P&G: Earnings Report for the Quarter Ending December 31, 2020

Procter and Gamble (P&G) reported before the market opened on January 20, 2021, it earned $1.47 per diluted share in the quarter that ended on December 31, 2020, up 4 percent from earnings of $1.41 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Core earnings, a non-GAAP figure, rose 15 percent to $1.64 per share from $1.42 one year earlier, a much better change than seen in the GAAP figures. Core earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits. However, caution is warranted when analyzing these figures because management has considerable leeway in choosing which GAAP-required items to exclude.

This post compares the quarterly GAAP Income Statement published by P&G to the predictions I made in the “Look Ahead” post I shared earlier.   

First a little background about the company:  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.

Revenue in the December 2020 quarter totaled $19.7 billion, 8 percent more than last year's $18.2 billion.   I had predicted Revenue of $18.8 billion, and the actual figure beat this by 5.1 percent.

The Fabric and Home Care business was responsible for 33 percent of overall revenue, and this unit's revenue grew by 12.0 percent compared to the year-earlier result. The Baby, Feminine and Family Care business contributed 25 percent of revenue, and this unit's revenue increased by 6.0 percent. The Beauty unit supplied 19 percent of revenue, and this business's revenue rose by 6.0 percent.

The Gross Margin strengthened from 51.4 percent of revenue to 53.1 percent, a sign that P&G sold its output and services at more profitable prices relative to production costs.  I had assumed the Gross Margin would be 51.0 percent, and the actual margin was much more profitable.

Sales, General, and Administrative expenses rose from $4.9 billion in the year-earlier quarter to $5.1 billion, but SG&A decreased from 26.8 percent to 25.9 percent of quarterly revenue.  This shows the company spent less per dollar of sales on other operational costs, such as marketing. I had expected SG&A to be 28 percent of revenue, a higher figure than the actual percentage.

Interest and other non-operating items totaled a net expense of $500 million.  I had predicted $425 million.  The non-operating  figure was pushed up by a one-time charge for early repayment of long-term debt, which was expected.  I had predicted $425 million.  

The effective income tax rate rose by 2.9 percent to 20.3 percent, which had a negative effect on net income.  The rate was higher than the 18.5 percent I had expected.  

Net Income attributable to P&G increased 3.7 percent to $3.85 billion, and it beat my estimate by 22 percent.  EPS, as mentioned above, grew 4.3 percent to $1.47 per share, handily beating my $1.20 estimate.

In summary, P&G’s revenue and operating margins increased by healthy amounts in the latest quarter, when compared to the year-ear period.  Negative factors included the one-time debt extinguishment charge and a higher tax rate.  All in all, though, it was a good quarter for P&G, and much better than I had predicted.

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

GOOG/GOOGL: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Alphabet'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 getting into the details, let's take a step back and start with background information about Alphabet.

Alphabet was formed in 2015 as the holding company for Google and various smaller businesses known as "Other Bets."  Alphabet has three classes of common shares, with Class B shares, which are primarily owned by Google's founders, having much greater voting rights than the Class A (ticker GOOGL) shares.  Class C shares (ticker GOOG) have no voting rights.  

Google's products include Search, Maps, Gmail, Android, Chrome, Google Cloud, YouTube and (recent acquisition) Fitbit.  Even though Alphabet also controls businesses such as Calico, GV, Verily, Waymo, and X, Alphabet's revenues are almost entirely due Google's ability to deliver online advertising.  Google (and, therefore, Alphabet) has been benefitting as commerce moves on line, and the COVID pandemic has accelerated this trend.  But, Google's strength can also be a concern.  In October 2020, the U.S. filed a civil antitrust lawsuit claiming that Google has abused its market position in the search and search advertising markets.  This follows a decision by the European Union in June 2018 to fine Google 4.34 billion euro ($5 billion) for abusing the dominance of its Android mobile operating system. One year earlier, the EU fined Google €2.42 billion ($2.74 billion) for violating European competition law in the way shopping search results and ads were displayed.

Shares of Alphabet now trade for about $1728 each, giving the company a market value of $1.2 trillion. These shares can be found in the Standard and Poors 500, NASDAQ 100, and Russell 1000 stock indices.

Alphabet recorded profits of $36 billion on revenue of $172 billion during the last year. In the quarter that ended on 30 September 2020, Alphabet earned $16.40 per share, which matched the $16.40 Wall Street consensus forecast. See https://tinyurl.com/y5u7dq2l for Alphabet's most recent quarterly report.

Revenue in the September 2020 quarter totaled $46.2 billion, 14 percent more than last year's $40.5 billion. The Google Search business was responsible for 57 percent of overall revenue, and this unit's revenue grew by 6.5 percent compared to the year-earlier result. The YouTube Advertising business contributed 11 percent of revenue, and this unit's revenue increased by 32.4 percent. The Google Cloud unit supplied 7 percent of revenue, and the value rose by 44.8 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.

Alphabet described its expectations for the fourth quarter of 2020 in October after the company last reported quarterly results.  Here are some of the most salient statements:

Let me end with our outlook. Regarding revenues, in the third quarter, we benefited from a broad-based improvement in advertiser spend across all geographies and nearly all verticals. This is reflected in both Search results as well as the rebound in brand advertising spend on YouTube. While we’re pleased with our performance in the third quarter, there is obviously uncertainty in the external environment. In terms of Google Cloud, we’re pleased with the consistent strong revenue growth that you saw again this quarter, reflecting the extraordinary secular trend under way. And, with respect to Other Revenues, the primary driver of growth was Play, where revenue growth reflected elevated engagement during the pandemic on top of strong underlying growth. There are signs that user behavior is beginning to return to normalized levels. 

Moving on to profitability. We are pleased with the improvement in profitability versus the prior quarter, reflecting both the revenue performance versus Q2 as well as the tactical adjustments we made to slow down certain categories of spend in response to COVID. In particular, the deceleration in headcount growth this quarter reflects the actions we took at the outset of the pandemic to focus hiring on our highest priority areas like Google Cloud. Excluding the impact of closing the pending Fitbit acquisition, we expect a moderate further deceleration in the pace of headcount growth in the fourth quarter. 

We also saw the impact of steps we took to slow down some categories of marketing spend. In the third quarter, Sales and Marketing expenses declined year-on-year, primarily due to a planned slow down in ads & promo. We expect a more moderated year-on-year decline in Sales & Marketing in the fourth quarter as we increase spend sequentially to support product launches and the holiday season. 

Turning to Capex, once again this quarter, we had a year-on-year decline in investments primarily due to a reduced pace of real estate acquisitions which we implemented at the outset of the pandemic. Servers continued to be the largest driver of investment in the third quarter, followed by data centers. Our Capex outlook for the full year has not changed as we continue to expect a modest decrease in 2020 compared with last year.

(emphasis added)

My takeaways from this guidance are as follows:

• Maintaining the revenue growth rate for Advertising, which is the preponderance of sales, depends on how the economy holds up during the pandemic.  Cloud revenues will continue to grow, revenues from lesser sources may moderate
• Margins will improve, but by small amounts, due to less hiring
• Sales and marketing expenses will fall, but not by much.
• Capital expenditures will neither accelerate nor decelerate.

Revenues increased by 14 percent in the third quarter of 2020 relative to the year-earlier period.  Economic data for the fourth quarter isn't yet available, but data for October and November showed small declines in personal income and consumer spending.  I'm going to assume Alphabet's revenue growth slipped to 11 percent.

The gross margin was 54.3 percent in the third quarter of 2020 and 54.4 percent in the fourth quarter of 2019.  I decided to go with 54.5 percent for the latest quarter.

Research and development spending has been about $6.8 to $6.9 billion per quarter in 2020. The figure is normally somewhat higher in the fourth quarter, $7.4 billion seems like a reasonable estimate for the fourth quarter of 2020.

Sales, general, and administrative expenses have been about 17 percent of revenue, but often higher in the fourth quarter.  I've chosen 17.5 percent of revenue for my estimate.

Alphabet's income tax rate was about 16 percent the last two quarters, although it was quite variable in the preceding periods.

The resulting estimate for Net Income is $10.9 billion ($15.88 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.

#alphabet  #google #googl #goog  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

FB: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Facebook'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 27, 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 getting into the details, let's take a step back and start with background information about Facebook.

Facebook operates its eponymous and widely used social network, plus Instagram, WhatsApp, and Messenger. Advertising is responsible for the bulk of the company's revenue.  COVID-19 accelerated a shift from offline to online commerce, and this has increased demand for online advertising.  Facebook has been under fire for some time about how it protects (or doesn't) the privacy of its users, how it manages (or doesn't) inappropriate content, and whether it has abused its dominant position in the market.  In December 2020, the Federal Trade Commission sued Facebook, claiming the company's anticompetitive conduct helped it maintain a monopoly. 

Shares of Facebook now trade for about $251 each, giving the company a market value of $727 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Facebook recorded profits of $25 billion on revenue of $79 billion during the last year. In the quarter that ended on 30 September 2020, Facebook earned $2.71 per share, which significantly beat the $1.90 Wall Street consensus forecast. See https://tinyurl.com/yyzvclj2 for Facebook's most recent quarterly report.

Revenue in the September 2020 quarter totaled $21.5 billion, 22 percent more than last year's $17.7 billion. The Advertising business was responsible for 99 percent of overall revenue, and this unit's revenue grew by 22.1 percent compared to the year-earlier result. The Payments/Fees business contributed 1 percent of revenue, and this unit's revenue decreased by 7.4 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.

Facebook described its expectations for the fourth quarter of 2020 in October after the company last reported quarterly results.  Here are some of the most salient comments:

In the fourth quarter of 2020, we expect this trend to continue and that the number of DAUs and MAUs in the US & Canada will be flat or slightly down compared to the third quarter of 2020.

We expect our fourth quarter 2020 year-over-year ad revenue growth rate to be higher than our reported third quarter 2020 rate, driven by continued strong advertiser demand during the holiday season. Additionally, Oculus Quest 2 orders have been strong which should benefit Other Revenue.

We expect 2020 total expenses to be in the range of $53-54 billion, narrowed from our prior range of $52-55 billion.

We expect 2020 capital expenditures to be approximately $16 billion, unchanged from our prior outlook.

We expect our fourth quarter 2020 effective tax rate to be in the mid-teens and our full-year 2021 tax rate to be in the high-teens.

With respect to revenue in the fourth quarter, the key statement above is "fourth quarter 2020 year-over-year ad revenue growth rate to be higher than our reported third quarter 2020 rate."  Facebook's revenue in the third quarter of 2020 was 21.6 percent higher than in the third quarter of 2019.  Given this, I'm going to assume, somewhat arbitrarily, revenue in the fourth quarter will grow by 24 percent.  Since Facebook's revenue was $21.1 billion in the fourth quarter of 2019, my estimate for the latest quarter becomes $26.1 billion.

The guidance indicates that Facebook's total expenses for the entirety of 2020 are expected to be between $53 and $54 billion.  The figure presumably covers cost of sales, research and development, and sales, general, and administrative costs.  During the first nine months of 2020, these expenses totaled $38 billion.  So, the guidance is really indicating that the expenses are expected to be $15 to $16 billion in the fourth quarter.  I used historical ratios to split the $16 billion expense figure across cost of sales, R&D, and SG&A.

The final critical figure is the income tax rate.  The company's guidance suggests "mid-teens," and I have used 16 percent.

The resulting estimate for Net Income is $8.67 billion ($3.00 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.

#facebook  #fb  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

INTC: Will Exceed Prior Guidance

On January 13, 2021, Intel announced that it had chosen Pat Gelsinger to replace Bob Swan as Chief Executive Officer, effective February 15.

The press release (https://tinyurl.com/y55lnk8z) also stated that:

Intel expects its fourth-quarter 2020 revenue and EPS to exceed its prior guidance provided on October 22, 2020. In addition, the company has made strong progress on its 7nm process technology and plans on providing an update when it reports its full fourth-quarter and full-year 2020 results as previously scheduled on January 21, 2021.

The guidance provided by the company last October was for revenue of about $17.4 billion and EPS of $1.02 on a GAAP basis in the fourth quarter of 2020.  Both figures are now likely to be surpassed when Intel reports next week how well the company actually performed.  

See https://www.gcfr2.com/2020/12/intc-look-ahead-to-december-2020.html for my forecast for Intel's fourth-quarter Income Statement, which built on the figures in the initial guidance.  Since Intel gave no hint about the magnitude of the increased revenue and earnings, I am not updating the forecast.

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.

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