ADM: Gauge Analysis (updated February 18, 2021)

I have analyzed Archer-Daniels-Midland'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.

Archer Daniels Midland is a global agribusiness, based in Chicago, 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).  ADM, which views itself as one of the world’s "leading nutrition companies," invested $1.8 billion in 2019 to acquire Neovia for its global animal feed business.  ADM is trying to sell its mills that produce the biofuel ethanol because this product has become less profitable.

ADM recorded profits of $2 billion on revenue of $64 billion during the last year. In the quarter that ended on December 31, 2020, ADM earned $1.21 per share (excluding certain items), which significantly beat the $0.71 Wall Street consensus forecast. See ADM's most recent quarterly report.

Shares of ADM now trade for about $56 each, giving the company a market value of $31 billion. 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.

Analysis Results:

ADM'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: $31.4 billion (large cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 1.5 (>2.0 is conservative)

    Long-term debt/Working Capital = 87% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = 11% (modest)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 57% (terrific)

    Owner Earnings growth rate (five-year average) = 21% (very good)

    Free Cash Flow growth rate (trailing year) = 0% (poor)

    Free Cash Flow growth rate (five-year average) = 18% (good)

5. The Company is Efficiently Profitable: RED

    Cash Flow Return On Invested Capital = 8% (so-so)

    Operating Profit/Sales = 2.7% (meager)

6. The Company Pays a Healthy Dividend: YELLOW

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 4.6% (weak)

    Dividend = 58% of last year's FCF (sustainability is a concern)

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

    Price/Owner Earnings (last year) = 14.7 (appealing)

    Price/GAAP Earnings (five-year average) = 20.3 (moderate to pricey)

    Free Cash Flow/Market Value = 4.4% (modest, less than the five-year average of 6.4%)

    Acquirer's Multiple = 19.8 (expensive)

    Price/Book Value = 1.6 (more expensive than the five-year average of 1.3)

    Price/Sales = 0.5 (about the same as its five-year average)

In summary, the analysis assigned Archer-Daniels-Midland three GREEN, two YELLOW, and two RED grades.  The resulting Overall Score is 41 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, ADM does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 40.9 percent, from $55.82 to $32.98, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that ADM's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on ADM's performance and the latest GCFR gauges and scores.

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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 #adm  #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

WMT: Earnings Report for the Quarter Ending January 31, 2021

Walmart reported before the market opened on February 18, 2021, it lost $0.74 per diluted share in the quarter that ended on January 31, 2021, down from earnings of $1.45 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). 

Adjusted earnings, a non-GAAP figure, rose 1 percent to $1.39 per share from $1.38 one year earlier. The most significant exclusions contributing to the $2.13 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Loss on international operations held for sale [($2.66) per share], Gain on equity investments [$0.49 per share], and Tax item and officer compensation charge [$0.04 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 Walmart to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Walmart'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:  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.

The following table is a simplified version of Walmart'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 $152.1 billion, 7 percent more than last year.  The Walmart U.S. business was responsible for 65 percent of overall revenue, and this unit's revenue grew by 7.9 percent compared to the year-earlier result.  The Walmart International business contributed 23 percent of revenue, and this unit's revenue increased by 5.5 percent.  The Sam's Club unit supplied 11 percent of revenue, and this business's revenue rose by 8.1 percent.

Based on an extrapolation of Census Bureau data on U.S. Retail and Food Service Sales, I was expecting Walmart to report revenue of $145.0 billion for the January 2021 quarter.  The actual amount surpassed my estimate by $7.1 billion (4.9 percent).  

The Cost of Revenue (also known as Cost of Goods Sold) was $115.3 billion in the latest quarter, which translates into a Gross Margin of 24.2 percent of revenue. Since it was higher than the 23.9 percent Gross Margin achieved in the year-earlier quarter, it signifies that Walmart sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 25.0 percent in the January 2021 quarter, and Walmart missed that prediction by 0.8 percent.  Perhaps costs were higher than expected because of additional labor and cleaning expenses due to COVID-19.

Sales, General, and Administrative expenses totaled $31.3 billion in the January 2021 quarter, up 9.5 percent from one year ago.  SG&A expenses increased from 20.2 percent to 20.6 percent of quarterly revenue, which shows Walmart spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 20.3 percent of revenue, and the actual percentage turned out to be higher than the prediction.

Walmart's Operating Income was $5.5 billion in the quarter, up 3.1 percent from the year-earlier period.  Despite better-than-expected Revenue, Operating Income fell short of my $6.9 billion estimate by $1.4 billion because expenses were even higher.

The Interest expense was consistent with expectations, but other non-operating expenses far, far exceeded what I had predicted.  The principal reason for this discrepancy was that Walmart recorded a $7.3 billion charge for selling certain international businesses, and I was expecting only $2.4 billion.

Net income attributable to Walmart was ($2.1) billion, ($0.74) per share in the quarter ending January 2021.  The figures for the year-earlier quarter were $4.1 billion, $1.45/share. My earnings estimate for  the latest quarter was $3.6 billion ($1.25/share), so Walmart earned $1.99 per share less than I had expected.

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

      – Better than expected:  Revenue growth 

      – Worse than expected:  Gross Margin + SG&A + Misc non-operating items 

      – Met or close to expectations:  SG&A/Revenue + Interest + Non-controlling interests 

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 #QtrlyRpt   #nac_financialanalysis

CAT: Gauge Analysis (updated February 17, 2021)

I have analyzed Caterpillar'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.

Caterpillar is a leading manufacturer and servicer of machinery for construction, mining, energy production, and transportation.  The company also has finance subsidiaries that help customers and dealers purchase and lease Caterpillar and certain other products.  Demand for Caterpillar's products tends to vary as economic conditions strengthen and weaken and commodity prices rise and fall.

Caterpillar recorded profits of $3 billion on revenue of $42 billion during the last year. In the quarter that ended on December 31, 2020, Caterpillar earned $2.12 per share (excluding certain items), which significantly beat the $1.49 Wall Street consensus forecast. See Caterpillar's most recent quarterly report.

Shares of Caterpillar now trade for about $202 each, giving the company a market value of $111 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.

Analysis Results:

Caterpillar'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: $111.2 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.5 (>2.0 is conservative)

    Long-term debt/Working Capital = 189% (<150% is conservative)

3. The Company Generates Stable Earnings: RED

    Eighteen positive quarterly earnings reports in last 5 years (not too bad)

    Earnings variability = 72% (very high)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = -36% (poor)

    Owner Earnings growth rate (five-year average) = 26% (very good)

    Free Cash Flow growth rate (trailing year) = -1% (poor)

    Free Cash Flow growth rate (five-year average) = 12% (good)

5. The Company is Efficiently Profitable: YELLOW

    Cash Flow Return On Invested Capital = 12% (decent)

    Operating Profit/Sales = 15.8% (very good)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 8% (fair)

    Dividend = 54% of last year's FCF (sustainable)

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

    Price/Owner Earnings (last year) = 24.1 (high)

    Price/GAAP Earnings (five-year average) = 36.7 (expensive)

    Free Cash Flow/Market Value = 3.8% (low, less than the five-year average of 5.0%)

    Acquirer's Multiple = 21.0 (expensive)

    Price/Book Value = 7.2 (more expensive than the five-year average of 4.9)

    Price/Sales = 2.7 (more expensive than the five-year average of 1.6)

In summary, the analysis assigned Caterpillar two GREEN, two YELLOW, and three RED grades.  The resulting Overall Score is 32 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, Caterpillar does not satisfy the GCFR criteria for investment consideration at this time.

The Overall Score would only increase to 55 points if the share price were to fall by 50%, from $202.38 to $100.83, all else being equal. It is also possible that Caterpillar's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on Caterpillar's performance and the latest GCFR gauges and scores.

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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 #caterpillar    #cat    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

KMI: Gauge Analysis (updated February 16, 2021)

I have analyzed Kinder Morgan'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.

Kinder Morgan operates a sprawling 83,000-mile network of pipelines and associated terminals for transporting oil, natural gas, gasoline and other fules, carbon-dioxide, and other products.  Kinder Morgan became gigantic when it combined with El Paso, Corp., in 2012.  Shortly thereafter, Kinder Morgan executed a series of transactions, totaling $76 billion, that converted general and limited partnership interests of various Kinder Morgan and El Paso entities into one publicly traded company. About 40 percent of the natural gas consumed in the U.S. is now carried by Kinder Morgan pipelines.  In 2020, worldwide actions to slow the spread of COVID-19 substantially reduced demand for energy products; firms across the energy industry suffered falling profits and cash flows.  Upstream producers that depend on high prices were hurt the most, but midstream firms such as Kinder Morgan were not spared.  The company incurred impairment charges of $1.6 billion in 2020 because lower energy prices made its assets less valuable.

Kinder Morgan recorded profits of $119 million on revenue of $12 billion during the last year. In the quarter that ended on December 31, 2020, Kinder Morgan earned $0.27 per share (excluding certain items), which matched the $0.27 Wall Street consensus forecast. See Kinder Morgan's most recent quarterly report.

Shares of Kinder Morgan now trade for about $15 each, giving the company a market value of $34 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.

Analysis Results:

Kinder Morgan'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: $34 billion (large cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 0.6 (>2.0 is conservative)

    Long-term debt/Equity = 99% (<100% is conservative)

3. The Company Generates Stable Earnings: RED

    Fifteen positive quarterly earnings reports in last 5 years (worrisome)

    Earnings variability = 87% (very high)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 8% (modest)

    Owner Earnings growth rate (five-year average) = 17% (good)

    Free Cash Flow growth rate (trailing year) = 15% (good)

    Free Cash Flow growth rate (five-year average) = 15% (good)

5. The Company is Efficiently Profitable: YELLOW

    Cash Flow Return On Invested Capital = 7% (so-so)

    Operating Profit/Sales = 29.8% (excellent)

6. The Company Pays a Healthy Dividend: YELLOW

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 23% (very good)

    Dividend = 83% of last year's FCF (sustainability is a significant concern)

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

    Price/Owner Earnings (last year) = 11.7 (appealing)

    Price/GAAP Earnings (five-year average) = 38.6 (expensive)

    Free Cash Flow/Market Value = 8.3% (appealing, more than the five-year average of 5.3%)

    Acquirer's Multiple = 19.8 (expensive)

    Price/Book Value = 1.0 (about the same as its five-year average)

    Price/Sales = 2.9 (less expensive than the five-year average of 3.0)

In summary, the analysis assigned Kinder Morgan, Inc., two GREEN, four YELLOW, and one RED grades.  The resulting Overall Score is 48 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, Kinder Morgan does not satisfy the GCFR criteria for value-investment consideration at this time.

The share price would theoretically have to fall by 22.6%, from $15.04 to $11.65, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that Kinder Morgan's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on Kinder Morgan's performance and the latest GCFR gauges and scores.

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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 #kindermorgan    #kmi    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

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