INTC: Gauge Analysis (updated February 15, 2021)

I have analyzed Intel's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

Intel makes semiconductor chips used in computers, servers, and many other devices. Once the clear leader of its industry, the rapid growth of mobile phones benefited competing firms that did a better job producing chips that consumed less electrical power, a key consideration.  Intel has also lost market share because of delays manufacturing new generations of chips.  For example, Apple replaced chips from Intel with faster, lower-power devices it designed itself.  When the price of Intel's shares dropped in 2020, Third Point, a hedge fund, got involved and advocated for changes.  They got their way, at least in part, when Intel announced in January 2021 that its Chief Executive Officer would be replaced by Pat Gelsinger, who was CEO of VMWare and had previously worked at Intel.  Even before external pressure to act, Intel had been selling or divesting businesses (e.g., smartphone modems, NAND devices) that it no longer wanted to compete in.

Intel recorded profits of $21 billion on revenue of $78 billion during the last year. In the quarter that ended on December 26, 2020, Intel earned $1.52 per share (excluding certain items), which significantly beat the $1.11 Wall Street consensus forecast. See Intel's most recent quarterly report.

Shares of Intel now trade for about $62 each, giving the company a market value of $255 billion. 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.

Analysis Results:

Intel's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $254.6 billion (mega-cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 1.9 (>2.0 is conservative)

    Long-term debt/Working Capital = 151% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Nineteen positive quarterly earnings reports in last 5 years (almost perfect)

    Earnings variability = 1% (negligible)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 21% (very good)

    Owner Earnings growth rate (five-year average) = 23% (very good)

    Free Cash Flow growth rate (trailing year) = 25% (very good)

    Free Cash Flow growth rate (five-year average) = 17% (good)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 32% (very good)

    Operating Profit/Sales = 30.7% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 7% (fair)

    Dividend = 26% of last year's FCF (easily sustainable with room to grow)

7. The Company's Shares are Fairly Valued: YELLOW

    Price/Owner Earnings (last year) = 14.9 (appealing)

    Price/GAAP Earnings (five-year average) = 16.9 (moderate to pricey)

    Free Cash Flow/Market Value = 8.3% (appealing, more than the five-year average of 6.8%)

    Acquirer's Multiple = 11.2 (inexpensive)

    Price/Book Value = 3.1 (more expensive than the five-year average of 2.9)

    Price/Sales = 3.3 (about the same as its five-year average)

In summary, the analysis assigned Intel Corporation five GREEN, two YELLOW, and zero RED grades.  The resulting Overall Score is 69 of the 100 possible points, which is a very good result.  The score is above the 60-point GCFR threshold, and, therefore, Intel is worthy of deeper investment research.

Check GCFR2 occasionally to see how the Overall Score changes after the company releases a new earnings report or the share price rises or falls.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #intel    #intc    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

HD: Look Ahead to January Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Home Depot's earnings for fiscal year 2020's fourth quarter, which ended on January 31, 2021, 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 getting into the details, let's take a step back and start with background information about Home Depot.

Home Depot operates about 2300 big-box home improvement stores in the U.S., Canada, and Mexico that cater both to professionals and do-it-yourself homeowners.  The COVID-19 pandemic, in some ways, benefited Home Depot as house-bound consumers started more renovation projects. However, the pandemic also led to increased labor and cleaning costs and supply chain challenges.  In December 2020, Home Depot acquired HD Supply Holdings, a former subsidiary, for $8 billion.  HD Supply distributes maintenance, repair and operations (MRO) products for use in multi-family and hospitality buildings.

Shares of Home Depot now trade for about $277 each, giving the company a market value of $299 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Home Depot recorded profits of $12 billion on revenue of $126 billion during the last year. In the quarter that ended on November 1, 2020, Home Depot earned $3.18 per share, which  beat the $3.05 Wall Street consensus forecast. 

Revenue in the November 2020 quarter totaled $33.5 billion, 23 percent more than last year.  The Building Materials business was responsible for 38 percent of overall revenue, and this unit's revenue grew by 22.3 percent compared to the year-earlier result.  The Décor business contributed 33 percent of revenue, and this unit's revenue increased by 19.5 percent.  The Hardlines unit supplied 29 percent of revenue, and this business's revenue rose by 29.0 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.

Home Depot did not provide any guidance about the fourth quarter when the company reported results last November.  I have had to rely on historical trends and national economic data to estimate the company's earnings.

The Census Bureau publishes data on U.S. Retail Sales, include data specific to Retail Sales: Building Materials, Garden Equipment and Supplies Dealers , which correlate fairly well to Home Depot's reported Revenue.  In November 2020, the index was up 16 percent when compared to the same month in 2019.  The final figures aren't yet available for December, but the advance number for the month was a stellar 22 percent than the year-earlier figure.  If Home Depot's Revenue were to increase at 19 percent (i.e., halfway between 16 and 22 percent) in the fourth quarter, the figure would be 1.19*$25.8 billion =  $30.7 billion.  For my Revenue estimate, I'm bumping this figure up to $31.0 billion to account for one month of HD Supply's sales.

Home Depot's Gross Margin is normally very close to 34 percent of Revenue, and will probably be so again in the fourth quarter.  This would translate into a Cost of Good Sold of (1-0.34)*$31.0 billion =$20.5 billion.

The Depreciation expense was $528 million in the third quarter, and I'm expecting a similar amount the fourth quarter.

In recent years, Sales, General, and Administrative (SG&A) expenses have been right around 18.7 percent of Revenue in the fourth quarter.  The SG&A estimate is 0.187*$31.0 billion =$5.8 billion.

The numbers above combine to produces an estimate for Operating Income of $4.2 billion, which is 24 percent higher than the equivalent quantity in the year-earlier quarter.

For non-operating gains and losses, I've selected figures similar to those reported in the first three quarters of the fiscal year.   

I assumed 24.3 percent for the effective income tax rate, which is similar to the rate in previous quarters for Home Depot.

With these figures, the estimate for Net Income (GAAP) in the quarter is $2.94 billion ($2.72 per share).  

I did not make any explicit provisions for acquisition transaction or financing costs.  I don't expect them to be significant.

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

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#homedepot  #hd  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

PEP: Earnings Report for the Quarter Ending December 26, 2020

PepsiCo reported before the market opened on February 11, 2021, it earned $1.33 per diluted share in the quarter that ended on December 26, 2020, up 6 percent from earnings of $1.26 in the equivalent 16 weeks 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 1 percent to $1.47 per share from $1.45 one year earlier, a less robust change than the GAAP percentage. The most significant exclusions contributing to the $0.14 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Mark to market impact [($0.05) per share], Restructuring and impairment charges [$0.09 per share], and Pension-related settlement charge [$0.11 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's primary, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by PepsiCo to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by PepsiCo's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  PepsiCo is a global food and beverage company. In addition to the eponymous soft drinks, PepsiCo also owns the Frito-Lay snack food business. In April 2020, PepsiCo acquired energy drink maker Rockstar for $3.85 billion. PepsiCo bought SodaStream in 2018 for $3.2 billion.

The following table is a simplified version of PepsiCo's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided to facilitate comparisons.

Revenue in the December 2020 quarter totaled $22.5 billion, 9 percent more than last year.  The Beverages North America business was responsible for 30 percent of overall revenue, and this unit's revenue grew by 8.6 percent compared to the year-earlier result.  The Frito-Lay North America business contributed 24 percent of revenue, and this unit's revenue increased by 5.7 percent.  The Europe unit supplied 18 percent of revenue, and this business's revenue rose by 3.8 percent.

I was expecting PepsiCo to report revenue of $21.6 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $855.0 million (4.0 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $10.4 billion in the latest quarter, which translates into a Gross Margin of 53.6 percent of revenue. Since it was lower than the 54.7 percent Gross Margin achieved in the year-earlier quarter, it's a sign that PepsiCo sold its products and services at less profitable prices relative to production costs. I was expecting the Gross Margin to be 55.0 percent in the December 2020 quarter, and PepsiCo missed that prediction by 1.4 percent.

Sales, General, and Administrative expenses totaled $9.2 billion in the December 2020 quarter, up 7.1 percent from one year ago.  SG&A expenses decreased from 41.6 percent to 41.0 percent of quarterly revenue, which shows PepsiCo spent less per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 42.0 percent of revenue, and the actual percentage turned out to be lower than the prediction.

PepsiCo's Operating Income was $2.8 billion in the quarter, up 4.7 percent from the year-earlier period.  Operating Income exceeded my $2.8 billion estimate by $18 million.

Interest and other non-operating items summed to a net expense of $469 million.  My estimate for non-operating items was $350 million.

The effective income tax rate rose by 1.7 percent to 21.1 percent, which had a negative effect on net income.  I expected the tax rate to be 21.0 percent.

Net income attributable to PepsiCo was $1.8 billion, $1.33 per share in the quarter ending December 2020.  The figures for the year-earlier quarter were $1.8 billion, $1.26/share. My earnings estimate for  the latest quarter was $1.9 billion ($1.39/share), so PepsiCo earned $0.06 per share less than I had expected.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  SG&A/Revenue 

      – Worse than expected:  Gross Margin + Misc non-operating items + Non-controlling interests 

      – Near expectations:  Revenue growth + SG&A + Interest + Income tax rate 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #pepsico    #pep    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

EIX: Look Ahead to December Quarterly Results

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

Edison International is the parent of Southern California Edison, which provides electric power to more than 15 million people.  Per government mandates, a growing percentage of this power has been derived from renewable sources. Electric utilities in California have been blamed for, and are spending considerable sums to prevent, wildfires caused by their equipment.

Shares of Edison now trade for about $58 each, giving the company a market value of $22 billion. These shares can be found in the Dow Jones Utilities Average, Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

Edison recorded profits of $356 million on revenue of $13 billion during the last year. In the quarter that ended on September 30, 2020, Edison earned $1.67 per share (excluding certain items), which matched the $1.67 Wall Street consensus forecast. See https://tinyurl.com/y4jdllsu for Edison's most recent quarterly report.

Revenue in the September 2020 quarter totaled $4.6 billion, 24 percent more than last year.

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.

Edison International updated its guidance for the entire fiscal year when it reported third-quarter results in last October. 

The columns above with guidance from last September can be ignored because the October guidance superseded any estimates issued earlier.  "Non-core Items" are  the difference between Basic (i.e., GAAP) and Core (i.e., Non-GAAP) earnings.  The $2.74 per share estimate for Non-core Items is almost the same as the actual Non-core amount during the first three quarters of 2020.  This suggests that Non-core amount in the fourth quarter will be minimal; in other words, the difference between Basic and Core EPS should be fairly small.

During the first three quarters of 2020, Edison's Core EPS was $0.57.  The company's Basic EPS guidance for the fourth quarter is, therefore, $1.73 minus $0.57 = $1.16 to $1.88 minus $0.57 = $1.31.

To estimate Revenue for the December quarter, I looked into Edison's historical financial data and found that roughly 24 percent of the company's annual Revenue gets recorded in the fourth quarter of a typical year.  The percentage can vary from year, sometimes significantly, but I consider it a reasonable basis for an estimate.  Since Revenue was $10.42 billion during the first three quarters of 2020, my estimate for the fourth quarter is $3.3 billion.

In the December quarters of 2016, 2017, 2018, and 2019, the Gross Margin averaged 37.2 percent of Revenue.  I'm assuming the figure will be similar in the fiscal year 2020.  The estimated Cost of Goods Sold is (1-0.372)* $3.3 billion = $2.1 billion 

Edison's depreciation expense was between $480 and $490 per quarter during the first nine months of 2020.  I assumed $485 million for the fourth quarter.

Miscellaneous operating expenses were over $1.3 billion in the third quarter because this period included non-core charges related to previous wildfire and mudslide events.  Since the guidance implied that non-core charges would be minimal in the fourth quarter (see above), I used only the token figure of $50 million for this line on the Income Statement.

The numbers above combine to produce an estimate for Operating Income in December quarter of about $690 million, which is more than double the equivalent quantity in the year-earlier quarter.

For the two non-operating items, I used figures from the September quarter..

Edison's effective income tax rate has been both absurdly high and absurdly low during recent quarters. In the first three quarters of the year, the company reported a tax credit of $355 million on pre-tax loss of $36 million.  I simply assumed a 10 percent tax rate, which (strangely enough) seems conservative.

After a $45 million deduction for preferred stock dividend payments, my estimate for Edison International's Net Income in the December 2020 quarter works out to be $454 million ($1.20 per share).

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

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#edison  #eix  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

CSCO: Earnings Report for the Quarter Ending January 23, 2021

Cisco Systems reported after the market closed on February 9, 2021, it earned $0.60 per diluted share in the quarter that ended on January 23, 2021, down 12 percent from earnings of $0.68 in the equivalent 13 weeks of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Non-GAAP earnings rose 3 percent to $0.79 per share from $0.77 one year earlier, a much better change than the GAAP percentage. The most significant exclusions contributing to the $0.19 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Stock-based compensation [$0.10 per share], Acquisition-related expenses [$0.06 per share], and Asset impairments and restructurings [$0.06 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's primary, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by Cisco to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Cisco's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  Founded in 1984, Cisco is a leading seller of products, such as routers and switches, and related services, for connecting devices via the Internet.  The company makes products related to the following technologies: software-defined wide area networks, cloud computing, 5G and WiFi-6, optical networking, next generation silicon, and artificial intelligence.  A frequent acquirer of other companies, Cisco expects it will soon complete the $4.5 billion acquisition of Acacia Communications, Inc., a company that sells high-speed coherent optical interconnect products.

The following table is a simplified version of Cisco's Income Statement for the quarter that ended in January 2021, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided to facilitate comparisons.

Revenue in the January 2021 quarter totaled $12.0 billion, about the same as last year.  The Infrastructure Platforms business was responsible for 53 percent of overall revenue, and this unit's revenue percent fell by 3.0 percent compared to the year-earlier result.  The Applications business contributed 11 percent of revenue, and this unit's revenue was essentially unchanged percent.  The Services unit supplied 28 percent of revenue, and this business's revenue rose by 2.0 percent.

I was expecting Cisco to report revenue of $11.9 billion for the January 2021 quarter.  The actual amount surpassed my estimate by $60.0 million (0.5 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $4.2 billion in the latest quarter, which translates into a Gross Margin of 65.1 percent of revenue. Since it was higher than the 64.7 percent Gross Margin achieved in the year-earlier quarter, it signifies that Cisco sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 62.5 percent in the January 2021 quarter, and Cisco exceeded that prediction by 2.6 percent.

Cisco spent $1.5 billion on Research and Development in the latest quarter, down from $1.6 billion one year ago. I had estimated that R&D expenses would be $1.6 billion.  R&D was 12.8 percent of Revenue.

Sales, General, and Administrative expenses totaled $2.8 billion in the January 2021 quarter, up 1.0 percent from one year ago.  SG&A expenses increased from 22.8 percent to 23.1 percent of quarterly revenue, which shows Cisco spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 21.8 percent of revenue, and the actual percentage turned out to be higher than the prediction.

The last operating expense line on the Income Statement is where the sum of other operating income and charges, such as restructuring, may be listed.  For Cisco the amount listed on this line was a $273 million loss in the latest quarter.  I was expecting a net loss of $200 million.

Cisco's Operating Income was $3.2 billion in the quarter, down 4.6 percent from the year-earlier period.  Operating Income exceeded my $3.0 billion estimate by $185 million.

Interest and other non-operating items summed to a net income of $32 million.  My estimate for non-operating items was $80 million.

The effective income tax rate rose by 3.3 percent to 21.8 percent, which had a negative effect on net income.  I expected the tax rate to be 19.0 percent.

Net income attributable to Cisco was $2.5 billion, $0.60 per share in the quarter ending January 2021.  The figures for the year-earlier quarter were $2.9 billion, $0.68/share. My earnings estimate for  the latest quarter was $2.5 billion ($0.60/share), so Cisco Systems earned the $0.60 I had predicted.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  Gross Margin 

      – Worse than expected:  SG&A + SG&A/Revenue + Special operating items + Misc non-operating items + Interest + Income tax rate 

      – Near expectations:  Revenue growth + R&D 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #cisco    #csco    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

WMT: Look Ahead to January 2021 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Walmart's earnings for fiscal year 2021's fourth quarter, which ended on January 31, 2021, 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 18, 2021, 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 Walmart.

Walmart is large retailer known for keeping its costs and prices low.  In addition to its many eponymous storers, Walmart also owns Sam's Club warehouses.  To fight off competition from Amazon and other online retailers, Walmart has invested significant sums to improve Walmart.com.  This strategy is starting to pay off, and the company's online sales are growing rapidly.  The person that led Walmart's ecommerce efforts, Marc Lore, left the company on January 31, 2021, so that might be a concern.  Walmart's reputation for low prices, especially for groceries, cleaning products, and other consumer staples, paid off in the early days of the pandemic when home-bound consumers were stocking up on supplies.  Walmart is now taking steps to reduce its overseas operations.  It announced an agreement to sell its UK subsidiary and business in Argentina.  Walmart also made a deal to sell a majority interest in its subsidiary in Japan.

Shares of Walmart now trade for about $144 each, giving the company a market value of $411 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.

Walmart recorded profits of $20 billion on revenue of $549 billion during the last year. In the quarter that ended on October 31, 2020, Walmart earned $1.34 per share (excluding certain items), which significantly beat the $1.18 Wall Street consensus forecast. 

Revenue in the October 2020 quarter totaled $134.7 billion, 5 percent more than last year.  The Walmart U.S. business was responsible for 66 percent of overall revenue, and this unit's revenue grew by 6.2 percent compared to the year-earlier result.  The Walmart International business contributed 22 percent of revenue, and this unit's revenue increased by 1.3 percent.  The Sam's Club unit supplied 12 percent of revenue, and this business's revenue rose by 8.3 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.

Walmart did not provide any guidance about the fourth quarter when the company reported results last November.  I have had to rely on historical trends and national economic data to estimate Walmart earnings.

In particular, data on U.S. Retail and Food Service Sales are published by the Census Bureau and are readily available.  These reports indicated, for example, that sales were up 3.7 percent in November 2020, compared to November 2019.  Walmart is so large that its Revenue correlates fairly well with the national data, and I use this relationship to estimate the company's Revenue.  Although there's no national data yet for January 2021, my preliminary fourth-quarter estimate for Walmart's revenue, using the data that is available, is $145 billion.

In the first three quarters of fiscal year 2021, Walmart's Gross Margin rose from 23.9 percent to 25.4 percent of Revenue.  Counterintuitively, the Gross Margin in the January quarter is usually a little less than in the preceding October quarter.  This history led me to select 25.0 percent as my estimate for the January 2021 quarter.  The corresponding Cost of Goods Sold is (1-0.25) * $145 billion = $108.75 billion.

Sales, General, and Administrative (SG&A) expenses should be a little more than 20 percent of Revenue if history is a valid guide.  To be specific, I used 20.25 percent of Revenue to come up with a $29.4 billion SG&A estimate.

The numbers above combine to produces an estimate for Operating Income of just under $6.9 billion, which is a hefty 29 percent higher than the equivalent quantity in the year-earlier quarter.

I'm aware of two large items items that may be listed as non-operating gains and losses on Walmart's Income Statement for the fourth quarter.  I've estimated using publicly available data that the equity investment in JD.com earned about $1.0 billion, if the size of the Walmart's  stake in the Chinese firm did not change.  On the other side of the ledger, Walmart previously announced it would recognize a non-cash loss of approximately $2.0 billion, after tax, in the fourth quarter of fiscal 2021 on the sale of a majority stake in Seiyu, a retailer in Japan.  On pre-tax basis, this loss could be $2.4 billion.

I used $525 million for the estimate of net interest paid and 26 percent for the effective income tax rate.  With these figures, the estimate for Net Income (GAAP) in the quarter is $3.57 billion (1.25 per share).  

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

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#walmart  #wmt  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

PEP: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for PepsiCo's earnings for fiscal 2020's 16-week fourth 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 February 11, 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 PepsiCo. 

PepsiCo is a global food and beverage company. In addition to the eponymous soft drinks, PepsiCo also owns the Frito-Lay snack food business. In April 2020, PepsiCo acquired energy drink maker Rockstar for $3.85 billion. PepsiCo bought SodaStream in 2018 for $3.2 billion.

Shares of PepsiCo now trade for about $140 each, giving the company a market value of $195 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, NASDAQ 100, and Russell 1000 stock indices. 

PepsiCo recorded profits of $7 billion on revenue of $69 billion during the last year. In the quarter that ended on September 5, 2020, PepsiCo earned $1.66 per share (excluding certain items), which significantly beat the $1.49 Wall Street consensus forecast. 

Revenue in the September 2020 quarter totaled $18.1 billion, 5 percent more than last year's $17.2 billion. The Beverages North America business was responsible for 33 percent of overall revenue, and this unit's revenue grew by 5.6 percent compared to the year-earlier result. The Frito-Lay North America business contributed 24 percent of revenue, and this unit's revenue increased by 7.2 percent. The Europe unit supplied 18 percent of revenue, and this business's revenue rose by 3.1 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.

PepsiCo updated its guidance for the fiscal year and, thus, the fourth quarter, after the company last reported quarterly results.  The key elements of the guidance are excerpted below:

The Company provides guidance on a non-GAAP basis as we cannot predict certain elements which are included in reported GAAP results, including commodity mark-to-market net impacts.

Based on our year-to-date results and what we can reasonably forecast for the balance of this year, we are providing an update to our full-year financial outlook today. The Company now expects:

•Full-year organic revenue growth to be approximately 4 percent;

•Full-year core earnings per share of $5.50 compared to 2019 core earnings per share of $5.53; and

•Approximately $10 billion in cash from operating activities and free cash flow of approximately $6 billion, which assumes net capital spending of approximately $4 billion.

In addition, the Company continues to expect:

•A core effective tax rate of approximately 21 percent; and

•Total cash returns to shareholders of approximately $7.5 billion, comprised of dividends of approximately $5.5 billion and share repurchases of approximately $2 billion.

Note that the guidance refers to non-GAAP earnings, which makes my task a little more difficult and amplifies the uncertainty of my estimates.

In the first three quarters (only 36 weeks at PepsiCo, but that's another story) of fiscal year 2020, organic Revenue growth was 3.6 percent and GAAP Revenue growth was 3.0 percent.  To get to 4 percent organic growth across the full fiscal year, as the guidance predicts, I've assumed the difference between GAAP and non-GAAP revenue growth will remain 0.6 percent.  This suggests that 3.4 percent (4.0 - 0.6) is a plausible estimate for GAAP revenue growth for the fiscal year.

In fiscal year 2019, PepsiCo's revenue was $67.2 billion.  Fiscal year 2020's revenue could, therefore, be 1.034* $67.2 billion = $69.5 billion.  Revenue during the first three quarters of the year was $47.9 billion, which leaves $69.5 billion - $47.9 billion = $21.6 billion for the fourth quarter of fiscal 2020.

During the first three quarters of the year, PepsiCo's Gross Margin averaged 55.4 percent.  The margin the fourth quarter is usually a little less, so I have assumed it will be 55 percent.  The Cost of Goods Sold estimate is, therefore, (1-0.55) * $21.6 billion = $9.7 billion.

Sales, General, and Administrative (SG&A) expenses have averaged 40.4 percent of Revenue during the first three quarters.  In the fourth quarter, this ratio is often 2 to 3 percent higher.  I don't think it will be quite that high this year, but it could see 42 percent as a possibility.

These estimates would lead to Operating Income of $2.8 billion, up from $2.7 billion one year earlier.

I assume net interest paid would drop to $400 million in this era of low rates.

For the income tax rate, I used the non-GAAP estimate of 21 percent.  The difference between the GAAP and non-GAAP rates is usually small.

With these assumptions, my estimate for Net Income is $1.93 billion ($1.39 per share), which compares favorably to $1.77 billion (1.26/share) in the year-earlier period.

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

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#pepsico  #pep  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis