Revenue ratio = 0.8, unchanged from a year ago
  

The measures that hurt the gauge were:

• Enterprise Value/Cash Flow = 10.5, up from 8.5 in December 2006
• P/E = 10.9, up from 9.8
  
• P/E to S&P 500 average P/E = 36 percent discount, essentially unchanged from recent levels
  

The average P/E for the Integrated Oil and Gas industry is 11.8. The average Price/Revenue for the industry is currently 1.1.

Now at 17 out of 100 possible points, the Overall gauge is dreadfully weak. Revenue Growth is lower than one might expect in an era of high energy prices. The recent quarter showed the initial signs of increased production. We will be looking to see if it continues. Net income perked up significantly in the last quarter, but it was still down on a year-over-year basis. BP attributes the disappointing performance to U.S. refining performance. The company is investing significantly to improve safety. Capital Expenditures were so high in the fourth quarter that it pushed Free Cash Flow (FCF) into the red. To be specific, Cash Flow from Operations (CFO) of $4.3 billion was overshadowed by $5.5 billion in Capital Expenditures.

Link Fixed

Our post looking ahead to Cisco's quarterly report was very popular. The number of people visiting the GCFR site on Monday was more than 4 times the daily average. The count was boosted by a link to the post prominently, but temporarily, placed on the Google Finance quote page for CSCO.

One reader took the time to point out a broken link in the Current Gauge Readings section on the web site's right margin. We fixed it. Thanks.

We anticipate that our next post will analyze BP p.l.c's (BP) report for the quarter that ended on 31 December 2007.

CSCO: Look Ahead to January 2008 Quarterly Results

After the stock market closes on Wednesday, 6 February 2008, Cisco Systems (CSCO) will report its results for the quarter that ended 26 January 2008. The quarter was the second of Cisco's 2008 fiscal year.

Our analysis after the October quarter noted higher SG&A expenses and greater-than-expected costs due to amortization of purchased intangible assets. We also observed that non-operating income was up substantially and the Income Tax Rate was artificially low because of a $162 million settlement. The non-operating results enabled Net Income to outshine expectations.

The Value Gauge read zero points in October, a rock-bottom level signaling that the stock, then $33, had become quite expensive. The Overall Gauge was a quite modest 27 points. Our gauge scores for Cisco had actually been weak for several quarters. The market didn't reach this conclusion until the effects of the subprime fiasco on national and global economic conditions became clearer late in 2007. Cisco shares are under $25 today.

Cisco's latest results will give us some hints as to whether the market might have over-reacted on the downside or whether the shares might fall further still.

When discussing October's results, Cisco management reiterated previous guidance that the company can grow over the long term at 12 to 17 percent per year with some periods outside either end of this range. For the January quarter, the company stated that they expect Revenue Growth near the top of the range, at "16 percent year-over-year." The GCFR definition of "year-over-year" is "the last four quarters compared to the four previous quarters." However, Cisco uses an alternative definition of "this quarter compared to the year-earlier quarter." One definition would set the revenue target at $9.2 billion, and the other leads to $9.8 billion. The higher value is the one we believe reflects Cisco's intent.

Management's guidance for Gross Margin is 65.5 percent, a figure that seems a little high. This ratio has been recently been closer to 64.5 percent. We'll split the difference, and set the target at 65 percent. Therefore, our forecast for Cost of Goods Sold (CGS) is 35 percent of $9.8 billion, which is $3.4 billion. (The cost would be about $50 million less if the Gross Margin is 65.5 percent.)

Cisco stated that they expect the quarter's Operating Expenses to be about 36 percent of Revenue. On Cisco's Income Statement, Operating Expenses include Research and Development (R&D) costs, Sales, General, and Administrative (SG&A) costs, and other various other charges, but not CGS. The 36 percent figure seems low, based on past results. We have no reason to believe that R&D expenses will be any lower than 12.5 percent of Revenue. This would equate to $1.2 billion. Similarly, we don't see why we should expect SG&A expenses to be much less than 25 percent of Revenue, which would be about $2.5 billion.

The R&D and SG&A estimates combine to 37.5 percent of Revenue, a point and a half above the guidance. Cisco executives are certainly better informed than we are, but we will stick with the GCFR methodology of using corporate guidance to modulate extrapolations of past results, not replace them.

The various other operating changes mentioned above include payroll tax on stock options, amortization of deferred compensation, amortization of purchased intangible assets, and the mysterious in-process research and development. We don't know how to forecast these costs, but $100 million seem reasonable.

These figures would result in Operating Income of $2.6 billion, compared to $2.13 billion in the year-earlier quarter.

Cisco indicated that interest and other income would be $225 million, which is close to the average for non-operating income during the previous four quarters. Pre-tax income would, therefore, be about $2.8 billion.

The income tax rate has been forecast at 24 percent. As a result, provisions for income taxes are estimated at $700 million.

Therefore, we're looking to see Net Income in the quarter of $2.14 billion. This would equate to $0.34 per share.

($M)		January 2008 (predicted)	January 2007 (actual)
Revenue		9789	8439
Op expenses
	CGS	(3426)	(3051)
	R&D	(1224)	(1094)
	SG&A	(2447)	(2066)
	Other	(100)	(98)
Operating Income		2592	2130
Other income
	Investments	0	0
	Interest, etc.	225	205
Pretax income		2817	2335
Income tax		(676)	(414)
Net Income		2141	1921
		$0.34/sh	$0.31/sh

ADP: Financial Analysis through December 2007

We have analyzed ADP's (ADP) preliminary financial results for the quarter that ended on 31 December 2007, which was the second quarter of the company's fiscal 2008. 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. These faults are not unusual in an ADP preliminary report, and they will certainly be rectified in the 10-Q the company will submit to the SEC. Since the GCFR analysis methodology requires some data not yet provided, we have had for this post to make various assumptions based on historical results.

ADP is a top provider of payroll and other personnel-related IT services to corporate customers. It publishes the monthly ADP National Employment Report that reports changes in total non-farm private employment. (The ADP report has painted a much rosier picture of the U.S. employment than the Bureau of Labor Statistics, but we digress.)

ADP, which is one of a mere handful of U.S. companies left with an AAA bond rating, has been restructuring. There have been several changes, the most significant of which was the divestiture on 30 March 2007 of the Brokerage Services Group business. The spun-off company, which will have annual Revenues over $1 billion, was renamed Broadridge Financial Solutions (BR). With each new set of quarterly results, we get a better understanding of the financial metrics of the ADP's current organization.

When we analyzed the company after the September quarter, the Overall Gauge score of 44 points (out of 100 possible) was the highest mark achieved by ADP since December 2003. However, we noted that the Broadridge spin-off and other changes could have skewed the calculations. Of the four individual gauges that fed into September's composite result, Growth was the strongest at 18 points. Value was weakest at 5 points.

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

• Cash Management: 14 of 25
• Growth: 19 of 25
• Profitability: 14 of 25
• Value: 8 of 25
  

• Overall: 49 of 100
  

These scores are tentative because they were computed without all needed Balance Sheet and Cash Flow data.


Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations. The differences were minor enough to give us confidence that our model for ADP has stabilized.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		Dec 2007 (actual)	Dec 2007 (predicted)	Dec 2006 (actual, 6)
Revenue (1)		2150	2100	1874
Operating expenses
	CGS (2)	(980)	(903)	(822)
	Depreciation (3)	(60)	(63)	(51)
	R&D (4)	(129)	(137)	(120)
	SG&A	(555)	(567)	(515)
	Other	0	0	(0)
Operating Income		427	431	368
Other income
	Investments	0	0	0
	Interest, etc.	13	15	28
Pretax income		441	446	396
Income tax		(149)	(165)	(148)
Net Income (5)		292	281	248
		$0.55/sh	0.52/sh	0.45/sh

<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
5. Net Income from continuing operations
6. Restated</sup>

Revenue in the quarter was 14.7 percent above the restated value in the year-earlier period. Year-over-year Revenue Growth was 13.8 percent, or about 1 percent more than we expected. The Cost of Goods Sold (CGS) -- called Operating Expenses on ADP's Income Statement -- was 45.6 percent of Revenue, significantly more than the 43 percent target. However, other costs were than we expected. Depreciation was 2.8 percent of Revenue, a little better than our 3 percent forecast. Research and Development (R&D) expenses were 6.0 percent of Revenue, compared to our prediction of 6.5 percent. Sales, General, and Administrative (SG&A) expenses were 25.8 percent of Revenue, nicely under our 27 percent forecast.

The various differences between actual and predicted numbers basically canceled each other out. Operating Income was a mere $4 million below our forecast. The actual value was 16.2 percent more than the amount attained in December 2006.

Non-operating income was only $2 million below our target value. Provisions for income taxes were, however, much less. The Income Tax Rate in the recent quarter was only 33.8 percent, compared to the predicted 37.0 percent.

The reduced tax burden enabled Net Income from continuing operations to beat our prediction by 4 percent. This Net Income exceeded the level attained a year ago by 17.6 percent. The growth rate was even higher, about 22 percent, on a per-share basis because the company has repurchased enough of its stock to reduce the number of shares outstanding, on a diluted basis, by 4.5 percent.

At least one press report after the recent earnings announcement indicated that ADP experienced declining profits, and the shares subsequently fell in value. If one looked strictly at the bottom line Net Income figure, this was true. However, we chose to focus on Net Income from continuing operations. While we are pro-GAAP analysts that don't typically exclude "special" or "non-recurring" gains and losses, we don't see how it makes sense to compare current company operations with previous results that included business since sold. Nevertheless, this hammers home an important point: when speaking of earnings, it is important to know exactly what income and expenses have been included and excluded. It often seems as if there are as many definitions of earnings as there are analysts.


Cash Management. This gauge was unchanged from September at 14 points. However, the recent score is suspect because we had to fill in missing Balance Sheet data with estimates.

The following measures all helped the gauge:

• Debt/CFO = nil
• Current Ratio = 1.8; up slightly from 1.7 one year ago
• LTD/Equity = 0.7 percent; down for 1.2 percent last year. Both values are insignificant.
• Days of Sales Outstanding (DSO) = 52.5 days, well down from 62.4 days at December 2006, but up a little from 48.4 days at the end of September.
• Cash Conversion Cycle Time (CCCT) = 39.8 days, compared to 42.3 days last year and 35.0 days last quarter.
  

The following measure was the only drag on this gauge score:

• Working Capital/Market Capitalization = 5.7 percent, down somewhat from 6.3 percent one year ago
  

Growth. This gauge increased from 17 points in September to 19 points now.

The following measures all helped the gauge:

• Revenue growth = 13.8 percent year-over-year, making up for last year's -3.4 percent
• Revenue/Assets = 101.3 percent, up dramatically from 75.7 percent in a year; sales efficiency is improving. The spin off and share repurchases both helped reduce Assets.
• Net Income growth = 18.1 percent year-over-year, up from -4.9 percent
  

Net income for the year benefited from a change in the income tax rate from 37.9 to 36.1 percent

The following measure may have held the score down:

• CFO growth = 1.3 percent year-over-year (estimated), compared to -15.6 percent one year ago.
  

Profitability. This gauge was unchanged from September at 14 points.

The measures that helped the gauge were:

• ROIC = 26.2 percent, up from 17.9 percent in a year
• FCF/Equity = 24.5 percent (estimated), up from 20.6 percent in a year
• Operating Expenses/Revenue = 80.3 percent, down from last year's 81.5 percent
  

The measure that hurt the gauge were:

• Accrual Ratio = -2.1 percent, up from -3.0 percent in a year
  

Value. ADP's stock price inched down from $45.93 to $44.53 over the course of the quarter -- it has since fallen under $40. The Value gauge, based on the year-end closing price, moved up from 5 to 8 points.

The measures that helped the gauge were:

• Enterprise Value/Cash Flow = 15.6, down from 18.4 in December 2006, but matching the 5-year median value
• P/E = 21.7, quite a bit below the 5-year median of 26.4
  
• P/E to S&P 500 average P/E = 27 percent premium, nearly half its five-year median value
  
• Price/Revenue ratio = 2.8, compared to a five-year median of 3.3
  

The average P/E for the Business Services industry is currently 18.5. The average Price/Revenue for the industry is currently 2.2.

If it holds up once we get the 10-Q data, 49 out of 100 possible points for the Overall gauge would qualify as a good score for ADP and the best in four years. We do have to note that some of the out-performance was due to a lower effective tax rate, and we don't know whether this reflects temporary conditions. We would like to see reduced Operating Expenses as a percentage of Revenue.

TDW: Financial Analysis through December 2007

We have analyzed Tidewater's (TDW) preliminary financial results for the quarter that ended on 31 December 2007, which was the third quarter of their fiscal 2008. Tidewater's press release includes all the data we require to compute GCFR gauge scores; however, we still intend to pore through the 10-Q report that the company will submit to the SEC. The formal report could contain additional information relevant to our analysis.

Tidewater claims to own "the world’s largest fleet of vessels serving the global offshore energy industry." Since Tidewater's assets are mobile, the company can shift vessels to the regions where activity is greatest and leasing rates are highest. Once focused on the Gulf of Mexico, international operations comprised almost 80 percent of Tidewater's business in fiscal 2007.

High prices for crude oil and natural gas leads to increased offshore production, which increases the need for maritime services, which, in turn, allows Tidewater to lease more of its vessels and at higher rates. If the economy slows in industrial nations, which is distinct possibility, the demand for energy products would abate, prices would decline, and offshore production would become relatively less attractive. In this scenario, Tidewater might have to cut its lease rates to keep its vessels active.

A similar result would occur simply if too many new vessels are put into operation at the same time. At the Southcoast Energy Conference in December 2007, the Times-Picayune reported that CEO and Chairman Dean Taylor said Tidewater "plans to invest between $300 million and $500 million annually through 2011 to renew its aging vessel fleet, with the hope of taking advantage of the growing opportunities in international markets."

When we analyzed Tidewater after the September quarter, which was the second of their fiscal year, we discovered that the Overall gauge score had declined to 35 points from earlier superlative levels in the 60's and 70's. Of the four individual gauges that fed into September's composite result, Value was the strongest at 13 points. Profitability was weakest at 4 points.

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

• Cash Management: 8 of 25
• Growth: 8 of 25
• Profitability: 4 of 25
• Value: 17 of 25
  

• Overall: 41 of 100
  

Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations. Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		Dec 2007 (actual)	Dec 2007 (predicted)	Dec 2006 (actual)
Revenue		314	326	288
Op expenses
	CGS (1)	(150)	(166)	(131)
	Depreciation	(31)	(33)	(30)
	SG&A	(31)	(33)	(25)
Operating Income		102	95	103
Other income
	Asset sales (2)	1	3	9
	Interest, etc.	6	7	4
Pretax income		108	105	115
Income tax		(18)	(20)	(22)
Net Income		89	85	93
		$1.66/sh	1.53/sh	1.67/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 fell short of expectations. We forecast Revenue to be 13 percent greater than in the year-earlier quarter, and the actual increase was 9.1 percent. The shortfall can be ascribed to lower vessel utilization rates, worldwide but especially in the U.S., and lower per-day lease rates in the U.S.

However, Operating Expenses as a percentage of Revenue were also lower than we expected, which increased earnings. We thought the Cost of Goods Sold (CGS) would be 51 percent of Revenue, and the actual value was only 47.9 percent. Depreciation and Sales, General, and Administrative (SG&A) expenses were both right on target at 10 percent of Revenue.

Keeping a lid on costs enabled Operating Income to exceed the forecast value by more than 7 percent.

Non-operating income was $3 million less than expected. On the other hand, the Income Tax Rate was a mere 17 percent, instead of the predicted 19 percent. As a result, Net Income surpased our prediction by 5.1 percent.


Cash Management. This gauge increased from 7 points in September to 8 points now.

The measures that helped the gauge were:

• LTD/Equity = 16.1 percent, compared to 16.7 percent a year ago despite significant capital equipment expenditures and share repurchases
• Current Ratio =2.7; down to a normal, healthy level from 4.8 in December 2006
• Debt/CFO = 0.7 years, unchanged from 12 months ago
  

The measures that hurt the gauge were:

• Working Capital/Market Capitalization = 11.6 percent, down from 17.4 percent.
• Cash Conversion Cycle Time (CCCT) = 56.5 days, up from 47 days, for this measure of efficiency
  
• Days of Sales Outstanding (DSO) = 87.3 days, up from last year's 84.8 days.
  

Growth. This gauge decreased from 11 points in September to 8 points now.

The measures that helped the gauge were:

• Revenue/Assets = 45.5 percent, up from 42.6 percent in a year; sales efficiency is improving
• Revenue growth = 14.3 percent year-over-year, good but down from 33.0 percent
  

The measure that hurt the gauge were:

• Net Income growth = 5.2 percent year-over-year, down from a rollicking 49.3 percent
• CFO growth = 1.9 percent year-over-year, down from 91.6 percent
  

Net income benefited from a change in the income tax rate from 21.6 to 18.7 percent The tax rate decreased as a result of a continuing shift to more operations outside the U.S.

Profitability. This gauge didn't change from 4 points in September.

The measures that helped the gauge were:

• ROIC = 16.2 percent, up a notch from 16.0 percent one year ago.
  

The measures that hurt the gauge were:

• FCF/Equity = 5.4 percent, down from 12.6 percent in a year (this is where the capital investments are having a negative effect.)
  
• Accrual Ratio = +9.2 percent, up from +4.4 percent in a year
• Operating Expenses/Revenue = 68.0 percent, up from 66.9 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 over the course of the quarter from $62.84 to $54.86. The Value gauge, based on the latter price, rose from the 14 points achieved three months ago to a healthy 17 points.

All measures had a positive impact on the gauge score:

• Enterprise Value/Cash Flow = 6.7, up from 6.0 in December 2006, but well below the five-year median of 11.6
  
• P/E = 8.4, up a little from 8.1 a year ago, but, again, well below the five-year median of 17
  
• P/E to S&P 500 average P/E = 50 percent discount, unchanged from one year ago.
• Price/Revenue ratio = 2.4, compared to the five-year median value of 2.9.
  

The average P/E for the Oil Well Services and Equipment industry is currently a more expensive 16.3. The average Price/Revenue for the industry is currently 3.3.

Now at a modest 41 out of 100 possible points, the Overall gauge has fallen from lofty levels in the 60s last year. The offshore industry seems to be past the top of the latest boom-bust cycle, and we see this manifested in the Growth and Profitability gauges. Activity in the Gulf Coast is especially weak. Fortunately, the Tidewater's management has diversified the business into various international markets. Management also deserves credit from cost containment, despite the slowdown, and in investing in the future by acquiring more modern, efficient vessels without harming the company's financial strength. The drop in the stock price has pushed up the Value gauge to attractive levels. If economic growth proves to be more robust than currently feared, we will see the other gauges perk up, and Tidewater will once again become quite attractive.

BUD: Financial Analysis through December 2007

We have analyzed Anheuser-Busch's (BUD) preliminary financial results for the quarter that ended on 31 December 2007. Our evaluation will be updated after the company formally submits a 10-Q report to the SEC.

There was reason for optimism. In announcing the second quarter results, BUD's President and CEO said last July that "the company is on track to deliver accelerating earnings growth in the second half of the year" and that he "expect[s] the company’s 2007 earnings per share increase to exceed this [7 to 10 percent] range." A similar statement was made in October in conjunction with the third quarter results.

BUD announced on 7 January that the number of barrels shipped by the company to wholesalers increased in 2007 by 2 percent over the number shipped in 2006.

BUD is looking to grow by expanding its operations in the fast growing countries of India and China. BUD bought China's Harbin Brewery and it has long held a stake in Tsingtao. There have been rumors that BUD might buy Belgian brewer InBev (INB), with whom it already has a product distribution agreement.

In the U.S., the nation's second and third-largest brewers, SABMiller and MolsonCoors, are taking steps to combine in order to better compete against Anheuser-Busch.

When we analyzed BUD after the September quarter, the Overall score was an unspectacular 27 points. Of the four individual gauges that fed into this composite result, Growth was strongest at 13 points. Value was weakest at 3 points.

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

• Cash Management: 3 of 25
• Growth: 9 of 25
• Profitability: 11 of 25
• Value: 1 of 25
  

• Overall: 22 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)		Dec 2007 (actual)	Dec 2007 (predicted)	Dec 2006 (actual)
Revenue		3694	3669	3425
Op expenses
	CGS	(2635)	(2531)	(2442)
	SG&A	(783)	(770)	(764)
	Other	0	0	0
Operating Income		276	367	219
Other income
	Equity income	123	167	140
	Interest, etc.	(118)	(120)	(114)
Pretax income		281	414	244
Income tax		(67)	(133)	(54)
Net Income		214	282	191
		0.29/sh	0.38/sh	0.38/sh

BUD's Revenue in the December 2007 quarter was 7.9 percent greater than in the year-earlier quarter; our estimate for Revenue Growth was 7.1 percent. Year-over-year Revenue Growth was 6.2 percent, which just slightly exceeded our estimate of 6.0 percent.

Operating expenses were significantly higher than we expected. We thought the Cost of Goods Sold (CGS) would be 69 percent of Revenue, and the actual value was 71.3 percent. The situation wasn't as bad with Sales, General, and Administrative (SG&A) expenses, which were 21.2 percent of Revenue -- just over our forecast of 21 percent.

The higher CGS caused Operating Income to fall 25 percent below the forecast value.

Equity income less interest expense was a substantial $42 million below our estimate. On the other hand, the Income Tax Rate (not adjusted for equity income) was only 24 percent, instead of the predicted 32 percent.

The net effect was Net Income 24 percent below our prediction.


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

The measures that helped the gauge were:

• Cash Conversion Cycle Time (CCCT) = -8.0 days, down from -7.3 days one year ago, for this measure of efficiency.
  

The measures that hurt the gauge were:

• Inventory/CGS = 23.9 days, compared to 22.7 and 24.2 days 3 and 12 months ago, respectively (note: we don't yet have the data identifying the finished goods component of inventory)
  
• Current Ratio =0.9; weaker than we like, but matching the 5-year median value
• LTD/Equity = 290 percent; highly leveraged and becoming more so as stock repurchases cut the Equity level
• Debt/CFO = 3.2 years, compared to 2.9 years 3 and 12 months ago
  
• Days of Sales Outstanding (DSO) = 16.7 days, up from 16.3 days one year earlier
• Working Capital/Market Capitalization = -0.6 percent, compared -0.9 percent one year earlier.
  

Growth. This gauge decreased from 13 points in September to 9 points now.

All of these measures had a small, but positive effect on the gauge score.

• Revenue growth = 6.2 percent year-over-year, up from 4.5 percent
• CFO growth = 8.5 percent year-over-year, up from 0.3 percent
• Net Income growth = 7.6 percent year-over-year, matching the previous year's growth rate
• Revenue/Assets = 97.3 percent year-over-year, up from 96.0 percent; sales efficiency is improving.
  

The Net income growth rate was neither helped, nor hurt, by a change in the income tax rate. The rate stayed at 31.4 percent

Profitability. This gauge decreased from 12 points in September to 11 points now.

The measures that helped the gauge were:

• FCF/Equity = 65.7 percent (excellent), up from 48.2 percent in a year
• ROIC = 16.2 percent, matching last year's value
  

The measures that hurt the gauge were:

• Accrual Ratio = +0.3 percent, down from +0.4 percent in a year
  
• Operating Expenses/Revenue = 82.8 percent, slightly above last year's 82.7 percent.
  

Value. BUD's stock price rose over the course of the quarter from $49.99 to $52.34, before receding in January. The Value gauge, based on the year-end price, decreased to 1 point, compared to 3 points three months ago (and 2 points twelve months ago).

• Price/Revenue ratio = 2.3, a little lower than its five-year median of 2.5
• Enterprise Value/Cash Flow = 16.2, down slightly from 16.8 in December 2006
• P/E = 18.2, down slightly from 19.4 one year ago
  
• P/E to S&P 500 average P/E = 11 percent premium, a little above its five-year median
  

The average P/E for the Alcoholic Beverages industry is 18. The average Price/Revenue for the industry is currently 2.0.

Now at 22 out of 100 possible points, the Overall gauge remains weak. The shares continue to trade at hard-to-explain premiums to the market, given that the growth rates are modest and operating costs are rising. Pleasing EPS growth rates can be partially attributed to the 4.8 percent reduction in the number of diluted common shares.