IBM: Gauge Analysis (updated February 23, 2021)

I have analyzed IBM'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.

IBM was the first major technology company, and it became a colossus selling powerful (for the time) mainframe computers.  IBM made early personal computers, but it sold that business to Lenovo in 2005 when IBM decided to focus on more profitable information technology services for businesses.  Always a research powerhouse, the company developed cloud-computing and artificial intelligence services (e.g., "Deep Blue").  But, IBM has not come close to regaining the dominating market position it had with mainframes.  IBM's annual revenue has been slowly declining for years. IBM took a big step towards repositioning the company around the "hybrid cloud" when it spent $34 billion to acquire Red Hat, a leading open-source software firm.  However, the jury is still out on whether IBM can compete effectively against the giants of the cloud business, which include Amazon, Microsoft, and Google.  In October 2020, IBM announced it would take a second restructuring step and spin off its managed infrastructure services unit.  The business to be divested into a new public company is now part of the IBM Global Technology Services division, and it brings in revenue of about $19 billion per year. 

IBM recorded profits of $6 billion, $6.22 per share, on revenue of $74 billion during the last 12 months.  In the quarter that ended on December 31, 2020, IBM earned $1.51 per share on a GAAP basis, and it gained $2.07 per share after non-GAAP adjustments and exclusions.  See IBM's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of IBM now trade for about $121 each, giving the company a market value of $109 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.

Analysis Results:

IBM'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: $108.7 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.0 (>2.0 is conservative)

    Long-term debt/Equity = 262% (<100% is conservative)

3. The Company Generates Stable Earnings: GREEN

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

    Earnings variability = 15% (modest)

4. The Company Exhibits Earnings Growth: RED

    Owner Earnings growth rate (trailing year) = -39% (poor)

    Owner Earnings growth rate (five-year average) = -6% (poor)

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

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

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 22% (good)

    Operating Profit/Sales = 8.4% (okay)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 4.3% (weak)

    Dividend = 37% 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) = 16.9 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 13.5 (appealing)

    Free Cash Flow/Market Value = 14.3% (very appealing), more than the five-year average of 10.3%)

    Acquirer's Multiple = 25.3 (very expensive)

    Price/Book Value = 5.2 (less expensive than the five-year average of 7.2)

    Price/Sales = 1.5 (less expensive than the five-year average of 1.7)

In summary, the analysis assigned IBM four GREEN, one YELLOW, and two RED grades.  The resulting Overall Score is 56 of the 100 possible points, which is a good, but not quite high enough result.  The score is below the 60-point GCFR threshold, and, therefore, IBM does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 14.8 percent, from $120.91 to $102.99, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that IBM's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on IBM'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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 #ibm        #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

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

Home Depot reported before the market opened on February 23, 2021, it earned $2.65 per diluted share in the quarter that ended on January 31, 2021, up 16 percent from earnings of $2.28 in the equivalent 13 of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

This post compares the quarterly Income Statement published by Home Depot to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Home Depot'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:  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.

The following table is a simplified version of Home Depot'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 $32.3 billion, 25 percent more than last year. I was expecting Home Depot to report revenue of $31.0 billion for the January 2021 quarter.  The actual amount surpassed my estimate by $1.3 billion (4.1 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $21.4 billion in the latest quarter, which translates into a Gross Margin of 33.6 percent of revenue. Since it was lower than the 33.9 percent Gross Margin achieved in the year-earlier quarter, it's a sign that Home Depot sold its products and services at less profitable prices relative to production costs. I was expecting the Gross Margin to be 34.0 percent in the January 2021 quarter, and Home Depot missed that prediction by 0.4 percent.

Sales, General, and Administrative expenses totaled $6.2 billion in the January 2021 quarter, up 28.5 percent from one year ago.  SG&A expenses increased from 18.7 percent to 19.2 percent of quarterly revenue, which shows Home Depot spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 18.7 percent of revenue, and the actual percentage turned out to be higher than the prediction.

Home Depot's Operating Income was $4.1 billion in the quarter, up 20.0 percent from the year-earlier period.  Operating Income fell short of my $4.2 billion estimate by $130 million.

Interest and other non-operating items summed to a net expense of $327 million.  My estimate for non-operating items was $328 million.

The effective income tax rate rose by 3.7 percent to 23.9 percent, which had a negative effect on net income.  I expected the tax rate to be 24.3 percent.

Net income attributable to Home Depot was $2.86 billion, $2.65 per share in the quarter ending January 2021.  The figures for the year-earlier quarter were $2.5 billion, $2.28/share. My earnings estimate for  the latest quarter was $2.94 billion ($2.72/share), so Home Depot earned $0.07 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:  Depreciation + SG&A + SG&A/Revenue 

      – Met or close to expectations:  Gross Margin + Misc non-operating items + 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).

 #homedepot    #hd    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

MSFT: Gauge Analysis (updated February 22, 2021)

I have analyzed Microsoft'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.

Microsoft develops and sells operating system and application software, software and cloud services, and hardware items, such as game consoles. Cloud computing has become a large and growing business for Microsoft, and the company competes with industry leader Amazon, Google, and others. Microsoft acquired LinkedIn in December 2016 for approximately $27 billion, and it acquired GitHub in October 2018 for $7.5 billion. In September 2020, Microsoft reached an agreement to acquire ZeniMax Media, the parent company of game-developer Bethesda Softworks, for $7.5 billion.

Microsoft recorded profits of $51 billion on revenue of $153 billion during the last year. In the quarter that ended on December 31, 2020, Microsoft earned $2.03 per share, which significantly beat the $1.64 Wall Street consensus forecast. See Microsoft's most recent quarterly report.

Shares of Microsoft now trade for about $240 each, giving the company a market value of $1.8 trillion. 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:

Microsoft'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: $1.8 trillion (mega-cap)

2. The Company is Conservatively Financed: GREEN

    Current ratio = 2.6 (>2.0 is conservative)

    Long-term debt/Working Capital = 52% (<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) = 27% (very good)

    Owner Earnings growth rate (five-year average) = 28% (very good)

    Free Cash Flow growth rate (trailing year) = 24% (very good)

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

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 37% (excellent)

    Operating Profit/Sales = 39.2% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 9% (fair)

    Dividend = 32% 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) = 40.4 (very expensive)

    Price/GAAP Earnings (five-year average) = 57.5 (expensive)

    Free Cash Flow/Market Value = 2.7% (low, less than the five-year average of 4.4%)

    Acquirer's Multiple = 29.3 (very expensive)

    Price/Book Value = 14.1 (more expensive than the five-year average of 9.1)

    Price/Sales = 12.0 (more expensive than the five-year average of 7.4)

In summary, the analysis assigned Microsoft six GREEN, zero YELLOW, and one 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 GCFR threshold, and, therefore, Microsoft does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 41%, from $241 to $142, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that Microsoft's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on Microsoft'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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 #microsoft    #msft    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

MMM: Gauge Analysis (updated February 21, 2021)

I have analyzed 3M'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.

Formed more than a century ago as Minnesota Mining and Manufacturing, the 3M Company is now a conglomerate that sells a wide range of innovative products for Safety and Industrial, Transportation and Electronics, Health Care, and Consumer markets.  While many 3M products have been designed for demanding commercial 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.  In December 2020, 3M announced it would be taking actions to eliminate redundancies and better leverage analytical data to become more efficient in both operations and marketing.

3M recorded profits of $5 billion on revenue of $32 billion during the last year. In the quarter that ended on December 31, 2020, 3M earned $2.38 per share, which beat the $2.26 Wall Street consensus forecast. See 3M's most recent quarterly report.

Shares of 3M now trade for about $177 each, giving the company a market value of $100 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:

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: $103 billion (mega-cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 1.9 (>2.0 is conservative)

    Long-term debt/Working Capital = 256% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

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

    Earnings variability = 6% (modest)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = 25% (very good)

    Owner Earnings growth rate (five-year average) = 3% (weak)

    Free Cash Flow growth rate (trailing year) = 23% (very good)

    Free Cash Flow growth rate (five-year average) = 6% (modest)

5. The Company is Efficiently Profitable: GREEN

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

    Operating Profit/Sales = 21.0% (excellent)

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 = 52% of last year's FCF (sustainable)

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

    Price/Owner Earnings (last year) = 18.8 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 21.0 (moderate to pricey)

    Free Cash Flow/Market Value = 6.4% (appealing, more than the five-year average of 4.9%)

    Acquirer's Multiple = 17.3 (expensive)

    Price/Book Value = 8.0 (less expensive than the five-year average of 10.1)

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

In summary, the analysis assigned 3M Company four GREEN, three YELLOW, and zero RED grades.  The resulting Overall Score is 58 of the 100 possible points, which is a good, but not quite high enough result.  The score is below the 60-point GCFR threshold, and, therefore, 3M does not satisfy the GCFR criteria for value-investment consideration at this time.

The share price would theoretically have to fall by 2.5%, from $176.50 to $172.14, all else being equal, to lift the Overall score to the 60-point threshold. It is also possible that 3M's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on 3M'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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 #3m    #mmm    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

PG: Gauge Analysis (updated February 21, 2021)

I have analyzed P&G'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.

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

P&G recorded profits of $14 billion on revenue of $74 billion during the last year. In the quarter that ended on December 31, 2020, P&G earned $1.64 per share (excluding certain items), which significantly beat the $1.42 Wall Street consensus forecast. See  P&G's most recent quarterly report.

Shares of P&G now trade for about $127 each, giving the company a market value of $330 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:

P&G'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: $332 billion (mega-cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 0.8 (>2.0 is conservative)

    Long-term debt/Equity = 46% (<100% is conservative)

3. The Company Generates Stable Earnings: YELLOW

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

    Earnings variability = 27% (high)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 27% (very good)

    Owner Earnings growth rate (five-year average) = 18% (good)

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

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

5. The Company is Efficiently Profitable: GREEN

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

    Operating Profit/Sales = 23.8% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 3.9% (weak)

    Dividend = 50% of last year's FCF (sustainable)

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

    Price/Owner Earnings (last year) = 22.4 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 31.2 (expensive)

    Free Cash Flow/Market Value = 4.9% (modest, more than the five-year average of 4.5%)

    Acquirer's Multiple = 20.0 (expensive)

    Price/Book Value = 6.8 (more expensive than the five-year average of 5.1)

    Price/Sales = 4.5 (more expensive than the five-year average of 3.9)

In summary, the analysis assigned Procter and Gamble four GREEN, two YELLOW, and one RED grades.  The resulting Overall Score is 47 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, P&G does not satisfy the GCFR criteria for value-investment consideration at this time.

The share price would theoretically have to fall by 25%, from $127 to $95.50, all else being equal, to lift the Overall score to the 60-point threshold.  Check this blog occasionally for updates on P&G'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 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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 #p&g    #pg    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

NVDA: Look Ahead to January Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for NVIDIA'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 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 NVIDIA.

NVIDIA develops high-speed integrated circuits and cards for demanding data-processing applications, such as gaming, data centers, visualization, artificial intelligence, and even cryptocurrency mining.  NVIDIA announced in September 2020 that it plans to acquire UK-based Arm Limited, a company that has been very successful at licensing designs for integrated circuits, from Softbank for $40 billion in cash and new NVIDIA shares. But, it's uncertain whether regulators will approve this deal and allow it to proceed.  NVIDIA was able to acquire Mellanox Technologies, a maker of high-performance computer networking products for data centers, for $7 billion in April 2020. 

Shares of NVIDIA now trade for about $566 each, giving the company a market value of $356 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

NVIDIA recorded profits of $4 billion on revenue of $15 billion during the last year. In the quarter that ended on October 25, 2020, NVIDIA earned $2.91 per share (excluding certain items), which significantly beat the $2.58 Wall Street consensus forecast. See NVIDIA's most recent quarterly report.

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.

NVIDIA's management communicated their expectations for the January quarter when they last reported results in November 2020.  Note that this period is 14 weeks long.

NVIDIA’s outlook for the fourth quarter of fiscal 2021 is as follows:

•Revenue is expected to be $4.80 billion, plus or minus 2 percent.

•GAAP and non-GAAP gross margins are expected to be 62.8 percent and 65.5 percent, respectively, plus or minus 50 basis points.

•GAAP and non-GAAP operating expenses are expected to be approximately $1.64 billion and $1.18 billion, respectively.

•GAAP and non-GAAP other income and expense are both expected to be an expense of approximately $55 million.

•GAAP and non-GAAP tax rates are both expected to be 8 percent, plus or minus 1 percent, excluding any discrete items. GAAP discrete items include excess tax benefits or deficiencies related to stock-based compensation, which are expected to generate variability on a quarter-by-quarter basis.

NVIDIA expects its Revenue in the fourth quarter will be $4.7 billion and $4.9 billion.  I'm assuming the figure will be in the middle of this range.

I'm also using the 62.8 percent of Revenue midpoint for the GAAP Gross Margin.  The Cost of Goods Sold in, therefore, estimated to be be $4.8 billion * (1 - 0.628) = $1.79 billion.

Operating expenses include Research and Development and Sales, General, and Administrative costs.  Based on historical data, I'm assuming R&D will be about 2/3 of the $1.64 billion GAAP guidance figure and the other 1/3 will be SG&A.

The numbers above combine to produces an estimate for Operating Income of $1.37 billion, which is 39 percent higher than the equivalent quantity in the year-earlier quarter.

For non-operating gains and losses, I used the $55 million net expense from the guidance and the 8 percent (!) effective income tax rate.   

With these figures, the estimate for Net Income (GAAP) in the quarter is $1.2 billion ($1.92 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).

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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