Walmart: Gauge Analysis (updated November 26, 2020)

I have analyzed Walmart's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis 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 evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation of the Overall Score has been designed to favor companies that exhibit good value characteristics over fast growing firms that are expensive.  An Overall Score above 60 isn't easy to achieve, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. 

First, a quick review of the company itself.

Walmart, the largest retailer in the U.S., is a discounter known for keeping its costs and prices low.  In addition to its many eponymous storers, Walmart also owns Sam's Club warehouses.  In response to competition from Amazon and other online retailers, Walmart has been investing heavily to make Walmart.com more capable and appealing.  This strategy is starting to pay off now, and Walmart's online sales have been increasing rapidly as COVID-19 accelerated the retail industry's transition from in-store to online shopping.  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.

Walmart recorded profits of $20 billion on revenue of $549 billion during the last year. In the quarter that ended on 31 October 2020, Walmart earned $1.34 per share (excluding certain items), which significantly beat the $1.18 Wall Street consensus forecast. See https://tinyurl.com/y2nm3ozs for Walmart's most recent quarterly report.

Shares of Walmart now trade for about $152 each.  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:

Walmart'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: $432.6 billion (mega-cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 0.8 (>2.0 is conservative)

    Long-term debt/Equity = 47% (<100% is conservative)

3. The Company Generates Stable Earnings: YELLOW

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

    Earnings variability = 22% (moderate)

4. The Company Exhibits Earnings Growth: YELLOW

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

    Owner Earnings growth rate (five-year average) = 2% (weak)

    Free Cash Flow growth rate (trailing year) = 74% (terrific)

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

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 25% (very good)

    Operating Profit/Sales = 4.1% (meager)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 1.9% (weak)

    Dividend = 25% of last year's FCF (easily sustainable with room to grow)

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

    Price/Owner Earnings (last year) = 26.0 (high)

    Price/GAAP Earnings (five-year average) = 34.5 (expensive)

    Free Cash Flow/Market Value = 5.6% (modest, less than the five-year average of 6.9%)

    Acquirer's Multiple = 21.0 (expensive)

    Price/Book Value = 4.9 (more expensive than the five-year average of 3.6)

    Price/Sales = 0.8 (more expensive than the five-year average of 0.6)

In summary, the analysis assigned Walmart three GREEN, three YELLOW, and one RED grades.  The resulting Overall Score is 40 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, Walmart does not satisfy the GCFR criteria for value-investment consideration at this time.

The share price would theoretically have to fall by 42.4%, from $151.83 to $87.48, all else being equal, to lift the Overall score to the 60-point threshold. Or, perhaps, the next earnings report from Walmart will include results that move the company's score up towards the threshold (or sink the score further).  Check this blog occasionally for updates on Walmart's performance and the resulting GCFR score.

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 perform 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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 #walmart    #wmt    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

Home Depot: Gauge Analysis (updated November 24, 2020)

I have analyzed Home Depot's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis 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 evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation of the Overall Score has been designed to favor companies that exhibit good value characteristics over fast growing firms that are expensive.  An Overall Score above 60 isn't easy to achieve, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. 

First, a quick review of the company itself.

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.  Recognizing the value of its employees during the COVID-19 pandemic, Home Depot hiked their pay and benefits.  In November 2020, Home Depot announced a deal to acquire 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.

Home Depot recorded profits of $12 billion on revenue of $126 billion during the last year. In the quarter that ended on 1 November 2020, Home Depot earned $3.18 per share, which missed the $3.68 Wall Street consensus forecast. See https://tinyurl.com/yxqu3gxd for Home Depot's most recent quarterly report.

Shares of Home Depot now trade for about $271 each.  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.

Analysis Results:

Home Depot'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: $292.6 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.4 (>2.0 is conservative)

    Long-term debt/Working Capital = 360% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

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

    Earnings variability = N/A (negligible)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 16% (good)

    Owner Earnings growth rate (five-year average) = 12% (good)

    Free Cash Flow growth rate (trailing year) = 62% (terrific)

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

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 63% (excellent)

    Operating Profit/Sales = 14.0% (good)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 22% (very good)

    Dividend = 36% of last year's FCF (easily sustainable with room to grow)

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

    Price/Owner Earnings (last year) = 22.8 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 30.7 (expensive)

    Free Cash Flow/Market Value = 6.2% (appealing, more than the five-year average of 5.0%)

    Acquirer's Multiple = 17.8 (expensive)

    Price/Book Value = 100.0 (more expensive than the five-year average of 62.9)

    Price/Sales = 2.3 (more expensive than the five-year average of 2.0)

In summary, the analysis assigned Home Depot five GREEN, zero YELLOW, and two RED grades.  The resulting Overall Score is 54 of the 100 possible points, which is not high enough.  The score is below the 60-point threshold, and, therefore, Home Depot does not qualify at this time for more in-in-depth consideration.

The share price would theoretically have to fall by 13.1%, from $271.41 to $235.87, all else being equal, to lift the Overall score to the 60-point threshold.  Of course, sustained improvements to the company's financial performance is the best way to raise the Overall Score. Check this blog occasionally for updates on how Home Depot's score actually changes in response to new data.

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 perform 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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 #homedepot    #hd    #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis

Stock-Based Compensation

 This is an excellent thread about Stock-Based Compensation and its true costs.

Twitter Thread by @10kdiver

WestRock Company: Gauge Analysis (updated November 23, 2020)

I have analyzed WestRock's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis 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 evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation of the Overall Score has been designed to favor companies that exhibit good value characteristics over fast growing firms that are expensive.  An Overall Score above 60 isn't easy to achieve, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. 

First, a quick review of the company itself.

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.

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.

Shares of WestRock now trade for about $42 each.  These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

WestRock'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: $11.0 billion (large cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.7 (>2.0 is conservative)

    Long-term debt/Working Capital = 457% (<150% is conservative)

3. The Company Generates Stable Earnings: RED

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

    Earnings variability = 93% (very high)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = 37% (very good)

    Owner Earnings growth rate (five-year average) = 8% (modest)

    Free Cash Flow growth rate (trailing year) = 16% (good)

    Free Cash Flow growth rate (five-year average) = 2% (weak)

5. The Company is Efficiently Profitable: YELLOW

    Cash Flow Return On Invested Capital = 10% (so-so)

    Operating Profit/Sales = 8.9% (okay)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = -1% (not good)

    Dividend = 32% 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) = 8.7 (appealing)

    Price/GAAP Earnings (five-year average) = 22.7 (moderate to pricey)

    Free Cash Flow/Market Value = 10.0% (very appealing), more than the five-year average of 8.1%)

    Acquirer's Multiple = 12.8 (reasonable)

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

    Price/Sales = 0.6 (about the same as its five-year average)

In summary, the analysis assigned WestRock Company two GREEN, three YELLOW, and two RED grades.  The resulting Overall Score is 48 of the 100 possible points, which is unappealing.  The score is below the 60-point threshold, and, therefore, WestRock does not qualify at this time for more in-in-depth consideration.

Check back here occasionally for updates to the Overall Score, which can change when the company releases new financial results and when there's a significant change in the company's share price.

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 perform 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.

---------------

 #westrock    #wrk    #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis

Value Investing Article in the FT

I strongly recommend this article in the Financial Times on value investing and the significance of intangible assets by @mjmauboussin

Why value investing still works in markets

3M Company: Gauge Analysis (updated November 22, 2020)

I have analyzed 3M's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis 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 evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation is weighted to favor companies that exhibit good value characteristics over firms that are fast growers but expensive.

An Overall Score of 60 or higher is a good result, and it signifies that the company has enough value-investment appeal to be worth examining in more detail.

First, a quick review of the company itself.

Formed more than a century ago as Minnesota Mining and Manufacturing, the 3M Company is now a diversified manufacturer of innovative products for Safety and Industrial, Transportation and Electronics, Health Care, and Consumer markets.  While many 3M products have been engineered for demanding industrial and medical applications, consumers might be more familiar with the company's Scotch® tape and Post-It Notes®.  COVID-19 has affected 3M's businesses in different ways:  sales of N-95 masks and certain other health care and consumer products have grown, while sales of industrial products have fallen.

3M recorded profits of $5 billion on revenue of $32 billion during the last year. In the quarter that ended on 30 September 2020, 3M earned $2.43 per share, which beat the $2.26 Wall Street consensus forecast. See https://tinyurl.com/y23nrbbb for 3M's most recent quarterly report.

Shares of 3M now trade for about $173 each.  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:

3M'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: $100.7 billion (mega-cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 1.9 (>2.0 is conservative)

    Long-term debt/Working Capital = 275% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

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

    Earnings variability = 8% (modest)

4. The Company Exhibits Earnings Growth: RED

    Owner Earnings growth rate (trailing year) = 1% (weak)

    Owner Earnings growth rate (five-year average) = 0% (poor)

    Free Cash Flow growth rate (trailing year) = 19% (good)

    Free Cash Flow growth rate (five-year average) = 3% (weak)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 26% (very good)

    Operating Profit/Sales = 19.7% (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) = 20.6 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 20.9 (moderate to pricey)

    Free Cash Flow/Market Value = 6.3% (appealing, more than the five-year average of 4.8%)

    Acquirer's Multiple = 18.5 (expensive)

    Price/Book Value = 8.4 (less expensive than the five-year average of 10.2)

    Price/Sales = 3.2 (less expensive than the five-year average of 3.5)

In summary, the analysis assigned 3M Company four GREEN, one YELLOW, and two RED grades.  The resulting Overall Score is 52 of the 100 possible points, which is not high enough.  The score is below the 60-point threshold, and, therefore, 3M does not qualify at this time for consideration by value investors.

Check back here occasionally for updates to the Overall Score, which can change when the company releases new financial results and when there's a significant change in the company's share price.

This analysis reported here is not, by any means, a complete evaluation of the subject company, and 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. Readers are encouraged to independently verify all data. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  The analysis 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 methodology and results are subject to change without notification.

---------------

 #3m    #mmm    #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis

NVIDIA: Earnings Report for the Quarter Ending October 25, 2020

NVIDIA reported (https://tinyurl.com/y4ms3avm) after the market closed on 18 November 2020 it earned $2.12 per diluted share in the quarter that ended on 25 October 2020, up 46% percent from earnings of $1.45 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), which are described at https://tinyurl.com/yy2nwv8n. 

NVIDIA develops high-speed integrated circuits and cards for demanding data-processing applications, such as gaming, data centers, visualization, and even cryptocurrency mining.  NVIDIA acquired Mellanox Technologies, a maker of computer networking products, for $6.9 billion in April 2020.  It announced in October that it plans to acquire semiconductor-designer Arm Limited for $40 billion. 

Non-GAAP earnings rose 63% to $2.91 per share from $1.78 one year earlier, a percent change much better than seen with the GAAP figures. Non-GAAP 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.

The exclusions responsible for the $0.79 per share difference in the latest quarter between GAAP earnings and Non-GAAP earnings were: Stock-based compensation [$0.50 per share], Acquisition-related costs [$0.25 per share], and Legal settlement [$0.03 per share].

Non-GAAP earnings of $2.91 per share in the latest quarter significantly beat the $2.58 average ("consensus") of estimates made by Wall Street analysts. See https://tinyurl.com/y5flwujv for NVIDIA's earnings record and forecasts.

Although NVIDIA's earnings were better than expected, stock market traders still weren't satisfied. The price of the company's shares fell 0.9% during after-hours trading following the report.

Looking deeper into the GAAP results, "top-line" revenue in the October 2020 quarter totaled $4.7 billion, 57% more than last year's $3.0 billion. The Gaming business was responsible for 48% of overall revenue, and this unit's revenue grew by 36.9% compared to the year-earlier result. The Data Center business contributed 40% of revenue, and this unit's revenue grew by 161.7%. The Professional Visualization unit supplied 5% of revenue, and the amount fell by 27.2%.

The gross margin weakened from 63.6% of revenue to 62.6%, a sign that NVIDIA sold its output and services at less profitable prices relative to production costs. Sales, general, and administrative expenses increased from 9.2% to 10.9% of quarterly revenue, which shows the company spent more per dollar of sales on other operational costs, such as marketing. The effective income tax rate fell by 5.4% to 0.9%, which had a positive effect on net income.

NVIDIA's operating activities generated $1.3 billion in cash during the last quarter, down 22.0% from $1.6 billion in the year-earlier period. The cash flow delta was, therefore, much worse than the change in earnings. Notable uses for cash included $99 million to pay dividends to shareholders, $1.4 billion for corporate acquisitions,  and $473 million to acquire property, plant and capital equipment. 

Free cash flow over the last 12 months totaled $4.2 billion, or $6.71 per share using the latest share count. At the current market price per share of $537.15, this translates into a weak Free Cash Flow Yield of 1.2%.

The accompanying charts illustrate several trends in NVIDIA's financial results, taken from data in regulatory filings. The text and the charts are intended to provide some limited historical context for readers interested in the company’s finances. No investment advice is provided, and no investment offer of any kind is made or solicited. The accuracy of the information presented is not guaranteed, and readers are encouraged to independently verify all data.

 #nvidia    #nvda    #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis