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re: Stocks...
Posted on 4/14/10 at 6:05 pm to kfizzle85
Posted on 4/14/10 at 6:05 pm to kfizzle85
quote:
Crazy. Those people must not spend much time at all looking at the filings, their GP% shrunk less than a third of a percent.
For traders, earnings are everything as they aren't interested in the longer-term. And for a stock priced under 5 dollars, there are going to be a lot of traders, especially after the monstrous uptrend the stock has seen.
Also, EPS are where most people come up with their valuations. EPS x A Fair P/E Ratio = the price at which you think the security should be trading. I know very few people who in real-life application use revenues in order to come up with an equity's fair value, at least not directly. They use them indirectly in coming up with a fair projected income, and thus a fair EPS, but earnings are at the very core of the analysis.
I'm playing this one differently than I'd play most others as this one is a BAH for me, so I do care about revenues and their relation to earnings.
quote:
It's a ridiculously well-capitalized company, but the earnings adjustment looks to be a product of either an artificially low tax expense last quarter, or an artificially high tax expense this quarter (ETA: I'm just looking at the first table in the Q that only has the two recent quarters). Simply based on book tax, I'd think it was the former, unless they're somehow managing to pay a 14% tax rate every quarter. I wish I had more time to look at it as a whole (or had more money so I wouldn't care as much), it looks promising between rev growth and the capitalization.
This is funny as I'm shocked you were able to come to this presumption without having read their filings. The correct answer re: your tax assessments is BOTH. In Q4'09, the company reversed their valuation allowance which resulted in them recording a significant, one-time income tax benefit, which in turn resulted in EPS of .40. Real EPS were around .05 w/ the one-time tax benefit taken out.
This quarter, they had an artificially high tax expense (around 48%). Unfortunately, it appears they will retain this rate throughout the year. As I understand it, when companies are expanding rapidly like JOEZ is, their tax rates are hiked way up. Sometimes it lasts only a quarter, sometimes the entire fiscal year. I'm guessing since we're expected to continue the rapid expansion, we must retain the artificially high rate. Still, though, with the revs way up and one-time expenses now accounted for, we should still be golden for the rest of the year. Also, the company is cyclical with a greater amount of profits being realized towards the end of the year.
Question: Who do you use for your one-stop financial data source? Most outlets have JOEZ last quarter earnings readjusted to .05. Surprised you even knew about the non-tax adjusted earnings.
1
Posted on 4/14/10 at 9:34 pm to RedStickBR
Warning: You might want to grab a beer or a smoke before you start reading. I rambled.
Gotcha.
This really gets to the point of my original question, but that is IMO and IME (in my experience), entirely dependent on what you're trying to achieve. A multiple valuation might be what traders use purely for short-term measurements, but there are several ways to value a company, and all true valuations (other than asset based measures) unilaterally revolve around projected future cash flows. The CF have to start with revenue, and revenue is the least manipulable item on the I/S.
It seems like sell-side analysts (not traders) focus almost exclusively on the revenue number (at least for big corps that I regularly pay attention to). Unless the revenue number was supposed to be 35% (or whatever) instead of 33%, I would've been surprised to see that kind of market reaction. It rarely ever happens in the large caps that I follow, the true earnings are absolutely an after-thought it seems (not my opinion, my observation of sell-side analyst opinons), and that's what provoked my initial response about revenue vs earnings expectations and market reactions.
The firm I work for typically focuses on EBIT, EBITA, and/or CFO or FCFO for valuation purposes. We usually do an asset approach (residual/enterprise value), an income approach (ebit/cf) and a market approach (multiple). If one of those is wack, it usually gets tossed. A lot of times we average the results together (depends on the purpose of the engagement and that's whole different ball of thorns). Again, I think the big difference here is the intent; our valuations are transactional in nature, traders otoh, are not.
There are several other things, like de-levering and re-levering a beta for some risk adjustment, adjusting for off-balance sheet items (which gets overly complicated with re-computing imputed interest expense in operating leases and a bunch of other garbage that I find fascinating), identifying and re-classifying non-recurring items that recur (surprise!), etc. that also come into play. The place I work with deals almost exclusively with privately held corps since its a regional audit firm, so there's almost always added premiums for control and liquidity in those cases. Clearly not an issue for most publicly traded companies, I'm just being thorough and presenting my viewpoint, since I tend to think about this stuff a lot.
I just noticed in the I/S that the number was dramatically different, but I hadn't looked at anything but the most recent Q, and it didn't have any other quarters on that first table, so I had nothing to compare it to, and I wanted to be clear on that. FWIW, that is a gigantic red-flag for earnings management. I'm presenting that viewpoint in a vacuum, so I'm not saying they are doing that necessarily, but I would be keep a close eye on that in future quarters. Seriously, google "earnings manipulation tax allowance." Its one of the most common manipulation practices around. Irrelevant for cash flows metrics, but very important for accrual metrics like net income.
48% does seem really high, I agree. The book tax rate is computed based on the expected tax rate for the entire fiscal year, and companies add/subtract to it each quarter as their full-year earnings expectations change, so it depends on expectations of future earnings to a large degree. I don't know about expansion = jacked up tax rates, afaik, you don't pay a higher tax rate for making money faster. The only reason the rate would go up would be if they entered a new bracket (or more correctly, are assuming they're going to enter a new bracket), but either way, 48% is about 10% above the highest corp tax rate, which is 38% (I think), and that's not a temporary change that later comes down if their growth rate slows. In reality, corps don't usually pay anything close to that rate in income tax, but that's beyond the point and I don't want to get attacked by politards.
https://sec.gov/edgar/searchedgar/companysearch.html
I never use Google/Yahoo/Marketwatch/Morningstar if I want to see the real numbers. I'll use them if I want to look over something really quick just for curiosity purposes, like if I just want to see how big GOOG's balance sheet is, but if I want to know something remotely in-depth, I use their filings. All of those places tweak things to fit their templates, so they might give you a different number/omit certain line items. I don't like to use the word "misleading," as its not the purpose to mislead, its just the nature of mass data collection.
/end gigantic reply
quote:
For traders, earnings are everything as they aren't interested in the longer-term. And for a stock priced under 5 dollars, there are going to be a lot of traders, especially after the monstrous uptrend the stock has seen.
Gotcha.
quote:
Also, EPS are where most people come up with their valuations. EPS x A Fair P/E Ratio = the price at which you think the security should be trading. I know very few people who in real-life application use revenues in order to come up with an equity's fair value, at least not directly. They use them indirectly in coming up with a fair projected income, and thus a fair EPS, but earnings are at the very core of the analysis.
This really gets to the point of my original question, but that is IMO and IME (in my experience), entirely dependent on what you're trying to achieve. A multiple valuation might be what traders use purely for short-term measurements, but there are several ways to value a company, and all true valuations (other than asset based measures) unilaterally revolve around projected future cash flows. The CF have to start with revenue, and revenue is the least manipulable item on the I/S.
It seems like sell-side analysts (not traders) focus almost exclusively on the revenue number (at least for big corps that I regularly pay attention to). Unless the revenue number was supposed to be 35% (or whatever) instead of 33%, I would've been surprised to see that kind of market reaction. It rarely ever happens in the large caps that I follow, the true earnings are absolutely an after-thought it seems (not my opinion, my observation of sell-side analyst opinons), and that's what provoked my initial response about revenue vs earnings expectations and market reactions.
The firm I work for typically focuses on EBIT, EBITA, and/or CFO or FCFO for valuation purposes. We usually do an asset approach (residual/enterprise value), an income approach (ebit/cf) and a market approach (multiple). If one of those is wack, it usually gets tossed. A lot of times we average the results together (depends on the purpose of the engagement and that's whole different ball of thorns). Again, I think the big difference here is the intent; our valuations are transactional in nature, traders otoh, are not.
There are several other things, like de-levering and re-levering a beta for some risk adjustment, adjusting for off-balance sheet items (which gets overly complicated with re-computing imputed interest expense in operating leases and a bunch of other garbage that I find fascinating), identifying and re-classifying non-recurring items that recur (surprise!), etc. that also come into play. The place I work with deals almost exclusively with privately held corps since its a regional audit firm, so there's almost always added premiums for control and liquidity in those cases. Clearly not an issue for most publicly traded companies, I'm just being thorough and presenting my viewpoint, since I tend to think about this stuff a lot.
quote:
This is funny as I'm shocked you were able to come to this presumption without having read their filings. The correct answer re: your tax assessments is BOTH. In Q4'09, the company reversed their valuation allowance which resulted in them recording a significant, one-time income tax benefit, which in turn resulted in EPS of .40. Real EPS were around .05 w/ the one-time tax benefit taken out.
I just noticed in the I/S that the number was dramatically different, but I hadn't looked at anything but the most recent Q, and it didn't have any other quarters on that first table, so I had nothing to compare it to, and I wanted to be clear on that. FWIW, that is a gigantic red-flag for earnings management. I'm presenting that viewpoint in a vacuum, so I'm not saying they are doing that necessarily, but I would be keep a close eye on that in future quarters. Seriously, google "earnings manipulation tax allowance." Its one of the most common manipulation practices around. Irrelevant for cash flows metrics, but very important for accrual metrics like net income.
quote:
This quarter, they had an artificially high tax expense (around 48%). Unfortunately, it appears they will retain this rate throughout the year. As I understand it, when companies are expanding rapidly like JOEZ is, their tax rates are hiked way up. Sometimes it lasts only a quarter, sometimes the entire fiscal year. I'm guessing since we're expected to continue the rapid expansion, we must retain the artificially high rate. Still, though, with the revs way up and one-time expenses now accounted for, we should still be golden for the rest of the year. Also, the company is cyclical with a greater amount of profits being realized towards the end of the year.
48% does seem really high, I agree. The book tax rate is computed based on the expected tax rate for the entire fiscal year, and companies add/subtract to it each quarter as their full-year earnings expectations change, so it depends on expectations of future earnings to a large degree. I don't know about expansion = jacked up tax rates, afaik, you don't pay a higher tax rate for making money faster. The only reason the rate would go up would be if they entered a new bracket (or more correctly, are assuming they're going to enter a new bracket), but either way, 48% is about 10% above the highest corp tax rate, which is 38% (I think), and that's not a temporary change that later comes down if their growth rate slows. In reality, corps don't usually pay anything close to that rate in income tax, but that's beyond the point and I don't want to get attacked by politards.
quote:
Question: Who do you use for your one-stop financial data source? Most outlets have JOEZ last quarter earnings readjusted to .05. Surprised you even knew about the non-tax adjusted earnings.
https://sec.gov/edgar/searchedgar/companysearch.html
I never use Google/Yahoo/Marketwatch/Morningstar if I want to see the real numbers. I'll use them if I want to look over something really quick just for curiosity purposes, like if I just want to see how big GOOG's balance sheet is, but if I want to know something remotely in-depth, I use their filings. All of those places tweak things to fit their templates, so they might give you a different number/omit certain line items. I don't like to use the word "misleading," as its not the purpose to mislead, its just the nature of mass data collection.
/end gigantic reply
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