PSX: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Phillips 66's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 29, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Phillips 66.

Phillips 66 is an energy company with refining, midstream, downstream, and chemical operations. An independent for decades, Phillips Petroleum merged with Conoco in 2002 to form the giant ConocoPhillips. Phillips became independent again in 2012 -- this time with the iconic "Phillips 66" brand as the company name -- when it was spun off from ConocoPhillips.  Phillips 66 operates refineries for converting crude oil into gasoline and other fuels; the company's San Francisco refinery is being transformed to process renewable oils, instead of crude oil.  The company's products are sold by a large number of branded gas stations and other outlets.  Through the Phillips 66 Partners master limited partnership, Phillips 66 also owns pipelines and terminals for transporting energy products between processing plants and storage facilities.  The company's chemicals business is a 50 percent share of Chevron Phillips Chemicals Company.

Shares of Phillips 66 now trade for about $72 each, giving the company a market value of $32 billion. These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

Phillips 66 incurred a loss of $3 billion on revenue of $77 billion during the last year. In the quarter that ended on 30 September 2020, Phillips essentially broke even (excluding certain items), which significantly beat the minus $0.80 per share Wall Street consensus forecast. See https://tinyurl.com/y25p7m47 for Phillips's most recent quarterly report.

Revenue in the September 2020 quarter totaled $15.9 billion, 41 percent less than last year's $27.2 billion. The Refined petroleum products business was responsible for 79 percent of overall revenue, and this unit's revenue percent fell by 43.8 percent compared to the year-earlier result. The Crude oil resales business contributed 14 percent of revenue, and this unit's revenue decreased by 37.4 percent. The Natural gas liquids unit supplied 6 percent of revenue, and the value fell by 5.8 percent

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Phillips 66 management described their expectations for the fourth quarter of 2020 in October after they last reported quarterly results.

In Chemicals, we expect the fourth-quarter global O&P utilization rate to be in the mid-90s. In Refining, crude utilization will be adjusted according to market conditions. In October, utilization has been in the mid-60% range, impacted by downtime at the Lake Charles and Alliance refineries. We expect fourth-quarter pre-tax turnaround expenses to be between $80 million and $100 million. We anticipate fourth- quarter Corporate and Other costs to come in between $220 million and $230 million pre-tax.

The guidance lacks the kind of details I need to prepare an earnings estimate.  But, it is noteworthy that refinery utilization was lower than normal in October because that suggests revenue and operating margins won't be as high as they might have been.  The expense estimates are within normal ranges.

To estimate revenue and the cost of goods sold (which I define as the sum of purchased crude oil and operating expenses), I examined how these figures at Phillips 66 have historically varied with the price of oil, gasoline, and other fuels. I then input the prices of these commodities during the fourth quarter of 2020, as published by the EIA.  This approach yielded a revenue estimate of $17.1 billion and a CGS estimate of $16.3 billion.  Finally, I backed these numbers down to $16.7 billion and $16.0 billion to reflect the lower refinery utilization rate mentioned above.

For the other lines on the Income Statement, I tried to choose values that were consistent with the company's historical results.  I'm more confident in some numbers than others.

The resulting estimate for Net Income is $100 million ($0.23 per share).

The following Income Statement summarizes the estimates made as discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#phillips66  #psx  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

COP: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for ConocoPhillips's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about ConocoPhillips.

ConocoPhillips is the biggest U.S.-based firm focused solely on energy exploration and production. It assumed its current name when it merged with Phillips Petroleum in 2002.  A decade later, the midstream and downstream assets were spun off as "Phillips 66." ConocoPhillips, like many in the industry, is now struggling with low oil and gas prices, which reduce the company's earnings and cash flows. The industry has been consolidating as a result, and ConocoPhillips has been no exception.  ConocoPhillips announced an agreement in October 2020 to acquire Concho Resources, which is a top producer in the Permian basin, in an all-stock transaction worth (when the deal was made) $9.7 billion plus $3.9 billion of debt assumed.

Shares of ConocoPhillips now trade for about $47 each, giving the company a market value of $50 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

ConocoPhillips incurred a loss of $1 billion on revenue of $21 billion during the last year. In the quarter that ended on 30 September 2020, ConocoPhillips lost $0.31 per share (excluding certain items), which significantly beat the -$0.58 Wall Street consensus forecast. See https://tinyurl.com/y5m9cbjq for ConocoPhillips's most recent quarterly report.

Revenue in the September 2020 quarter totaled $4.4 billion, 43 percent less than last year's $7.8 billion. The Crude Oil business was responsible for 53 percent of overall revenue, and this unit's revenue percent fell by 49.7 percent compared to the year-earlier result. The Natural Gas business contributed 34 percent of revenue, and this unit's revenue decreased by 16.1 percent. The Natural Gas Liquids and Other unit supplied 13 percent of revenue, and the value fell by 58.7 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

ConocoPhillips management described their expectations for the fourth quarter of 2020 in October after they last reported quarterly results.

Outlook

Fourth-quarter 2020 production is expected to be 1,125 to 1,165 MBOED, resulting in full-year 2020 production guidance of 1,115 to 1,125 MBOED. This guidance excludes Libya.

Operating plan capital for 2020 is expected to be $4.3 billion. This guidance excludes approximately $0.5 billion for opportunistic acquisitions completed during the year.

The company's production (ex-Libya) was 1066 thousand Barrels of Oil Equivalent per Day (MBOED) in the September 2020 quarter.  The estimate of 1125 to 1165 MBOED equates to a sequential gain between 5.5 percent and 9.3 percent.

ConocoPhillips's revenue in any given period of time is determined by the production level during that period and by the selling price of the oil and gas produced.  In the fourth quarter of 2020, the price of West Texas Intermediate oil increased by 4 percent, from $40.89 in the third quarter to $42.45, according to the EIA.  The Henry Hub price of natural gas went up much more, almost 27 percent.

(See https://www.eia.gov/dnav/pet/pet_pri_spt_s1_m.htm and https://www.eia.gov/dnav/ng/hist/rngwhhdm.htm)

Starting with third quarter revenue of $4.386, and assuming a 7.5 percent production increase, and 15 percent average price increase, I come up with an estimate for fourth-quarter revenue of $5.4 billion.  Obviously, there's a fair degree of uncertainty with this estimate.

Margins should also improve with higher selling prices.  The Gross Margin was 36 percent in the third quarter, and between 46 and 49 percent in 2019.  I've assumed 42 percent for the fourth quarter.  

The Depreciation expense, while somewhat variable, is usually around $1.4 billion per quarter.  The exploration expense is usually over $100 million, so I've assumed $150 million.  Sales, General, and Administrative (SG&A) expenses are also variable, but 5 percent of Revenue isn't a bad benchmark.  I bumped the number up to $300 million to cover expenses related to the planned Concho merger.

For the other lines of the Income Statement, I tried to choose values consistent with historical results.  This was a bit of challenge in some cases, and a few numbers are little more than guesses.

I end up with an earnings estimate of $253 million, or $0.23 per share.

The following Income Statement summarizes the figures discussed above.

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#conoco  #cop  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

WRK: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for WestRock's earnings for fiscal 2021's first quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about WestRock.

WestRock is a leading, multinational manufacturer of corrugated packaging, packaging for consumer goods, and other paper products.  WestRock was formed in 2015 when RockTenn and MeadWestvaco merged.  The combined company spun off its specialty chemicals operations and Home, Health and Beauty (HH&B) business in order to acquire several other firms in the  paper and packaging business.  The largest acquisitions were KapStone Paper & Packaging for $4.9 billion (2018) and Multi Packaging Solutions for $1.35 billion (2017).  In May 2020, in response to COVID-19, WestRock announced steps to reduce its expenses and to conserve cash.  Cutting the common stock dividend was one such step. Later in 2020, WestRock recorded a $1.3 billion non-cash charge to lower the carrying value of Consumer Packaging assets.

Shares of WestRock now trade for about $45 each, giving the company a market value of $12 billion. These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

WestRock incurred a loss of $691 million on revenue of $18 billion during the last year.  In the quarter that ended on 30 September 2020, WestRock earned $0.74 per share (excluding certain items), which beat the $0.68 Wall Street consensus forecast. See https://tinyurl.com/y237sr6f for WestRock's most recent quarterly report.

Revenue in the September 2020 quarter totaled $4.5 billion, 4 percent less than last year's $4.7 billion. The Corrugated Packaging business was responsible for 65 percent of overall revenue, and this unit's revenue percent fell by 4.0 percent compared to the year-earlier result. The Consumer Packaging business contributed 36 percent of revenue, and this unit's revenue decreased by 3.6 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

WestRock management described their expectations for the first quarter of fiscal 2021 in October 2020 after they last reported quarterly results.

The guidance indicates that WestRock expects Adjusted EPS (a non-GAAP figure) in the December 2020 quarter to be between $0.46 and $0.54.  The equivalent figure was $0.58 per share in the December 2019 quarter, so an earnings decline is the expectation.  Note also that GAAP EPS will be lower than Adjusted EPS, although the difference between these figures varies quite a bit from quarter to quarter.

The guidance does not include a quantitative estimate for revenues, but the comments don't suggest optimism.  My guess is a 3-percent decline from Revenues of $4.47 billion in September 2020 quarter.

The Gross Margin has been about 18.2 percent in recent periods, but I am going with 18.0 percent because the guidance hints at higher costs.  For a similar reasons, I'm assuming Sales, General, and Administrative (SG&A) expenses will edge up to about 10 percent of revenue.  For the other lines of the Income Statement, I followed the trends evident in WestRock's historic results.

With these assumptions, the GAAP EPS turns out to be $0.44 per share.  Non-GAAP EPS would be higher, presumably within the guidance range.  I have no reason to believe there will be a larger-than-usual charge that would impact GAAP but not non-GAAP results.

The following Income Statement results from estimates made as discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#westrock  #wrk  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

PG: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Procter & Gamble's earnings for fiscal 2021's second quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Procter & Gamble.

P&G, which owns brands familiar to shoppers around the world, is a long-time giant of the consumer products industry. COVID-19 increased consumer and business demand for cleaning products and this has boosted P&G's sales, as did the greater amount of time people are spending at home.  Note that P&G acquired in November 2018 the over-the-counter (OTC) consumer healthcare business of Germany's Merck for $3.7 billion in cash.

Shares of P&G now trade for about $139 each, giving the company a market value of $364 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

P&G recorded profits of $14 billion on revenue of $72 billion during the last year. In the quarter that ended on 30 September 2020, P&G earned $1.63 per share, which significantly beat the $1.42 Wall Street consensus forecast. See https://tinyurl.com/yxf89wdr for P&G's most recent quarterly report.

Revenue in the September 2020 quarter totaled $19.3 billion, 9% more than last year's $17.8 billion. The Fabric and Home Care business was responsible for 34% of overall revenue, and this unit's revenue grew by 14.0% compared to the year-earlier result. The Baby, Feminine and Family Care business contributed 24% of revenue, and this unit's revenue increased by 3.0%. The Beauty unit supplied 20% of revenue, and the value rose by 7.0%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

P&G management updated their expectations for fiscal 2021 in October 2020 when they last reported quarterly results.

P&G raised its outlook for fiscal 2021 all-in sales growth from a range of one to three percent to a range of three to four percent versus the prior fiscal year. The revised range includes an estimated one percent negative impact from foreign exchange. The Company raised its outlook for organic sales growth from a range of two to four percent to a range of four to five percent.

The Company said it now expects fiscal 2021 GAAP diluted net earnings per share growth in a range of four to nine percent versus fiscal 2020 GAAP EPS of $4.96. GAAP EPS guidance now includes non-core charges in the range of $0.15 to $0.20 per share from the early debt retirement project that was initiated earlier this month. P&G raised guidance for core earnings per share growth from a range of three to seven percent to a range of five to eight percent versus fiscal 2020 core EPS of $5.12. The Company said its current outlook includes headwinds of approximately $325 million after-tax from foreign exchange impacts and $50 million after-tax from higher freight costs. The outlook also includes an estimated $150 million after tax headwind for the combined impacts of higher interest expense and lower interest income. These headwinds should be partially offset by approximately $175 million after-tax benefit from lower commodity costs.

P&G did not provide any specific guidance for the December 2020 quarter.  

Revenue is predicted to rise between 3 and 4 percent for the fiscal year, but this figure grew 8.5 percent in the September quarter.  This may indicate that management is somewhat concerned that the overall economic impact of COVID-19 might start to have more of a negative effect on P&G.  I'm going to assume that P&G's revenue in the December 2020 quarter will only be 3 percent more than in the December 2019 period.

GAAP EPS for the fiscal year is expected to increase between 4 and 9 percent from last year's $4.96, which sets the range as $5.16 to $5.41.  The reported EPS for the September quarter was $1.63, which leaves $3.53 to $3.78 for the final nine months of the fiscal year.  It's also worth noting that operating earnings per share will have to be $0.15 to $0.20 higher than this range to compensate for an early debt retirement charge.

For the Gross Margin and Sales, General and Administrative (SG&A) expenses, I'm assuming their values as a percent of sales will be consistent with P&G recent quarters.  I'm not sure if forecast for the early debt retirement charge will be fully recognized in the December quarter, but I reduced my estimate of non-operating gains by $400 million to account of this charge.

For the other lines of the Income Statement, I tried to choose values consistent with historical results.  I end up with an earnings estimate of $3.15 billion, or $1.20 per share.

The following Income Statement results from estimates made as discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #p&g  #pg  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

KMI: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Kinder Morgan's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 20, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Kinder Morgan.

Kinder Morgan owns and operates a sprawling network of pipelines and associated terminals for transporting oil, gas, carbon-dioxide, and other products. About 40 percent of the natural gas consumed in the U.S. is carried by Kinder Morgan pipelines.  In 2014, the company completed a series of acquisitions that converted general and limited partnership interests in various Kinder Morgan and El Paso entities into full ownership.  As was the case for nearly every company in the industry, Kinder Morgan's results in 2020 were hurt by the significant drop in worldwide demand for energy products as COVID-19 led to reduced economic activity.  The resulting decline in the price of oil and gas also impaired (i.e., reduced the carrying value of) the tangible and intangible assets on the company's balance sheet. 

Shares of Kinder Morgan, Inc., now trade for about $14 each.  These shares can be found in the Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Kinder Morgan recorded profits of $122 million on revenue of $12 billion during the last year. In the quarter that ended on 30 September 2020, Kinder Morgan earned $0.18 per share (excluding certain items), which missed the $0.20 Wall Street consensus forecast. See https://tinyurl.com/y2hps7cd for Kinder Morgan's most recent quarterly report.

Revenue in the September 2020 quarter totaled $2.9 billion, 9% less than last year's $3.2 billion. The Natural Gas Pipelines business was responsible for 62% of overall revenue, and this unit's revenue fell by 6.5% compared to the year-earlier result. The Products Pipelines business contributed 15% of revenue, and this unit's revenue fell by 8.7%. The Terminals and CO2 unit supplied 23% of revenue, and the amount fell by 16.3%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

The expectations Kinder Morgan's management communicated for the December 2020 quarter last October are shown below.  Unfortunately, for my purposes here, the guidance is for Distributable Cash Flow (DCF) and Adjusted Earnings Before Interest expense, income Taxes, Depreciation, depletion, amortization (DD&A), and Amortization of excess cost of equity investments and certain items (EBITDA).  The company does not provide guidance for GAAP net income, claiming it is impractical to make the necessary predictions.

For 2020, KMI’s original budget contemplated DCF of approximately $5.1 billion ($2.24 per common share) and Adjusted EBITDA of approximately $7.6 billion. Because of the pandemic-related reduced energy demand and the sharp decline in commodity prices, the company expects DCF to be below plan by slightly more than 10% and Adjusted EBITDA to be below plan by slightly more than 8%. As a result, KMI expects to end 2020 with a Net Debt-to-Adjusted EBITDA ratio of approximately 4.6 times.

Market conditions also negatively impacted a number of planned expansion projects such that they are not needed at this time or no longer meet our internal return thresholds. We therefore expect the budgeted $2.4 billion of expansion projects and contributions to joint ventures for 2020 to be lower by approximately $680 million. With this reduction, DCF less expansion capital expenditures is improved by approximately $135 million compared to budget, helping to keep our balance sheet strong.

The guidance indicates that Kinder Morgan expects DCF for the year to be less than 90 percent of $5.1 billion, or $4.59 billion.  DCF realized during the first nine months of 2020 was $3.35 billion, so the fourth-quarter estimate is $1.24. billion or a little less.  Similarly, the Adjusted EBITDA guidance for the year is 92 percent of $7.6 billion, or $7.0 billion.  For the fourth quarter, the estimate is $7.0 billion less the $5.13 billion of the first nine months of 2020, or $1.87 billion.

A prediction for GAAP net income can be derived from the DCF or Adjusted EBITDA estimates, but the calculation in each case requires approximations to account for the many items excluded from DCF and Adjusted EBITDA.

Consider Adjusted EBITDA:  During the first nine months of 2020, GAAP net income was about $5.6 billion less than Adjusted EBITDA.  However, $1.6 billion of this amount was a one-time impairment charge.  The difference between GAAP net income and Adjusted EBITDA was $4.0 billion, or $1.33 billion per quarter, excluding the impairment.  

Subtracting $1.33 billion from the $1.87 billion Adjusted EBITDA estimate yields $0.54 billion, or $540 million, as the GAAP net income estimate for the December 2020 quarter.

Coming up with an Income Statement prediction that would generate $540 million ($0.24 per share) in earnings is an even trickier proposition, and one most certainly prone to error.  But the following takes into consideration the information mentioned above and trends seen in the company's historical results. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #kindermorgan  #kmi  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

ADM: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Archer Daniels Midland's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on February 2, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about ADM.

Chicago-based ADM is a global agribusiness that purchases, transports, stores, processes, and merchandises agricultural commodities (including oilseeds, corn, and wheat) and products (such as vegetable oils, flour, other food ingredients, livestock feed, and biofuels).  In the first quarter of 2019, ADM acquired Neovia and Florida Chemical Company as it seeks to become one of the world’s "leading nutrition companies."  Separately, ADM is creating an independent ethanol subsidiary that it may eventually sell or spin-off.

Shares of ADM now trade for about $51 each.  These shares can be found in the Standard and Poors 500, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

ADM recorded profits of $2 billion on revenue of $63 billion during the last year. In the quarter that ended on 30 September 2020, ADM earned $0.89 per share (excluding certain items), which significantly beat the $0.71 Wall Street consensus forecast. See https://tinyurl.com/y5v988oj for ADM's most recent quarterly report.

Revenue in the September 2020 quarter totaled $15.1 billion, 10% less than last year's $16.7 billion. The Agricultural Services and Oilseeds business was responsible for 76% of overall revenue, and this unit's revenue fell by 8.6% compared to the year-earlier result. The Carbohydrate Solutions business contributed 14% of revenue, and this unit's revenue fell by 19.5%. The Nutrition unit supplied 10% of revenue, and the amount was essentially unchanged from the year-earlier period.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

ADM management communicated some expectations for the December 2020 quarter during the conference call with financial analysts after the company announced its third-quarter results last October.  A few relevant excerpts follow:

Looking ahead, we expect to see strong North American exports and global crush margins in the fourth quarter, combined to contribute to a very strong Ag Services and Oilseeds performance, with results significantly higher than the third quarter of this year, though lower than Q4 of 2019, which included a $270 million benefit for 2 years of the retroactive biodiesel tax credit.

Looking ahead, we expect the fourth quarter for Carbohydrate Solutions to be close to Q3 of this year and substantially higher than the fourth quarter of 2019, driven by improved year-over-year fuel ethanol margins and higher industrial-grade sales. While Sweetener and Flour volumes will still be impacted by weaker food service demand, we expect the year-over-year percentage decline to be smaller than it was in Q3.

Looking ahead to the fourth quarter, we expect nutrition to deliver another quarter of 20-plus percent year-over-year OP growth with a typically seasonally weaker Q4 in Human Nutrition, offset by seasonally stronger Animal Nutrition

The guidance above, if I'm interpreting it correctly, suggests that ADM's Segment Operating Profits for the fourth quarter may be in the ranges listed below.

Corporate results that subtract from Segment Operating Profit averaged $400 million per quarter during the first nine months of 2020.  If the fourth quarter turns out to be similar, Income before Taxes could be $380 to $540 million.

It's not the ideal analytical approach but, lacking other definitive information, I played around with the Income Statement to get Income before Taxes to equal $460 million (midpoint of the range above), while keeping each line more or less consistent with the company's historical results.  The result was an estimate for earnings of $413 million ($0.73 per share).

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #adm  #archerdanielsmidland  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

AAPL: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Apple's earnings for fiscal 2021's first quarter, which ended on December 26, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on January 28, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Apple.

Apple became one of the world's most valuable companies by designing and selling stylish, easy-to-use computers, tablets, smartphones, music players, and watches, as well as software and media.  Services for these devices are also a lucrative and growing business for Apple, but selling iPhones is, by far, the company's largest single revenue source. The transition to 5G mobile technology may serve to boost iPhone sales even higher.  Apple is now selling laptops with fast, power-efficient processors it designed, replacing chips made by Intel, and they expectation is that other Apple-designed chips will be included in future products.  Apple's shares split 4-for-1 on 28 August 2020; they had split 7-for-1 just six years earlier.

Shares of Apple now trade for about $130 each.  These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Apple recorded profits of $57 billion on revenue of $275 billion during the last year.  In the quarter that ended on September 26, 2020, Apple earned $0.73 per share, which beat the $0.71 Wall Street consensus forecast. See https://tinyurl.com/yx9xv84k for Apple's most recent quarterly report.

Revenue in the September 2020 quarter totaled $64.7 billion, 1% more than last year's $64.0 billion. The iPhone business was responsible for 41% of overall revenue, and this unit's revenue fell by 20.7% compared to the year-earlier result. The Services business contributed 22% of revenue, and this unit's revenue grew by 16.3%. The Mac unit supplied 14% of revenue, and the amount grew by 29.2%.  

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Apple communicated its expectations for the December 2020 quarter last October during the conference call it held for financial analysts after it released the results for the September quarter. (It would have been nice if they had included the guidance in their earnings press release or the associated 8-K SEC filing.) Apple declined to provide specific revenue guidance because of the uncertainties associated with COVID-19, but they did provide some information about the company's outlook.

Given the continued uncertainty around the world in the near term, we will not be issuing revenue guidance for the coming quarter. However, we are providing some insights on our expectations for the December quarter for our product categories. These directional comments, assume that COVID related impacts to our business in November and December are similar to what we’re seeing in October.

We just started shipping iPhone 12 and 12 Pro, and we’re off to a great start. We are also excited to start preorders on iPhone 12 Mini and 12 Pro Max next Friday. Given the tremendously positive response, we expect iPhone revenue to grow during the December quarter, despite shipping iPhone 12 and 12 Pro four weeks into the quarter, and iPhone 12 Mini and 12 Pro Max seven weeks into the quarter. We expect all other products in aggregate to grow double digits, and we also expect services to continue to grow double digits.

For gross margin, we expect it to be similar to our most recent quarters, despite the costs associated with the launch of several new products. For OpEx, we expect to be between $10.7 billion and $10.8 billion. We expect OI&E to be around $50 million, and the tax rate to be around 16%.

In the quarter that ended in December 2019, Apple's sales totaled $91.8 billion (see below), with the iPhone responsible for $56 billion or almost 61 percent.  Lacking more specific guidance, I've assumed iPhone sales in the December 2020 quarter will increase 3 percent, and sales of all other products and services will rise 10 percent.  These assumptions yield a revenue estimate of $97.1 billion

1) Net sales by category:
iPhone	$	55,957			$	51,982
Mac	7,160				7,416
iPad	5,977				6,729
Wearables, Home and Accessories	10,010				7,308
Services	12,715				10,875
Total net sales	$	91,819

I'm also assuming the Gross Margin will be 38.2 percent, which is about what it has been recently.  The other lines of the Income Statement get determined fairly easily from Apple's guidance and/or historical results.

This process yields an earnings estimate of $22.2 billion ($1.30 per share).

The following Income Statement summarizes the figures discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #apple  #aapl  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis