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Message
re: Stocks...
Posted on 4/14/10 at 9:34 pm to RedStickBR
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
2
Posted on 4/14/10 at 10:32 pm to kfizzle85
Wow. Okay, thank you for the very detailed response. My knowledge of this stuff is confined mainly to what I need in order to be a successful trader, so a lot of the transactional issues you speak of are WAY over my head. When I get into business school, I'll be able to have a much more in depth conversation with you about some of this applied knowledge (or at least that's the hope).
If you don't mind, I may just kind of pick at your response over the course of a few posts as this really is a lot to think about all at once. Two things I'd like to talk about first: Earnings v. Revenues; Taxes
It just seems to me that earnings are what equity investors are most concerned with. How often do you here someone say, "Hey, fizz, when does GOOG report revenues?" Maybe in your line of work you do legitimately hear that. But IME individual investors are fixated on earnings as they are below the line. Revenues mean nothing in and of themselves. It's profit that counts for individual investors. As investopedia says and I agree with:
On to taxes. I was off on my thinking the increase in taxes was due to expansion. I'm going off of memory here and it's been a few weeks since they reported. Here is the exact phraseology from the filings:
Any insight into this would be very much appreciated.
Here's another snippet:
As you can see, the increase in taxes really hurt us, but not nearly as much as the expenses incurred from relocating corporate and from increased advertising and marketing fees due to moving into 9 new stores/markets. These expenses will be nonexistent and minimized, respectively, next quarter, in my opinion.
Here are some more snippets:
Am I missing anything? Our margins are fine. Our SG&A will be reduced. Taxes will still be around. But sales, gross profit, operating income, and net income should all be in good shape for next quarter if the past quarter is any indication. Remember that the company does better in Q2 than Q1, better in Q3 than Q2, and best in Q4. It seems the first quarter was a good quarter to hash out a bunch of these one-time expenses as there is more room for outstanding results in later quarters anyway.
If you don't mind, I may just kind of pick at your response over the course of a few posts as this really is a lot to think about all at once. Two things I'd like to talk about first: Earnings v. Revenues; Taxes
It just seems to me that earnings are what equity investors are most concerned with. How often do you here someone say, "Hey, fizz, when does GOOG report revenues?" Maybe in your line of work you do legitimately hear that. But IME individual investors are fixated on earnings as they are below the line. Revenues mean nothing in and of themselves. It's profit that counts for individual investors. As investopedia says and I agree with:
quote:
Earnings are perhaps the single most studied number in a company's financial statements because they show a company's profitability.
On to taxes. I was off on my thinking the increase in taxes was due to expansion. I'm going off of memory here and it's been a few weeks since they reported. Here is the exact phraseology from the filings:
quote:
We account for income taxes pursuant to the provisions of ASC 740 “Income Taxes” (formerly known as SFAS No. 109, Accounting for Income Taxes ). The effective tax rate was 48 percent for the first quarter of 2010 compared to 15 percent in the first quarter of 2009. In 2009, our valuation allowance that was recorded against deferred tax assets was fully released, resulting in a net tax benefit of $20,291,000. For fiscal 2010, no valuation allowance is necessary as we believe our deferred tax assets will be fully realized. Further, the effective tax rate differs from the statutory corporate tax rate in part due to permanent book/tax differences related to the costs of acquiring a trademark and due to state taxes for various jurisdictions where we are subject to taxation. These factors were the primary drivers resulting in a higher effective tax rate for the first quarter of fiscal 2010.
Any insight into this would be very much appreciated.
Here's another snippet:
quote:
"We generated net income of $694,000 in the first quarter of fiscal 2010 compared to $800,000 for the first quarter of fiscal 2009. Our income before taxes increased by $388,000 or 41 percent. This increase in income before taxes was offset by additional income taxes of $494,000."
As you can see, the increase in taxes really hurt us, but not nearly as much as the expenses incurred from relocating corporate and from increased advertising and marketing fees due to moving into 9 new stores/markets. These expenses will be nonexistent and minimized, respectively, next quarter, in my opinion.
Here are some more snippets:
quote:
Net sales increased 41% to $23.2 million over the prior year comparative period
Gross profit increased 38% to $11.4 million over the prior year
comparative period
Operating income increased 36% to $1.4 million over the prior year comparative period
gross margins decreased 1%, 49 to 50
sg&a increased from 7.1 to 9.7mil or 37%
net income went down to 694k from 800k, ~106k, or 13%
taxes on operating income increased 352%
Am I missing anything? Our margins are fine. Our SG&A will be reduced. Taxes will still be around. But sales, gross profit, operating income, and net income should all be in good shape for next quarter if the past quarter is any indication. Remember that the company does better in Q2 than Q1, better in Q3 than Q2, and best in Q4. It seems the first quarter was a good quarter to hash out a bunch of these one-time expenses as there is more room for outstanding results in later quarters anyway.
Posted on 4/14/10 at 10:35 pm to kfizzle85
quote:
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.
LINK
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.
What???
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