AAPL: Gauge Analysis (updated February 26, 2021)

I have analyzed Apple'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.

Apple became one of the world's most valuable companies by designing and selling stylish, easy-to-use computers, tablets, smartphones, music players, and watches, as well as software and media.  Services for these devices are also a lucrative and growing business for Apple, but selling iPhones is, by far, the company's largest single revenue source. The transition to 5G mobile technology may serve to boost iPhone sales even higher.  Apple is now selling laptops with fast, power-efficient processors it designed, replacing chips made by Intel, and they expectation is that other Apple-designed chips will be included in future products.  Apple's shares split 4-for-1 on 28 August 2020; they had split 7-for-1 just six years earlier.

Apple recorded profits of $64 billion, $3.74 per share, on revenue of $294 billion during the last 12 months.  In the quarter that ended on December 26, 2020, Apple earned $1.68 per share on a GAAP basis.  See Apple's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of Apple now trade for about $121 each, giving the company a market value of $2.1 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:

Apple'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: $2.1 trillion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.2 (>2.0 is conservative)

    Long-term debt/Working Capital = 460% (<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) = 13% (good)

    Owner Earnings growth rate (five-year average) = 19% (good)

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

    Free Cash Flow growth rate (five-year average) = 11% (good)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 47% (excellent)

    Operating Profit/Sales = 25.2% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 10% (fair)

    Dividend = 17% 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) = 31.3 (very expensive)

    Price/GAAP Earnings (five-year average) = 42.0 (expensive)

    Free Cash Flow/Market Value = 3.9% (low, less than the five-year average of 6.6%)

    Acquirer's Multiple = 28.4 (very expensive)

    Price/Book Value = 31.3 (more expensive than the five-year average of 10.6)

    Price/Sales = 7.1 (more expensive than the five-year average of 3.9)

In summary, the analysis assigned Apple five GREEN, zero YELLOW, and two 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, Apple does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 47.9 percent, from $121.26 to $63.20, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that Apple's future results will push the score up (or pull it down).  Revisit GCFR2 occasionally for updates on Apple'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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 #apple    #aapl    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

EIX: Earnings Report for the Quarter Ending December 31, 2020

Edison International reported after the market closed on February 25, 2021, it earned $1.39 per diluted share in the quarter that ended on December 31, 2020, up 248 percent from earnings of $0.40 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Core earnings, a non-GAAP figure, rose 21 percent to $1.19 per share from $0.98 one year earlier, a less robust change than the GAAP percentage. The most significant exclusions contributing to the $0.20 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Gain on sale of of investment in power plant in Vidalia, LA [$0.26 per share], Wildfire Insurance Fund expenses [($0.20) per share], and Sale of nuclear fuels [$0.15 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 Edison to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Edison'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:  Edison International is the parent of Southern California Edison, which provides electric power to more than 15 million people.  Per government mandates, a growing percentage of this power has been derived from renewable sources. Electric utilities in California have been blamed for, and are spending considerable sums to prevent, wildfires caused by their equipment.

The following table is a simplified version of Edison'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 $3.2 billion, 6 percent more than last year. 

I was expecting Edison to report revenue of $3.3 billion for the December 2020 quarter.  The actual amount  fell short of my estimate by $143.0 million (4.3 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $2.0 billion in the latest quarter, which translates into a Gross Margin of 38.1 percent of revenue. Since it was higher than the 37.8 percent Gross Margin achieved in the year-earlier quarter, it signifies that Edison sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 37.2 percent in the December 2020 quarter, and Edison exceeded that prediction by 0.9 percent.

The Depreciation expense was $504 million, up from $470 million in the year-earlier quarter.  I was expecting Depreciation of $485 million.  

The last operating expense line on the Income Statement is where the sum of other operating income and charges, such as restructuring, may be listed.  For Edison the amount listed on this line was a $94 million gain in the latest quarter.  I was expecting a net loss of $50 million.  A large non-recurring gain on the sale of an investment boosted this item unexpectedly.

Edison's Operating Income was $794 million in the quarter, up 176.7 percent from the year-earlier period.  Operating Income exceeded my $693 million estimate by $101 million.

As for non-operating items, the major item is the Interest expense, and it was $226 million in the December quarter, very close to my estimate.  But, miscellaneous non-operating items were about $50 million less than I expected.

The effective income tax rate was 8.3 percent.  I expected the tax rate to be 10.0 percent.

Net income attributable to Edison was $526 million, $1.39 per share in the quarter ending December 2020.  The figures for the year-earlier quarter were $143 million, $0.40/share. My earnings estimate for  the latest quarter was $454 million ($1.20/share), so Edison International earned $0.19 per share more than I had predicted.

The average number of shares outstanding during the last quarter was 5.0 percent higher than one year ago, which was a drag on earnings per share.

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

      – Better than expected:  Gross Margin + Misc non-operating items + Income tax rate 

      – Worse than expected:  Revenue growth 

      – Met or close to expectations:  Depreciation + Special operating items + 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).

 #edison    #eix    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

VZ: Gauge Analysis (updated February 25, 2021)

I have analyzed Verizon Communications'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.

Verizon Communications is a major provider of wired and wireless voice and data communications services to U.S. businesses and consumers. The company took its current form in 2000 when Bell Atlantic merged with GTE.  In 2013, Verizon agreed to pay Vodafone $130 billion in order to assume complete ownership of Verizon Wireless, which had been a joint venture.  In February 2021, Verizon announced it would be paying $45 billion for C-band spectrum licenses it won at an auction run by the Federal Communications Commission (FCC).  Verizon plans to use this spectrum as part of its transition to the newest, fifth-generation ("5G") wireless technology.  Separately, Verizon announced plans in September 2020 to acquire Tracfone, the leading pre-paid and value mobile service provider.  

Verizon recorded profits of $18 billion, $4.30 per share, on revenue of $128 billion during the last 12 months.  In the quarter that ended on December 31, 2020, Verizon earned $1.11 per share on a GAAP basis, and it gained $1.21 per share after non-GAAP adjustments and exclusions.  See Verizon's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of Verizon now trade for about $57 each, giving the company a market value of $234 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:

Verizon'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: $234.2 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.4 (>2.0 is conservative)

    Long-term debt/Working Capital = 825% (<150% is conservative)

3. The Company Generates Stable Earnings: YELLOW

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

    Earnings variability = 32% (high)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = -4% (poor)

    Owner Earnings growth rate (five-year average) = 24% (very good)

    Free Cash Flow growth rate (trailing year) = 32% (very good)

    Free Cash Flow growth rate (five-year average) = 45% (terrific)

5. The Company is Efficiently Profitable: GREEN

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

    Operating Profit/Sales = 22.4% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 2.2% (weak)

    Dividend = 43% of last year's FCF (sustainable)

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

    Price/Owner Earnings (last year) = 10.2 (appealing)

    Price/GAAP Earnings (five-year average) = 12.1 (appealing)

    Free Cash Flow/Market Value = 10.1% (very appealing), more than the five-year average of 6.2%)

    Acquirer's Multiple = 11.9 (inexpensive)

    Price/Book Value = 3.4 (less expensive than the five-year average of 5.7)

    Price/Sales = 1.8 (about the same as its five-year average)

In summary, the analysis assigned Verizon Communications five GREEN, one YELLOW, and one RED grades.  The resulting Overall Score is 71 of the 100 possible points, which is an excellent result.  The score is above the 60-point GCFR threshold, and, therefore, Verizon 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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 #verizon    #vz    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

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

NVIDIA reported after the market closed on February 24, 2021, it earned $2.31 per diluted share in the quarter that ended on January 31, 2021, up 51 percent from earnings of $1.53 in the equivalent 14 weeks of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Non-GAAP earnings rose 64 percent to $3.10 per share from $1.89 one year earlier, a much better change than the GAAP percentage. The most significant exclusions contributing to the $0.79 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Stock-based compensation [$0.58 per share], Acquisition-related costs [$0.23 per share], and Gains) from non-affiliated investments [$0.01 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 NVIDIA to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by NVIDIA'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:  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.  

The following table is a simplified version of NVIDIA'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 $5.0 billion, 61 percent more than last year.  The Gaming business was responsible for 50 percent of overall revenue, and this unit's revenue grew by 67.3 percent compared to the year-earlier result.  The Data Center business contributed 38 percent of revenue, and this unit's revenue increased by 96.6 percent.  The Professional Visualization unit supplied 6 percent of revenue, and this business's revenue fell by 7.3 percent.

I was expecting NVIDIA to report revenue of $4.8 billion for the January 2021 quarter.  The actual amount surpassed my estimate by $203.0 million (4.2 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $1.8 billion in the latest quarter, which translates into a Gross Margin of 63.1 percent of revenue. Since it was lower than the 64.9 percent Gross Margin achieved in the year-earlier quarter, it's a sign that NVIDIA sold its products and services at less profitable prices relative to production costs. I was expecting the Gross Margin to be 62.8 percent in the January 2021 quarter, and NVIDIA exceeded that prediction by 0.3 percent.

NVIDIA spent $1.1 billion on Research and Development in the latest quarter, up from $738 million one year ago. I had estimated that R&D expenses would be $1.1 billion.  R&D was 22.9 percent of Revenue.

Sales, General, and Administrative expenses totaled $503 million in the January 2021 quarter, up 75.3 percent from one year ago.  SG&A expenses increased from 9.2 percent to 10.1 percent of quarterly revenue, which shows NVIDIA spent more per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 11.3 percent of revenue, and the actual percentage turned out to be lower than the prediction.

NVIDIA's Operating Income was $1.5 billion in the quarter, up 52.2 percent from the year-earlier period.  Operating Income exceeded my $1.4 billion estimate by $133 million.

Interest and other non-operating items summed to a net expense of $37 million.  My estimate for non-operating items was $55 million.

The effective income tax rate fell by 5.6 percent to 0.9 percent, which had a positive effect on net income.  I expected the tax rate to be 8.0 percent.

Net income attributable to NVIDIA was $1.5 billion, $2.31 per share in the quarter ending January 2021.  The figures for the year-earlier quarter were $950 million, $1.53/share. My earnings estimate for  the latest quarter was $1.2 billion ($1.92/share), so NVIDIA earned $0.39 per share more than I had predicted.

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

      – Better than expected:  Revenue growth + SG&A/Revenue + Income tax rate 

      – Worse than expected:

      – Met or close to expectations:  Gross Margin + R&D + SG&A + Interest 

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).

 #nvidia    #nvda    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

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).

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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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