Twitter Inc (TWTR) Extended Graph Analysis

May 30th, 2019 Posted by Extended Analysis No Comment yet

Twitter Inc (TWTR) is one of the most favored social networking services in the world. Founded by Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams in 2006.

TWTR logo

About the Company

 

Company Profile

Twitter is an American online news and social networking service on which users post and interact with messages known as “tweets”. Tweets were originally restricted to 140 characters, but on November 7, 2017, this limit was doubled to 280 for all languages except Chinese, Japanese, and Korean. Wikipedia

Founded on March 21, 2006, at San Francisco, CA. The founders are Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams.

 

Twitter Extended Graph Analysis

 

A) TWITTER CASH FLOW

CASH FLOW

Net cash flow provided by operating activites Net cash used for investing activities Net cash provided by (used for) financing activities Capital expenditures Free cash flows
2014 81,796,000 -1,097,272,000 1,691,722,000 -201,630,000 -119,834,000
2015 383,066,000 -902,421,000 -62,998,000 -347,280,000 36,786,000
2016 763,055,000 -598,008,000 -83,975,000 -218,657,000 544,398,000
2017 831,209,000 -112,932,000 -78,373,000 -160,742,000 670,467,000
2018 1,339,711,000 -2,055,513,000 978,116,000 -483,934,000 855,777,000
TTM 1,448,731,000 -1,767,075,000 978,051,000 -473,869,000 974,862,000

Facts

  • Net cash flow provided by operating activities were $1.34 billion and $1.45 billion in 2018 and the trailing twelve months (TTM), respectively.
  • Net cash used for investing activities was -$2.06 billion and -$1.77 billion in 2018 and the trailing twelve months respectively.
  • The net cash provided by (used for) financing activities were $978 million and $978 million in 2018 and the trailing twelve months respectively.
  • While the capital expenditures were -$484 million and -$474 million in 2018 and the trailing twelve months respectively.
  • On the other hand, the free cash flows were $856 million and $975 million in 2018 and the trailing twelve months respectively.

Explanation

  • The net cash flow had increased by 61 and 8 percent from 2017 to 2018 and the trailing twelve months due to the huge increase in net income at 1216 percent.
  • Net cash used for investing activities increased by 1720 percent from 2017 to 2018 due to the increase in purchases of investment.
  • There was a debt issued of $1.15 billion in 2018 which impacted the net cash provided by (used for) financing activities and shows a positive result.
  • On the other hand, capital expenditures are an investment in properties, plant, and equipment.
  • While free cash flows are increasing year-over-year and show a growth of 112 percent in the last five years.

Interpretation

Free cash flows exclude the non-cash expenses and include expenses from equipment and assets and changes in working capital. The company’s free cash flow was impressive as year-over-year it increases. Moreover, Twitter is liquid and its free cash flows represent 73 percent of the net income.

B) TWITTER BALANCE SHEET

Twitter

2014 2015 2016 2017 2018
Total cash 3,621,878,000 3,495,348,000 3,774,579,000 4,403,102,000 6,209,401,000
Current Assets 4,255,853,000 4,381,792,000 4,652,196,000 5,321,884,000 7,111,036,000
Total assets 5,583,082,000 6,442,439,000 6,870,365,000 7,412,477,000 10,162,572,000
Current liabilities 393,794,000 506,039,000 584,021,000 583,278,000 1,516,311,000
Total liabilities 1,956,679,000 2,074,392,000 2,265,430,000 2,365,259,000 3,356,978,000
Equity 3,646,403,000 4,368,047,000 4,604,935,000 5,047,218,000 6,805,594,000
Retained earnings -1,572,446,000 -2,093,477,000 -2,550,350,000 -2,671,729,000 -1,454,073,000
Total debts 1,376,020,000 1,455,095,000 1,538,967,000 1,627,460,000 2,628,250,000
Working capital 3,862,000,000 3,876,000,000 4,068,000,000 4,739,000,000 5,595,000,000

Facts:

  • Total cash was $6.21 billion in 2018.
  • The current assets were $7.12 billion in 2018.
  • Total assets were $10.16 billion in 2018.
  • Current liabilities were $1.52 billion in 2018.
  • Total liabilities were $3.36 billion in 2018.
  • Total equity was $6.8 billion in 2018.
  • Retained earnings were -$1.45 billion in 2018.
  • Total debts were $2.6 billion in 2018.
  • Working capital was $5.6 billion in 2018.

Explanation

  • Total cash increases year-over-year from 2015 to 2018 and has a growth of 42 percent in five years.
  • Current assets increase year-over-year in the last five years and have a growth of 40 percent.
  • Total assets increase year-over-year in the last five years and have a growth of 45 percent.
  • Current liabilities increase year-over-year in the last five years at a rate of 74 percent.
  • Total liabilities increase year-over-year in the last five years at a rate of 42 percent.
  • Total equity increases year-over-year in the last five years at a rate of 46 percent due to additional paid-in capital.
  • Retained earnings were negative in the last five years due to net income losses from 2014 to 2017. In 2018 and the trailing twelve months net income shows positive results and increase 109 and 10 percent from 2017 to 2018 and the trailing twelve months.
  • Total debts increased 48 percent from 2014 to 2018.
  • Working capital has a growth of 31 percent in five years and increasing year-over-year.

Interpretation

The balance sheet represents the company’s financial status at a certain period of time. Twitter has a strong balance sheet, it has sufficient funds and able to handle its liabilities. In other words, Twitter is liquid.

C) TWITTER FINANCIAL RATIOS

Twitter

2011 2012 2013 2014 2015 2016 2017 2018 TTM
Asset turnover (average) 0.15 0.41 0.32 0.31 0.37 0.38 0.34 0.35 0.34
Return on assets % -22.77 -10.23 -30.75 -12.91 -8.67 -6.86 -1.51 13.72 14.29
Financial leverage (average) 0.00 0.00 1.14 1.54 1.47 1.49 1.47 1.49 1.57
Return on equity % 0.00 0.00 -47.77 -17.57 -13.03 -10.19 -2.24 20.34 21.72
Return on invested capital % 0.00 0.00 -42.82 -13.79 -7.59 -6.19 0.17 15.48 15.92
Interest coverage 0.00 0.00 0.00 0.00 -4.43 -3.41 0.09 4.19 4.19

Facts:

  • The asset turnover (average) was 0.34 ratio in the trailing twelve months.
  • Return on assets was 14.29 percent in the trailing twelve months.
  • Financial leverage (average) was 1.57 ratio in the trailing twelve months.
  • Return on equity was 21.72 percent in the trailing twelve months.
  • While return on invested capital was 15.92 percent in the trailing twelve months.
  • The interest coverage was 4.19 ratio in the trailing twelve months.

Explanation

  • Asset turnover ratio means that each dollar of assets generates an average of $0.34 in the trailing twelve months.
  • Return on assets indicates that for every dollar that was invested in assets produced $0.137 in 2018.
  • Financial leverage indicates that the liabilities are 157 percent of the stockholder’s equity.
  • Return on equity indicates that every dollar of common shareholders equity earned $0.2172 return on their investment in 2018.
  • Return on invested capital indicates that every dollar invested in capital produces a $0.1592 return in 2018.
  • Interest coverage measures the company’s ability to make interest payments on its debt in time. Twitter is able to make 4.19 times more earnings than his current interest payments.

Interpretation

Twitter is liquid and was able to make an acceptable return on investments made.

D) INCOME AND MARKET

Twitter

2014 2015 2016 2017 2018 YTD
Revenue 1,403,002,000 2,218,032,000 2,529,619,000 2,443,299,000 3,042,359,000 3,164,378,000
EBIT -538,866,000 -450,036,000 -367,208,000 38,740,000 453,325,000 472,058,000
Net Income -577,820,000 -521,031,000 -456,873,000 -108,063,000 1,205,596,000 1,335,403,000
Market Capitalization 23,042,000,000 16,062,000,000 11,653,000,000 17,834,000,000 21,965,000,000 30,676,000,000
Intrinsic Value 0 815,729,332 890,352,542 2,026,132,340 2,822,415,366 4,173,150,541

Facts:

  • Revenue was $3.16 billion in the trailing twelve months.
  • While the EBIT was $472 million in the trailing twelve months.
  • And the net income was $1.34 billion in the trailing twelve months.
  • The market capitalization was $30.68 billion in the trailing twelve months.
  • While the intrinsic value was $4.17 billion in the trailing twelve months.

Explanation

  • Revenue increases year-over-year and has a growth of 56 percent in five years.
  • While EBIT shows negative in the first three years and has a growth of 214 percent in five years.
  • Net income shows negative in the first 4 years however managed an increased in 2018 and YTD and has a growth of 143 percent in five years.
  • Moreover, market capitalization was erratic in movement in the last five years and has a growth of 25 percent in five years.
  • However, the intrinsic value is increasing year-over-year in the last four years and has a growth of 80 percent. The market capitalization might be overvalued compared to the intrinsic value.

Interpretation

In the last two years of its operation, the management was able to augment its earnings which shows a positive bottom line and was able to increase its cash and working capital as well. Twitter is profitable.

E) KEY EXECUTIVE COMPENSATION

Twitter

2014 2015 2016 2017 2018
Key Executive Compensation 7,855,088 440,006 9,904,051 15,207,588 39,067,621
Jack Dorsey/ Chief Executive Officer 0 68,506 56,551 0 1
Ned Segal/ Chief Financial Officer 0 0 0 14,299,528 4,963,054
Michael Montano/ Engineering Lead 0 0 0 0 17,984,246
Vijava Gadde/ Chief Legal Officer and Secretary 7,855,088 371,500 9,847,500 908,060 11,799,901
Mathew Derella/ Customers Lead 0 0 0 0 4,320,419

Detailed Distribution

2014 2015 2016 2017 2018
Key Executive Compensation
Salary 283,981 370,000 498,000 665,385 1,822,885
Bonus 300,000 609,210
Annual Other Income
Restricted Stock Award 7,555,950 9,348,000 14,239,203 36,626,526
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation 15,157 70,006 58,051 3,000 9,000
Total 7,855,088 440,006 9,904,051 15,207,588 39,067,621
Jack Dorsey/Chief Executive Officer
Salary 1
Bonus
Annual Other Income
Restricted Stock Award
Securities Option
LTIP Payout
Non-Equity Compensation 68,506 56,551
Other Compensation 68,506 56,551 1
Total
Ned Segal/Chief Financial Officer
Salary 165,385 500,000
Bonus 300,000
Annual Other Income
Restricted Stock Award 13,832,643 4,460,054
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation 1,500 3,000
Total 14,299,528 4,963,054
Michael Montano/ Engineering Lead
Salary 325,769
Bonus 45,500
Annual Other Income
Restricted Stock Award 17,612,977
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation
Total 17,984,246
Vijaya Gadde/ Chief Legal Officer
Salary 283,981 370,000 498,000 500,000 498,077
Bonus
Annual Other Income
Restricted Stock Award 7,555,950 9,348,000 406,560 11,298,824
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation 15,157 1,500 1,500 1,500 3,000
Total 7,855,088 371,500 9,847,500 908,060 11,799,901
Matthew Derella/Customers Lead
Salary 499,038
Bonus 563,710
Annual Other Income
Restricted Stock Award 3,254,671
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation 3,000
Total 4,320,419

Facts

  • Total key executive compensation was $39,067,621 in 2018.
  • And the chief executive officer, Jack Dorsey compensation was $1 in 2018.
  • While the chief financial officer, Ned Segal compensation was $4,963,054 in 2018.
  • On the other hand, Engineering Lead, Michael Montano compensation was $17,984,246 in 2018.
  • In addition, the Chief Legal Officer and Secretary, Vijava Gadde compensation was $11,799,901 in 2018.
  • Customers Lead, Matthew Derella compensation was $4,320,419 in 2018.

Explanation

  • The total key executive compensation represents 1.81 percent of the gross profit.
  • Ned Segal, CFO total salary represent 10 percent of his total compensation.
  • Michael Montano, Engg Lead total salary represents 2 percent of his total compensation.
  • Vijava Gadde, CLO and Secretary total salary represent 4 percent of his total compensation.
  • Matthew Derella, Customer Lead total salary represent 12 percent of his total compensation.

Interpretation

The total key executive compensation shows an increase of 110.53 percent from that of last year.

F) LOBBYING AND CONTRIBUTIONS

Twitter

LOBBYING/CONTRIBUTIONS TO POLITICIANS

2013 2014 2015 2016 2017 2018 2019
$90,000.00 $310,000.00 $500,000.00 $680,000.00 $550,000.00 $1,100,000.00 $420,000.00

TOTAL CONTRIBUTIONS

Cycle Total Democrats Republicans % to Dems % to Repubs Individuals PACs Soft (Indivs) Soft (Orgs)
2018 $288,284.00 $278,211.00 $9,150.00 97.00% 3.00% $269,558.00 $10,700.00 $250.00 $0.00
2016 $858,021.00 $589,276.00 $263,945.00 69.00% 31.00% $840,021.00 $15,500.00 $2,250.00 $0.00
2014 $41,300.00 $23,300.00 $3,000.00 56.00% 7.00% $26,300.00 $0.00 $15,000.00 $0.00
2012 $35,529.00 $34,279.00 $250.00 97.00% 1.00% $34,529.00 $0.00 $0.00 $0.00
2008 $3,000.00 $3,000.00 $0.00 100.00% 0.00% $3,000.00 $0.00 $0.00 $0.00
$1,226,134.00 $928,066.00 $276,345.00 76.00% 23.00% $1,173,408.00 $26,200.00 $17,500.00 $0.00

Itemized Lobbying Expenses for Twitter, 2019

Firms Hired Total Reported by Filer Reported Contract Expenses (Included in Total Reported by Filer)
Twitter $420,000.00
Mehlman, Castagnetti, et al $60,000.00
Integrated Solutions Group $30,000.00
Joseph Group $30,000.00
Total $120,000.00

A lobbyist representing Twitter, 2019

Lobbying Firm Hired Amount Subsidiary (Lobbied For) Lobbyist
Integrated Solutions Group $30,000.00 Twitter Boyd, Moses
O’Hanlon, G John
Joseph Group $30,000.00 Twitter Joseph, Kevin
Mehlman, Gastanetti, et al $60,000.00 Twitter Aronson, Lauren
Castagnetti, David
Collins, Mike
Distefano, Nichole
Eastman, Sage
Haro, Steven
Hingson, Dean Constantine
Mehlman, Bruce P
Pickering, Elise Finley
Robinson, Michael C
Rosen, Dean
Thomas, David R
Tolar, Helen
Wooters, Charles
Twitter $420,000.00 Twitter Culbertson, Lauren
Kane, Kevin
Roman, Lisa

Facts:

  • Total lobbying expenses in 2013 was $90,000.00.
  • Total lobbying expenses in 2014 was $310,000.00.
  • The lobbying expenses in 2015 was $500,000.00.
  • While lobbying expenses in 2016 was $680,000.00.
  • Lobbying expenses in 2017 was $550,000.00.
  • On the other hand, in 2018 the total lobbying expenses was $1,100,000,00.
  • And the total lobbying expenses in 2019 was $420,000.00.

Explanation

A special interest’s lobbying activity may go up or down over time, depending on how much attention the federal government is giving their issues. Particularly active clients often retain multiple lobbying firms, each with a team of lobbyists, to press their case for them.

Total Lobbying Expenditures: $420,000

Source: OpenSecrets.org

Center for Responsive Politics

Interpretation

Twitter is incurring a lobbying and contributions expenses to politicians every year since 2013 to the present time. These expenses are not reflected in the financial statements of the company although they were actually incurred.

G) FINANCIAL STRENGTH

Twitter

DATA

Working capital Total assets Sales EBIT Market value of equity Book value of total liabilities Retained earnings
5,595,000,000 10,162,572,000 3,164,378,000 472,058,000 28,585,400,000 3,356,978,000 -1,454,073,000

FORMULA

Z-Score =  1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Calculation Ratio Z-Score Result
A – Working Capital / Total Assets 0.55 1.2 0.66
B – Retained Earnings / Total Assets -0.14 1.4 -0.196
C – EBIT / Total Assets 0.05 3.3 0.165
D – Market Value of Equity / Book Value of Total Liabilities 8.52 0.6 5.112
E – Sales / Total Assets 0.31 1.0 0.31
Z-Score 6.051

The Z-Score formula is computed as follows: Z-Score =  1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Facts

  • A – 0.55 * 1.2 = 0.66
  • B – -0.14 * 1.4 = -0.196
  • C – 0.05 * 3.3 = 0.165
  • D – 8.52 * 0.6 = 5.112
  • E – 0.31 * 1.0 = 0.31   
  • Z-Score = 6.051

Explanation

  • The Z-Score by Dr. Edward Altman is a significant measure in determining the financial strength of the company because it relies on different weighted financial liquidity and profitability metrics to come up with the overall score. It indicates the company’s probability of bankruptcy.

Interpretation

The Z-Score of Twitter was 6.051, it is then compared to the grading scale. According to Altman, an overall score of 3 and above will not declare bankruptcy. Twitter is not close to solvency. The company is in good financial health.  

CONCLUSION

Twitter company’s balance sheet is in good health and financially stable. The company is liquid and profitable. The management was able to augment its earnings every year which produced good financial results.

The company’s stock price was erratic in movement so as the market capitalization in the last ten years. The book value is increasing every year in the past six years. The shares of stocks were increasing as well. I recommend the stock of Twitter Inc (TWTR) a Buy.

 

CITATION

https://www.morningstar.com/stocks/XNYS/TWTR/quote.html

https://www.opensecrets.org/orgs/lobby.php?id=D000067113

Researched and written by Criselda

Twitter: criseldarome

 

 

 

Tesla Inc (TSLA) Extended Graph Analysis

April 29th, 2019 Posted by Extended Analysis No Comment yet

Tesla Motors Inc (TSLA) has officially changed its name to Tesla Inc. The company has acquired Solar City in August 2016, a solar power company.

tesla-motors-inc

About the Company

Company Profile

Tesla, Inc. is an American automotive and energy company based in Palo Alto, California. The company specializes in electric car manufacturing and, through its SolarCity subsidiary, solar panel manufacturing. Founded July 1, 2003, in San Carlos, CA by Elon Musk.Source: Wikipedia

 

TESLA EXTENDED GRAPH ANALYSIS

 

A) TESLA CASH FLOW

TeslaCASH FLOWS

Net Cash flows provided by operating activities Net Cash used for investing activities Net Cash provided (used for) financing Capital Expenditure Free Cash Flow
2014 -57,337,000 -990,444,000 2,143,130,000 -969,885,000 -1,027,222,000
2015 -524,499,000 -1,673,551,000 1,523,523,000 -1,634,850,000 -2,159,349,000
2016 -123,829,000 -1,416,430,000 3,743,976,000 -1,440,471,000 -1,564,300,000
2017 -60,654,000 -4,418,967,000 4,414,864,000 -4,081,354,000 -4,142,008,000
2018 2,097,802,000 -2,337,428,000 573,755,000 -2,319,516,000 -221,714,000
TTM 2,097,802,000 -2,337,428,000 573,755,000 -2,319,516,000 -221,714,000

Facts

  • Net cash flows provided by operating activities was $2.098 billion in 2018 and the trailing twelve months.
  • Also, net cash used for investing activities was $-2.34 billion in 2018 and the trailing twelve months.
  • And, cash provided (used for) financing was $574 million in 2018 and the trailing twelve months.
  • On the other hand, capital expenditures were $-2.32 billion in 2018 and the trailing twelve months.
  • Free cash flow was $222 million in 2018 and the trailing twelve month

Explanation

  • The net cash flows provided by operating activities soared up to 103 percent from 2017 to 2018 due to depreciation.
  • Also, the net cash used for investing activities is the purchases of property and equipment, excluding capital leases, net of sales.
  • Net cash provided (used for) financing activities are proceeds from the issuance of convertible and other debt; and repayments of convertible and other debt. Plus collateralized lease borrowings and other repayments.
  • On the other hand, capital expenditures are an investment in property and equipment.
  • Free cash flow increases by 1768 percent although negative, compared to 2017.

Interpretation

Tesla suffered a negative free cash flow for the past five years due to its huge investment in property and equipment. However, in 2018, free cash flow improved by 1768 percent. There is no cash left over from cash from operations after operating expenses and capital expenditures or CAPEX.

B) TESLA BALANCE SHEET

tesla motors

BALANCE SHEET 2014 2015 2016 2017 2018
Total cash 1,905,713,000 1,196,908,000 3,393,216,000 3,367,914,000 3,685,618,000
Current Assets 3,198,657,000 2,791,568,000 6,259,796,000 6,570,520,000 8,306,308,000
Total assets 5,849,251,000 8,092,460,000 22,664,076,000 28,655,372,000 29,739,614,000
Current liabilities 2,107,166,000 2,816,274,000 5,827,006,000 7,674,670,000 9,992,136,000
Total liabilities 4,937,541,000 7,003,516,000 17,911,165,000 24,418,130,000 24,816,371,000
Equity 911,710,000 1,088,944,000 4,752,911,000 4,237,242,000 4,923,243,000
Retained earnings -1,433,682,000 -2,322,323,000 -2,997,237,000 -4,974,299,000 -5,317,832,000
Total debts 2,466,280,000 2,715,586,000 7,128,431,000 10,314,938,000 11,971,371,000
Working capital 1,091,000,000 -25,000,000 433,000,000 -1,104,000,000 -1,686,000,000

Facts

  • Total cash were $3.37 billion and $3.69 billion in 2017 and 2018 respectively.
  • And, current assets were $6.57 billion and $8.31 billion in 2017 and 2018 respectively.
  • Total assets were $28.66 billion and $29.34 billion in 2017 and 2018 respectively.
  • Current liabilities were $7.67 billion and $9.99 billion respectively.
  • Total liabilities were $24.42 billion and $24.82 in 2017 and 2018 respectively.
  • Equity were $4.97 billion and $5.32 billion in 2017 and 2018 respectively.
  • Retained earnings were -$4.97 billion and -$5.32 billion in 2017 and 2018 respectively.
  • Total debts were $10.31 billion and $11.97 billion in 2017 and 2018 respectively.
  • Working capital was -$1.1 billion and -$1.7 billion in 2017 and 2018 respectively.

Explanation

  • Total cash growth was 48 percent in five years period.
  • And, current assets growth was 61 percent in five years period. Increased in inventory has impacted the total.
  • While total assets growth was 80 percent in five years period.
  • Current liabilities increased 79 percent in five years due to an increase in accounts payable.
  • On the other hand, total liabilities increased 80 percent in five years due to an increase in long-term debt which increases year-over-year.
  • Equity has a growth of 81 percent in five years due to year-over-year increases in paid-in capital.
  • Retained earnings were negative in the last five years and falling year-over-year.
  • Moreover, total debts increase year-over-year and have grown 79 percent in five years. Long-term debt impacted the total and in 2018 the short term-debt increased by 186 percent from 2017 to 2018.
  • On the other hand, working capital was negative due to current liabilities are higher than the current liabilities in 2017 and in 2018. Due to increased accounts payable and short-term debt.

Interpretation

Tesla’s total current assets are not enough to pay its total current liabilities in the past two years because liabilities are higher than the current assets.

 

C) TESLA FINANCIAL RATIOS

tesla-motors

FINANCIAL RATIOS 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 TTM
Asset turnover (average) 1.23 0.45 0.37 0.45 1.14 0.77 0.58 0.46 0.46 0.73 0.73
Return on assets % -61.21 -59.76 -46.28 -43.36 -4.19 -7.11 -12.75 -4.39 -7.64 -3.34 -3.34
Financial leverage (average) 0.00 1.86 3.18 8.94 3.62 6.42 7.43 4.77 6.76 6.04 6.04
Return on equity % 0.00 0.00 -118.03 -227.22 -18.69 -37.25 -88.84 -23.11 -43.63 -21.31 -21.31
Return on invested capital % 0.00 0.00 -64.97 -72.34 -4.55 -8.45 -21.46 -6.27 -11.47 -1.90 -2.38
Interest coverage -21.01 -154.40 0.00 0.00 -1.17 -1.82 -6.37 -2.75 -3.69 -0.52 -0.52

Facts

  • Asset turnover was averaging 0.46 and 0.73 in 2017, 2018 respectively.
  • Return on assets was -.0764 percent and -.0334 percent in 2017 and 2018 respectively.
  • Financial leverage was averaging 6.76 and 6.04 in 2017 and 2018 respectively.
  • Return on equity was -43.63 percent and -21.31 percent in 2017 and 2018 respectively.
  • Return on invested capital was -11.47 percent and -1.90 percent in 2017 and 2018 respectively.
  • Interest coverage were -3.69 and -0.52 in 2017 and 2018 respectively.

Explanation

  • Asset turnover ratio means that each dollar of assets generates an average of 46 cents and 73 cents of sales in 2017 and 2018 respectively.
  • While the returns on assets (ROA) indicates that for every dollar that was invested in assets produced -$76.4 and -$33.4 of net income in 2017 and 2018 respectively. In other words, there were no returns on the dollar invested in assets because it is negative.
  • Moreover, financial leverage indicates that liabilities are 676 percent and 604 percent of shareholders’ equity in 2017 and 2018 respectively.
  • Also, return on equity indicates that every dollar of common shareholders’ equity earned -$43.63 percent and -$21.31 in 2017 and 2018 respectively. In other words, the shareholders did not earn a return on their investment.
  • Return on invested capital indicates that for every dollar invested in capital produces a -$0.1147 and -$0.0190 cents negative returns in 2017 and 2018 respectively.
  • On the other hand, interest coverage means that Tesla has negative 3.69 and negative -0.52 times earnings than its current interest payments in 2017 and 2018 respectively. In other words, its earnings are less than the current interest payment.

Interpretation

The profitability of Tesla was not impressive. The return on the investments in assets, equity and invested capital was negative meaning there was no return on the investment. Moreover, financial leverage was high at 604 percent. In addition, Its current interest payment is greater than its earnings.

 

D) TESLA INCOME AND MARKET

tesla-motors

  2014 2015 2016 2017 2018 TTM
Revenue 3,198,356,000 4,046,025,000 7,000,132,000 11,758,751,000 21,461,268,000 21,461,268,000
EBIT -186,689,000 -716,629,000 -667,340,000 -1,632,086,000 -252,840,000 -252,840,000
Net Income -294,040,000 -888,663,000 -674,914,000 -1,961,400,000 -976,091,000 -976,091,000
Market capitalization 27,954,000,000 31,543,000,000 34,423,000,000 52,328,000,000 57,442,000,000 48,338,000,000
Intrinsic value 6,912,210,299 12,344,598,323 1,227,212,668 9,992,830,135 27,736,000,163 35,273,927,556

Facts

  • Revenue were $11.76 billion and $21.46 billion in 2017 and 2018 respectively.
  • While EBIT was -$1.63 billion and -$253 million in 2017 and 2018 respectively.
  • Net income were -$1.96 billion and -$976 million in 2017 and 2018 respectively.
  • In addition, market capitalization were $57,442,000,000 and $48,338,000,000 in 2018 and the trailing twelve months respectively. The market value falls down by 20 percent in the trailing twelve months from 2018.
  • On the other hand, the intrinsic values were $27,736,000,163 and $35,273,927,556 in 2018 and the trailing twelve months respectively. In other words, the intrinsic value was $27.74 billion and $35.27 billion in 2018 and the trailing twelve months.

Explanation

  • The revenue growth was 85 percent in five years and it increases year-over-year.
  • While EBIT was erratic in movement and negative in the last five years.
  • In addition, net income was erratic in movement and was negative in the last five years.
  • Moreover, market capitalization has a growth of 42 percent in the last five years.
  • The intrinsic value was erratic in movement from 2014 to 2017. However, the value increased by 64 percent and 21 percent in 2018 and the trailing twelve months respectively.

Interpretation

Although the revenue increases year-over-year, the bottom line was not impressive. The cost of revenue represents 80 percent of the sales. In addition, the intrinsic value is lesser than the market capitalization of Tesla. It may be said that the market value is overstated.

E) KEY EXECUTIVE COMPENSATION

tesla-motors

Key Executive Compensation 2013 2014 2015 2016 2017
Key Executive Compensation 875,592 20,950,746 24,641,448 17,360,435 27,558,904
Elon Musk / CEO and Chairman of the Board 69,989 35,360 37,584 45,936 49,920
Deepak Ahuja / Chief Financial Officer 338,000 3,784,343 339,300 0 15,498,009
Jason Wheeler / Former Chief Financial Officer 0 0 20,898,296 501,931 174,041
Douglas John Field / Senior Vice President, Engineering 0 0 3,115,708 2,420,475 9,151,618
John Mcneil / Former President, Global Sales and Service 0 0 0 6,464,510 2,435,706
Jeffrey Straubel / Chief Technology Officer 467,603 17,131,043 250,560 7,927,583 249,600

DETAILED DISTRIBUTION

2013 2014 2015 2016 2017

Key Executive Compensation

Salary 620,880 622,960 980,521 1,601,503 1,702,407
Bonus 10,500 0
Annual Other Income 0
Restricted Stock Award 56,424 32,655 2,808,785 4,238,644 20,756,754
Securities Option 187,788 20,295,131 20,852,142 10,747,808 4,567,304
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 0 0 0 772,480 395,803
Other Compensation 0 0 0 0 136,636
Total 875,592 20,950,746 24,641,448 17,360,435 27,558,904

Elon Musk / CEO and Chairman of the Board

Salary 33,280 35,360 37,584 45,936 49,920
Bonus
Annual Other Income
Restricted Stock Award 10,620
Securities Option 26,089
LTIP Payout
Non-Equity Compensation
Other Compensation
Total 69,989 35,360 37,584 45,936 49,920
Deepak Ahuja / Chief Financial Officer
Salary 338,000 338,000 339,300 0 428,846
Bonus 0
Annual Other Income 0
Restricted Stock Award 10,501,859
Securities Option 3,446,343 4,567,304
LTIP Payout 0 0
Non-Equity Compensation 0 0
Other Compensation 0 0
Total 338,000 3,784,343 339,300 0 15,498,009

Jason Wheeler / Former Chief Financial Officer

Salary 0 0 46,154 501,931 174,041
Bonus
Annual Other Income
Restricted Stock Award
Securities Option 20,852,142
LTIP Payout
Non-Equity Compensation
Other Compensation
Total 0 0 20,898,296 501,931 174,041

Douglas John Field / Senior Vice President, Engineering

Salary 0 0 306,923 301,153 300,000
Bonus 0
Annual Other Income 0
Restricted Stock Award 2,808,785 2,119,322 8,851,618
Securities Option
LTIP Payout
Non-Equity Compensation
Other Compensation
Total 0 0 3,115,708 2,420,475 9,151,618

John Mcneil / Former President, Global Sales and Service

Salary 0 0 0 501,923 500,000
Bonus 0 0
Annual Other Income 0 0
Restricted Stock Award 2,119,322 1,403,277
Securities Option 3,070,785 0
LTIP Payout 0 0
Non-Equity Compensation 772,480 395,803
Other Compensation 0 136,626
Total 0 0 0 6,464,510 2,435,706

Jeffrey Straubel / Chief Technology Officer

Salary 249,600 249,600 250,560 250,560 249,600
Bonus 10,500 0
Annual Other Income 0 0
Restricted Stock Award 45,804 32,655
Securities Option 161,699 16,848,788 7,677,023
LTIP Payout 0 0
Non-Equity Compensation 0 0
Other Compensation 0 0
Total 467,603 17,131,043 250,560 7,927,583 249,600

Facts

  • The total key executive compensation was $27,558,904 in 2017.
  • Elon Musk total compensation was $49,920 in 2017.
  • While Deepak Ahuja total compensation was $15,498,009 in 2017.
  • In addition, Jason Wheeler total compensation was $174,041 in 2017.
  • Douglas John Field total compensation was $9,151,618 in 2017.
  • Moreover, John McNeil total compensation was $2,435,706 in 2017.
  • Jeffrey Straubel total compensation was $249,600 in 2017.

Explanation

  • The total key executive compensation had increased by 58.75 percent from the previous year.
  • Elon Musk total compensation represents 0.18 percent of the total key executive compensation.
  • While Deepak Ahuja total compensation represents 56.24 percent of the total key executive compensation.
  • And, Jason Wheeler total compensation represents 0.63 percent of the total key executive compensation.
  • Douglas John Field total compensation represents 33.21 percent of the total key executive compensation.
  • In addition, John McNeil total compensation represents 8.84 percent of the total key executive compensation.
  • Jeffrey Straubel total compensation represents 0.91 percent of the total key executive compensation.

Interpretation

The total key executive compensation represents 1.24 percent of the gross profit, however, its EBIT and net income were negative.

 

F) TESLA LOBBYING/CONTRIBUTIONS TO POLITICIANS

tesla-motors

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
40,000 30,000 170,000 120,000 120,000 0 0 0 560,000 820,000 760,000 890,000

 

Firms Hired

Total Reported by Filer

Reported Contract Expenses (Included in Total Reported by Filer)

Tesla Motors

$890,000.00

West Front Strategies $200,000.00
Holland & Knight $130,000.00
Tia Ginsberg & Assoc $120,000.00
Burton Strategy Group $15,000.00
Total $465,000.00

Lobbyists representing Tesla Motors Inc, 2018

Lobbying Firm Hired Amount Subsidiary

(Lobbied For)

Lobbyist
Burton Strategy Group $15,000.00 Tesla Motors Burton Jeff
Holland & Knight $130,000.00 Tesla Motors Dunham, Ben
Karakitsos, Dimitri
Mason, Scott D
Reynolds, Tom
Tesla Motors $890,000.00 Tesla Motors Hennessy, Scott
Kintz, Brooke Frankenfield
Nazar, Hasan
Veitch, Alexandra Norris
Tia Ginsberg & Assoc $120,000.00 Tesla Motors Ginsberg, Matt
Pike, Madelene
Tai, Jason
West Front Strategies $200,000.00 Tesla Motors Brown, Cindy S
Davis, Ashley E
Mcdaniel, Malloy
Remington, Kristi
Stein, Shimon

Source: OpenSecret.org   The Center for Responsive Politics

 

Facts

  • Lobbying was $40,000 in 2007.
  • And, lobbying in 2008 was $30,000.
  • In 2009 the lobbying was $170,000.
  • In 2010 the lobbying was $120,000.
  • While in 2011 the lobbying was $120,000.
  • On the other hand, in 2012, 2013 and 2014, the lobbying was $0.
  • Lobbying in 2015 was $560,000.
  • The lobbying in 2016 was $820,000.
  • Moreover, lobbying in 2017 was $760,000.
  • And in 2018 lobbying was $890,000.

Explanation

The total lobbying in 2018 of $890,000 represents 0.02 percent of the total operating expenses.

Interpretation

Total lobbying expenses are not shown in the financials of Tesla, however, yearly the company contributed to the politicians.

 

G) TESLA FINANCIAL STRENGTH

tesla-motors

DATA

Working Capital Total Assets Sales EBIT Market Value of Equity Book Value of Total Liabilities Retained Earnings
-1,686,000,000 29,739,614,000 21,461,268,000 -252,840,000 48,338,000,000 24,816,371,000 -5,317,832,000

Formula:

Z-Score =  1.2A + 1.4B + 3.3C + 0.6D + 1.0E

 

Calculation Ratio Z-Score Result
A – Working Capital / Total Assets -0.06 1.2 -0.07
B – Retained Earnings / Total Assets -0.18 1.4 -0.25
C – EBIT / Total Assets -0.01 3.3 -0.03
D – Market Value of Equity / Book Value of Total Liabilities 1.95 0.6 1.17
E – Sales / Total Assets 0.72 1.0 0.72
Z-Score 1.53

 

The Z-Score formula is computed as follows: Z-Score =  1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Facts

  • A – -0.06 * 1.2  = -0.07
  • B – -0.18 * 1.4 = – 0.25
  • C – -0.01 * 3.3 = – 0.03
  • D – 1.95  * 0.6 = 1.17
  • E – 0.72 * 1.0  = 0.72
  • Z – Score = 1.53

Explanation

Z-Score is a mathematical measurement that is used to compare data points from different sets of data to arrive at the relationship to the mean. This impression is often known as the Altman Z-Score. This measurement was used to forecast the likelihood of the company would go bankrupt.

Interpretation

The Z – Score of Tesla was 1.53. According to Altman, a score of 0 – 1.8 would likely to declare bankruptcy in the future. Let us go deeper into the analysis with care. Tesla is an auto industry and is highly capital intensive, in addition, its cost of revenue from year-to-year is expensive which needs a huge amount of cash to meet its production demands. Although Elon Musk has no problem in obtaining funds, he has somehow developed that trust among investors which is very significant.

This statistical measurement sums several weighted financial ratios and compares it to the scale shown above as A, B, C, D & E. The profitability, liquidity, leverage, and efficiency are the main factors of this measurement. Hence, total assets are the denominator in four equations, and total assets represent a huge percentage on all the ratios, the result is most likely negative and low.

Conclusion

Since Tesla was founded in 2003, investors believed that the company can succeed. In the past, Tesla has faced a number of challenges and was able to meet its target production but with a quarter of short-target production. There was an issue of Model 3 production mistakes which is excessive automation.

According to Bloomberg in an article written by Tom Randall and Dean Halford updated April 30, 2019, they estimated that the company had manufactured 241,253 cars of Model 3s or 22,640 units in the current quarter or 5,902 units per week. When I first valued Tesla in April 2014, the number of units I estimated at the end of 2014 was 42,250 units which are almost the actual number of units produced by the company when the report came out. I also projected the five years annual from 2015 up to 2019. The total number of units I projected at the end of 2019 was 259,521 units which are not far from the Bloomberg estimate.

Tesla Inc is not liquid because of the demand in cash is too high. Its financial leverage ratio was 6.04 or 604 percent, meaning debt is 604 percent of total equity. In other words, Tesla is using more debt than equity. The market price in 2019 drop by 28.66 percent from the end of 2018.

Elon Musk had established the confidence of many investors and I believed that the company will succeed although Tesla is experiencing a tough time running its operation due to the high volume of demands and production that must be manufactured and delivered.

I believed in the ability of Elon Musk in running the company as other investors have put there trust in him. I can say that I can recommend a Buy on the stock of Tesla Inc (TSLA).

CITATION

https://www.morningstar.com/stocks/XNAS/TSLA/quote.html

https://www.sec.gov/cgi-bin/browse-edgar?CIK=TSLA&owner=exclude&action=getcompany&Find=Search

 

Researched and written by Criselda

Twitter: criseldarome

Air Lease Corporation Class A (AL) Extended Graph Analysis

February 13th, 2019 Posted by Extended Analysis 4 comments

Air Lease Corporation Class A (AL)

air-lease-corporation-al

About the Company

Company Profile

Air Lease Corporation Class A (AL) is a leading aircraft leasing company that was founded by aircraft leasing industry pioneer, Steven F. Udvar-Házy. The Company engages in purchasing new commercial jet transport aircraft directly from aircraft manufacturers. Such as The Boeing Company (“Boeing”) and Airbus S.A.S. (“Airbus”), and leasing those aircraft to airlines throughout the world. The company is based in the United States. Further, AL is headquartered in Los Angeles, California, USA. Moreover, the initial public offering (IPO) of Class A stock on the New York Stock Exchange on April 19, 2011, and in fact raised an estimated total of US $965.6 million.

AIR LEASE EXTENDED GRAPH ANALYSIS

A) AIR LEASE CASH FLOW

CASH FLOWS

Net Cash Flow provided by Operating Activities Net Cash used for Investing activities Net Cash (used for) financing activities Capital expenditure Free Cash Flow
2013 654,213,000 -2,185,894,000 1,571,765,000 -2,283,642,000 -1,629,429,000
2014 769,018,000 -1,805,657,000 1,049,285,000 -2,409,506,000 -1,640,488,000
2015 839,795,000 -2,152,801,000 1,186,862,000 -2,905,548,000 -2,065,753,000
2016 1,020,078,000 -2,005,516,000 1,103,565,000 -2,993,556,000 -1,973,478,000
2017 1,059,713,000 -2,143,951,000 1,101,640,000 -2,923,440,000 -1,863,727,000
TTM 1,178,181,000 -3,123,079,000 1,948,309,000 -3,545,839,000 -2,367,658,000

Facts:

  • Operating cash flow was $1.06 billion and $1.2 billion in 2017 and the trailing twelve months respectively.
  • Net cash used for investing activities was -$2.1 and $3.1 billion in 2017 and the trailing twelve months respectively.
  • On the other hand, net cash used for financing activities was $1.1 and $1.9 billion in 2017 and the trailing twelve months respectively.
  • Next, capital expenditure was -$2.9 and -$3.5 billion in 2017 and the trailing twelve months respectively.
  • Also, Free cash flow was -$1.9 and -$2.4 billion in 2017 and the trailing twelve months respectively.

Explanation

  • Operating cash flow shows that AL is successful in its operation by producing sufficient money for its growth.
  • On the other hand, net cash used for investing activities is consist of flight equipment under operating lease and payments for deposits on flight equipment purchases.
  • Moreover, the net cash used for financing activities is cash dividends paid and the acquisition of furnishings, equipment, and other assets.
  • Likewise, capital expenditures are:
    • $1.97 million – acquisition of flight equipment under operating lease.
    • $774k – payments on deposits on flight equipment purchases.
    • $177k – acquisition of aircraft furnishings, equipment, and other assets.
  • Moreover,  Free cash flow was negative in the last five years indicating that capital expenditures are higher than the operating cash flows. It might simply mean that AL is investing heavily in new equipment and other capital assets that cause excess cash to utilized.

Interpretation

As a result, Air Lease Corporation is liquid and has sa table cash flow in the past five years of its business operations.

 

B) AIR LEASE BALANCE SHEET

air-lease-corporation-al

Total Cash Current Asset Total Asset Current Liabilities Total Liabilities Equity Retained Earnings Total Debts Working Capital
2013 270,173,000 1,345,196,000 9,332,604,000 131,223,000 6,809,170,000 2,523,434,000 312,859,000 5,853,317,000 1,213,973,000
2014 282,819,000 1,427,422,000 10,774,784,000 190,952,000 8,002,722,000 2,772,062,000 555,573,000 6,714,362,000 1,236,470,000
2015 156,675,000 1,227,710,000 12,355,098,000 215,983,000 9,335,186,000 3,019,912,000 791,526,000 7,712,421,000 1,011,727,000
2016 274,802,000 1,565,478,000 13,975,616,000 256,775,000 10,593,429,000 3,382,187,000 1,143,311,000 8,713,874,000 1,308,703,000
2017 292,204,000 1,854,980,000 15,614,164,000 309,182,000 11,486,722,000 4,127,442,000 1,866,342,000 9,698,785,000 1,545,798,000

Facts:

  • Total cash were $275 and $292 million in 2016 and 2017 respectively.
  • And the current assets were $1.57 and $1.85 billion in 2016 and 2017 respectively.
  • Total assets were $13.98 and $18.6 billion in 2016 and 2017 respectively.
  • On the other hand, current liabilities were $256.8 and $309 million in 2016 and 2017 respectively.
  • Moreover, total liabilities were $1.59 and $11.49 billion in 2016 and 2017 respectively.
  • Consequently, the equities were $3.38 and $4.13 billion in 2016 and 2017 respectively.
  • In the same way, retained earnings were $1.14 and $1.87 billion in 2016 and 2017 respectively.
  • In addition, total debts were $8.71 and $8.7 billion in 2016 and 2017 respectively.
  • Similarly, working capitals were $1.31 and $1.55 billion in 2016 and 2017 respectively.

Explanation

  • Total cash has a growth of 8 percent in five years. Cash is 2 percent of total assets.
  • And also, current assets have a growth of 38 percent in five years. It is 12 percent of total assets.
  • Total assets have a growth of 67 percent in five years.
  • On the other hand, current liabilities increased 136 percent from 2013 to 2017. It is 3 percent of total liabilities.
  • Moreover, total liabilities increased by 69 percent from 2013 to 2017.
  • Likewise, equity had a growth of 64 percent in five years.
  • And also the retained earnings had a growth of 497 percent in five years and have a year-over-year growth averaging 60 percent.
  • Consequently, the total debt increased by 66 percent from 2013 to 2017.
  • Last, working capital was stable in the last five years at an average of $1.3 million indicating that AL was able to finance its short-term obligations. Further, it has a growth of 27 percent in five years.

Interpretation

AL is high leverage at nearly 400 percent. Its long-term debt represents 84 percent against total debt. Further, the debt was greater 43 percent against equity. However, its total assets were impressive and increase year-over-year in five years. Finally, the company’s balance sheet was stable and sound.

 

C) AIR LEASE FINANCIAL RATIOS

air-lease-corporation-class-a-al

2011 2012 2013 2014 2015 2016 2017 TTM
Asset Turnover (Average) 0.06 0.10 0.10 0.10 0.11 0.11 0.10 0.10
Return on Assets % 1.03 2.11 2.28 2.55 2.19 2.85 5.11 5.20
Financial Leverage (Average) 2.37 3.15 3.70 3.89 4.09 4.13 3.78 3.92
Return on Equity % 2.45 5.85 7.84 9.67 8.75 11.71 20.14 20.74
Return on Invested Capital % 1.84 3.65 3.97 4.27 4.01 4.73 7.35 7.28
Interest Coverage 2.44 2.56 2.73 3.05 2.67 3.27 3.36 3.19

Facts

  • The asset turnover ratio is averaging 0.10 in 2017 and the trailing twelve months.
  • Return on assets was 5.11 and 5.20 percent in 2017 and the trailing twelve months.
  • Moreover, Financial leverage is averaging 3.78 and 3.92 in 2017 and the trailing twelve months.
  • In addition, Return on equity was 20.14 and 20.74 in 2017 and the trailing twelve months.
  • Likewise, Return on invested capital was 7.35 and 7.28 percent in 2017 and the trailing twelve months.
  • And the interest coverage was 3.36 and 3.19 in 2017 and the trailing twelve months.

Explanation

  • Asset turnover ratio means that each dollar of assets generates an average of 10 cents of sales.
  • The return on assets (ROA) indicates that for every dollar that was invested in assets produced $51.10 and $52 of net income in 2017 and the trailing twelve months respectively.
  • On the other hand, financial leverage indicates that AL’s liabilities are 378 and 392 percent of shareholders’ equity in 2017 and the trailing twelve months respectively, which are high.
  • Return on equity indicates that every dollar of common shareholders’ equity earned $20.14 and $20.74 in 2017 and the trailing twelve months respectively. In other terms, shareholders earned 2014 percent return on their investment.
  • Return on invested capital indicates that for every dollar invested in capital produces a $0.0735 and $0.0728 cents returns in 2017 and the trailing twelve months respectively.
  • Lastly, interest coverage means that AL 3.36 and 3.19 times more earnings than its current interest payments in 2017 and the trailing twelve months respectively.

Interpretation

Overall, efficiency and profitability ratios show positive results although financial leverage has a high ratio. Further, it indicates that debt is used effectively to convert capital to earned profits. Furthermore, the company is capable to pay its interest on debt with its principal.

 

D) AIR LEASE INCOME AND MARKET

air-lease-corporation-al

Sales EBIT Net Income Market Cap Intrinsic Value
2013 858,675,000 485,812,000 190,411,000 3,222,000,000 712,340,1357
2014 1,050,493,000 615,366,000 255,998,000 3,576,000,000 2,097,085,219
2015 1,222,840,000 731,097,000 253,391,000 3,434,000,000 2,900,818,643
2016 1,419,055,000 866,439,000 374,925,000 3,531,000,000 3,601,547,148
2017 1,516,380,000 896,901,000 756,152,000 4,983,000,000 14,180,694,017
TTM 1,628,192,000 953,981,000 843,538,000 3,351,000,000 12,118,551,202

Facts:

  • Sales were $1.5 billion and $1.6 billion in 2017 and 2018 TTM respectively.
  • And the EBIT was $896.9 million and $954 million in 2017 and 2018 TTM respectively.
  • Net Income was $756 million and $843.5 million in 2017 and 2018 TTM respectively.
  • Further, the market capitalization was $4.98 billion and $3.351 billion in 2017 and 2018 TTM respectively.
  • Likewise, intrinsic value was $14.181 and $12,119 billion in 2017 and 2018 TTM respectively.

Explanation:

  • The sales growth was 90 percent in five years and increases year-over-year at an average of 14 percent.
  • And the EBIT growth was 96 percent in five years and increases year-over-year at an average of 15 percent.
  • Moreover, the net income has a growth of 343 percent in five years and increases year-over-year at an average of 39 percent, except in 2015 to 2016 where the growth was -1.02 percent.
  • On the other hand, market capitalization has a growth of 4 percent in five years and the year-over-year growth was averaging 3.64 percent. It suffered negative growth in 2016 at 4 percent and the trailing twelve months at 32.75 percent.
  • Further, the intrinsic value was 185 and 185 percent above the market cap in 2017 and 2018 TTM respectively.

Interpretation

AL management has managed to utilize its assets to produce sufficient revenue for the operation of the business in the last five years. As a result, the company is profitable. Moreover, its intrinsic value was higher than the market cap indicating that the stock price of AL was trading at an undervalued price.

 

E) AIR LEASE KEY EXECUTIVE COMPENSATION

air-lease-corporation-al

SUMMARY

Executive 2013 2014 2015 2016 2017 (2017) %
Key Executive Compensation 24,969,215 26,494,168 24,748,889 27,000,783 24,568,646 100.00%
Steven F. Udvar-Hazy – Exec Chairman of the Board 9,122,086 9,674,429 9,079,933 9,686,620 7,924,666 32.26%
John L. Plueger – CEO and President 7,122,845 7,482,030 7,012,942 7,785,065 8,076,572 32.87%
Gregory B. Willis – CFO and EVP 1,277,367 1,554,217 1,923,635 2,272,815 2,202,488 8.96%
Jie Chen – EVP and Managing Director of Asia 4,163,116 4,369,772 3,671,083 3,881,834 3,323,377 13.53%
Grant A. Levy – EVP 3,283,801 3,413,720 3,061,296 3,374,449 3,041,543 12.38%

DETAILED DISTRIBUTION

Key Executive Compensation

2013 2014 2015 2016 2017 % 2017
Salary 5,351,865 5,443,304 5,508,251 5,335,625 5,153,417 20.98%
Bonus 1,492,816 1,017,497 1,337,132 1,730,618 0
Restricted Stock Award 7,866,680 9,097,027 10,348,203 9,565,268 11,819,083 48.11%
Non-Equity Compensation 9,936,909 10,569,427 7,220,411 9,882,069 7,029,850 28.61%
Other Compensation 320,945 366,913 334,892 487,203 566,296 2.30%
Total 24,969,215 26,494,168 24,748,889 27,000,783 24,568,646 100.00%

Steven F. Udvar-Hazy – Exec Chairman of the Board

Salary 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000 22.71%
Bonus 526,291 347,328 456,840 649,801 0
Restricted Stock Award 3,376,861 3,897,384 4,316,339 3,817,607 3,267,474 41.23%
Non-Equity Compensation 3,276,000 3,420,000 2,340,000 3,132,000 2,548,000 32.15%
Other Compensation 142,934 209,717 166,754 287,212 308,392 3.89%
Total 9,122,086 9,674,429 9,079,933 9,686,620 7,924,666 100.00%

John L. Plueger – CEO and President

Salary 1,500,000 1,500,000 1,500,000 1,250,000 1,000,000 12.38%
Bonus 410,561 258,552 380,700 541,500 0
Restricted Stock Award 2,412,042 2,793,105 3,093,352 3,279,398 5,145,622 63.71%
Non-Equity Compensation 2,730,000 2,850,000 1,950,000 2,610,000 1,770,000 21.92%
Other Compensation 70,242 80,373 88,890 104,167 160,950 1.99%
Total 7,122,845 7,482,030 7,012,942 7,785,065 8,076,572 100.00%

Gregory B. Willis – CFO and EVP

Salary 401,969 443,333 491,667 555,917 606,417 27.53%
Bonus 25,886 43,969 67,085 83,875 0
Restricted Stock Award 306,571 409,224 763,157 485,301 818,496 37.16%
Non-Equity Compensation 492,492 641,250 585,000 1,126,389 755,790 100.00%
Other Compensation 50,449 16,441 16,726 21,333 21,785 0.99%
Total 1,277,367 1,554,217 1,923,635 2,272,815 2,202,488 100.00%

Jie Chen – EVP and Managing Director of Asia

Salary 876,563 905,596 914,167 920,833 928,667 27.94%
Bonus 303,148 228,500 246,881 259,003 0 0.00%
Restricted Stock Award 930,018 1,063,983 1,229,799 1,060,523 1,369,522 41.21%
Non-Equity Compensation 2,027,917 2,141,502 1,248,975 1,604,280 987,660 29.72%
Other Compensation 25,470 30,191 31,261 37,195 37,528 1.13%
Total 4,163,116 4,369,772 3,671,083 3,881,834 3,323,377 100.00%

Grant A. Levy – EVP

Salary 773,333 794,375 802,417 808,875 818,333 26.91%
Bonus 226,930 139,148 185,626 196,439 0
Restricted Stock Award 841,188 933,331 945,556 922,439 1,217,969 40.04%
Non-Equity Compensation 1,410,500 1,516,675 1,096,436 1,409,400 967,600 31.81%
Other Compensation 31,850 30,191 31,261 37,296 37,641 1.24%
Total 3,283,801 3,413,720 3,061,296 3,374,449 3,041,543 100.00%

Facts:

In 2017:

  • Total key executive compensation was $24.57 million.
  • And Steven F. Udvar-Hazy total compensation was $7.92 million.
  • John L Plueger total compensation was $8.08 million.
  • Gregory B. Willis total compensation was $2.20 million.
  • Jie Chen total compensation was $3.23 million.
  • Grant A. Levy total compensation was $3.04 million.

Explanation

  • The total key executive compensation represents 3.25 percent of the total net income in 2017.
  • And Steven F. Udvar-Hazy total compensation represents 32.26 percent of the total key executive compensation, in which 22.71 percent is salary or equivalent to $1.8 million.
  • Further, John L. Plueger total compensation represents 32.86 percent of the total key executive compensation in which 12.38 percent is salary equivalent to $1.0 million.
  • Likewise, Gregory B. Willis total compensation represents 8.96 percent of the total key executive compensation in which 27.53 percent is salary or equivalent to $606k.
  • Next is Jie Chen total compensation represents 13.53 percent of the total key executive compensation in which 27.94 percent is salary or equivalent to $929k.
  • Similarly, Grant A. Levy total compensation represents 12.38 percent of the total key executive compensation in which 26.91 percent is salary or equivalent to $818k.

Interpretation

The total key executive compensation is averaging $25.6 million in five years comparing to the average 5-year net income of $366 million. Therefore, it indicates that the total executive compensation is 7 percent of the average net income.

 

F) LOBBYING/CONTRIBUTIONS TO POLITICIANS

There is no record of lobbying found for Air Lease Corporation (AL).

Search Results

No lobbying income or spending found.

This may be because no lobbying was reported, because the lobbying contract was terminated, or because reported lobbying was less than the $10,000 threshold that allows us to build a profile. The Center for Responsive Politics conservatively assumes any lobbying under the $10,000 threshold to be $0 earned or spent. Please click on “View Report Images” on the tab navigation bar to see if this firm or client has filed any reports.

NOTE: All lobbying expenditures on this page come from the Senate Office of Public Records. Data for the most recent year was downloaded on October 24, 2018.

 

G) AIR LEASE FINANCIAL STRENGTH

air-lease-corporation-al

Data:

Working Capital Total Assets Sales EBIT Market Value of Equity Book Value of Total Liabilities Retained Earnings
1,545,798,000 15,614,164,000 1,629,374,000 953,981,000 4,127,442,000 11,486,722,000 1,866,342,000

Formula:

Z-Score =  1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Calculation Ratio Z-Score Result
A – Working Capital/Total Assets 0.10 1.2 0.12
B – Retained Earnings/Total Assets 0.12 1.4 0.17
C – EBIT/Total Assets 0.06 3.3 0.20
D – Market Value of Equity/Book Value of Total Liabilities 0.36 0.6 0.22
E-Sales/Total Assets 0.10 1.0 0.10
Z-Score 0.81

The above Z-Score is computed as follows:  Z-Score =  1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Facts:

  • A –  0.10 * 1.2 = 0.12
  • B – 0.12 * 1.4 = 0.17
  • C – 0.06 * 3.3 = 0.20
  • D – 0.36 * 0.6 = 0.22
  • E – 0.10 * 1.0 = 0.10
  • Z-Score = 0.81  

Explanation

Z-Score is a mathematical measurement that is used to compare data points from different sets of data to arrive at the relationship to the mean. Moreover, this impression is often known as the Altman Z-Score. This measurement was used to forecast the likelihood of the company would go bankrupt.

Interpretation

The Z-Score of AL is below 1.0 which is 0.81. Typically a score of 0 – 1.8 is more likely the company will declare bankruptcy. Alarming isn’t it. But wait let us go deeper and interpret it with care.

Let us note that, this statistical measurement sums several weighted financial ratios and compare it to the scale shown above  A, B, C, D & E. The profitability, liquidity, leverage, and efficiency is the main factors of this measurement. Hence, total assets are the denominator in four equations, therefore, total assets represent a huge percentage on all the ratios, the result is obviously low.  

In addition, analyzing this kind of industry, AL is an intensive industry which requires a huge amount of capital investment to run its business effectively. Further, AL invested heavily in property, plant, and equipment and in the last five years the company has never suffered a loss in its operation and is considered to be profitable.

In conclusion

Air Lease Corporation (AL)  has sound financial health and is profitable in the past five years. Debt is greater than equity and the leverage ratio is high at nearly 400 percent. And also, the company is investing heavily in equipment. Significantly, the management or the leaders of AL has a satisfactory strategic method in running the operation of the business for its growth and development. AL doesn’t have any expenses in lobbying. Moreover, AL has not failed in the past five years based on all the test and valuation made for AL above. As a result, I believe that Air Lease Corporation (AL) can be a good candidate for investment, therefore, I recommend a BUY on the stock of AL.

 

CITATION

https://www.sec.gov/cgi-bin/browse-edgar?CIK=AL&owner=exclude&action=getcompany

https://www.morningstar.com/

https://finance.yahoo.com/

https://airleasecorp.com/

https://en.wikipedia.org/wiki/Air_Lease_Corporation

https://www.opensecrets.org/lobby/lookup.php

https://www.opensecrets.org/industries/alphalist.php

Researched and written by Criselda

Twitter: criseldarome

Totem’s Performance on Portfolio Was Unveiled

February 11th, 2019 Posted by Stocks Portfolio No Comment yet

 Totem’s portfolio performance was unveiled today. We have updated the overall returns we made from May 2013 to December 31, 2016.  We have monitored companies we believed were valuable and we are publicly revealing the results of returns.

Totem analyzed and scrutinized each company through our own method of filtering and leaving only the companies with value as a guide for beginners in investing.

Performance Summary of  Time-Weighted Rate of Return 

We have cracked the analysis we made as of December 31, 2016.

Period Cost Value Overall Return Days Annual return Time Weighted
5/23/2013 12/31/2013 23,711 40,593 71.20% 222 142.06% 1.095
12/31/2013 8/13/2014 73,341 93,201 27.08% 225 47.51% 1.042
8/13/2014 8/30/2014 207,206 223,509 7.87% 17 408.42% 1.001
8/30/2014 12/31/2014 223,509 211,710 -5.28% 123 6.59% 0.995
12/31/2014 3/25/2015 377,599 383,182 1.48% 84 6.59% 1.001
3/25/2015 12/2/2015 437,435 473,353 8.21% 252 12.11% 1.015
12/2/2015 12/31/2015 371,583 380,531 2.41% 29 34.92% 1.001
12/31/2015 4/12/2016 402,239 423,449 5.27% 103 19.97% 1.004
4/12/2016 5/5/2016 367,711 359,903 -2.12% 23 -28.87% 1.000
5/5/2016 5/31/2016 359,903 362,753 0.79% 26 11.71% 1.000
5/31/2016 6/30/2016 362,753 357,506 -1.45% 30 -16.24% 1.000
6/30/2016 7/31/2016 357,506 377,261 5.53% 31 88.38% 1.001
7/31/2016 8/31/2016 377,261 391,919 3.89% 31 56.64% 1.001
8/31/2016 9/30/2016 391,919 406,971 3.84% 30 58.17% 1.001
9/30/2016 10/31/2016 406,971 407,614 0.16% 31 1.88% 1.000
10/31/2016 11/30/2016 407,614 407,350 -0.06% 30 -0.79% 1.000
11/30/2016 12/31/2016 407,350 397,340 -2.46% 31 -25.39% 0.999
1318 16.17%

Following us from the beginning you probably make the same returns as we did from the list we monitored. In the next article, we will provide an updated analysis for the first quarter of 2017. We invite you to keep a watch on the articles we are posting. We will reveal the next overall analysis.

Thank you for reading.

If you want to read our previous post on blog click here.

Portfolio Return on Totem List Updated

October 28th, 2017 Posted by Stocks Portfolio No Comment yet

Portfolio Updates

Portfolio returns on the company list we monitored were updated as of August 31, 2017. We believed these companies were valuable and we publicly reveal the results of returns. We analyzed and scrutinized all these companies in the list through our own method of filtering, leaving and choosing only the companies with value. The summary of the analysis of the portfolio return is shown in the table below. 

Summary

Period Cost Value Overall return Days Annual return Time Weighted
5/23/2013 12/31/2013 23,711 40,593 71.20% 222 38.68% 1.079
12/31/2013 8/13/2014 73,341 93,201 27.08% 225 15.92% 1.035
8/13/2014 8/30/2014 207,206 223,509 7.87% 17 0.35% 1.001
8/30/2014 12/31/2014 223,509 211,710 -5.28% 123 -1.81% 0.996
12/31/2014 3/25/2015 377,599 383,182 1.48% 84 0.34% 1.001
3/25/2015 12/2/2015 437,435 473,353 8.21% 252 5.60% 1.013
12/2/2015 12/31/2015 371,583 380,531 2.41% 29 0.19% 1.000
12/31/2015 4/12/2016 402,239 423,449 5.27% 103 1.46% 1.003
4/12/2016 5/5/2016 367,711 361,724 -1.63% 23 -0.10% 1.000
5/5/2016 5/31/2016 361,724 362,590 0.24% 26 0.02% 1.000
5/31/2016 6/30/2016 362,590 357,295 -1.46% 30 -0.12% 1.000
6/30/2016 7/31/2016 357,295 377,062 5.53% 31 0.46% 1.001
7/31/2016 8/31/2016 377,062 391,718 3.89% 31 0.32% 1.001
8/31/2016 9/30/2016 391,718 406,762 3.84% 30 0.31% 1.001
9/30/2016 10/31/2016 406,762 407,371 0.15% 31 0.01% 1.000
10/31/2016 11/30/2016 407,371 407,171 -0.05% 30 0.00% 1.000
11/30/2016 12/31/2016 791,544 781,540 -1.26% 31 -0.11% 1.000
12/31/2016 1/31/2017 781,540 822,893 5.29% 31 0.44% 1.001
1/31/2017 2/28/2017 822,893 853,749 3.75% 28 0.28% 1.001
2/28/2017 3/31/2017 860,749 877,985 2.00% 31 0.17% 1.000
3/31/2017 4/30/2017 930,880 966,310 3.81% 30 0.31% 1.001
4/30/2017 5/31/2017 979,756 1,000,174 2.08% 31 0.18% 1.000
5/31/2017 6/30/2017 1,000,174 979,344 -2.08% 30 -0.17% 1.000
6/30/2017 7/31/2017 979,344 1,037,439 5.93% 31 0.49% 1.001
7/31/2017 8/31/2017 1,037,439 1,002,025 -3.41% 31 -0.29% 0.999
          1561   13.88%

Above all, if you follow us all the way from the beginning you probably make the same portfolio return of 13.88 percent. Therefore, we encourage you to keep a close watch on the companies we published. Further, it will serve as a guide in choosing companies with value in your portfolio.

Happy investing.

Thank you for reading.

Time-Weighted Rate of Return (TWRR)

July 13th, 2017 Posted by Stocks Portfolio No Comment yet

Time-Weighted Rate of Return (TWRR) on Portfolio

Time-Weighted Rate of Return (TWRR) is a method to measure the performance of the portfolio over the time period invested. The summary of the results on the portfolio list we maintained is seen below in a table. These companies we are monitoring has a recommendation of a Buy in the articles we wrote and published in the website.  Totem has started publishing articles from as early as 2012.  Each company has a recommendation for a Buy and a template was created to monitor the returns and we assumed all these companies had a 100 shares Buy from the date the article was published was also the date of purchase.

The following Cris Portfolio is one of the three portfolio lists that is being monitored, maintained and updated periodically. This is part of my training in Totem.

TWRR

Period Cost Value Overall

Return

Days Annual

Return

08-12-2012 12-31-2012 68,199 64,884 -4.86% 141 -0.40% 0.996000
12-31-2012 12-31-2013 130,528 141,587 8.47% 365 1.71% 1.017078
12-31-2013 12-31-2014 155,792 174,716 12.15% 365 2.42% 1.024157
12-31-2014 12-31-2015 160,853 183,189 13.89% 365 2.74% 1.027443
12-31-2015 08-31-2016 161,200 187,392 16.25% 244 2.12% 1.021177
08-31-2016 09-30-2016 161,200 184,224 14.28% 30 0.23% 1.002287
09-30-2016 10-31-2016 161,200 179,672 11.46% 31 0.19% 1.001920
10-31-2016 11-30-2016 161,200 184,224 14.28% 30 0.23% 1.002287
11-30-2016 12-31-2016 161,200 179,672 11.46% 31 0.19% 1.001920
12-31-2016 01-31-2017 317,069 332,186 4.77% 31 0.08% 1.000824
01-31-2017 02-28-2017 317,069 354,834 11.91% 28 0.18% 1.001799
02-28-2017 03-31-2017 317,069 371,784 17.26% 31 0.28% 1.002819
03-31-2017 04-30-2017 317,069 381,453 20.31% 30 0.32% 1.003169
04-30-2017 05-31-2017 317,069 413,624 30.45% 31 0.47% 1.004712
1753 11.24%

Furthermore,

The above table shows an overall time-weighted rate of return (TWRR) of 11.24 percent. Above all, following our recommendations from the beginning with all the companies written and published on the company’s website. Likewise, you might have the same time-weighted rate of return of 11.24 percent.

We invite you to monitor our company and investment analysis through the written articles on our website: totemtalk.com

Thank you for reading.

Lazard Ltd Shs A (LAZ) Extended Graph Analysis

June 10th, 2017 Posted by Extended Analysis No Comment yet

Lazard Company Profile

Lazard Ltd Shs A (LAZ) is a financial advisory and asset management firm. The company has a diverse set of clients around the globe including corporations, governments, institutions, partnership, and individuals. The company is currently operating from 42 cities in key business and financial centers across 27 countries throughout North America, Europe, Asia, Australia, the Middle East, and Central and South America. Moreover, LAZ has 2,610 employees as of 2015.

LAZ logo

Lazard Ltd Shs A (LAZ) Extended Graph Analysis

A. LAZ CASH FLOW

LAZ CF

  Net cash provided by operating activities Net cash used for investing activities Net cash provided (used for) financing activities Capital expenditure Free Cash Flow
2011 397,277,000 -45,277,000 -552,359,000 -45,277,000 442,554,000
2012 481,908,000 -84,933,000 -563,220,000 -84,933,000 566,841,000
2013 526,697,000 -54,553,000 -487,072,000 -54,553,000 581,250,000
2014 736,017,000 20,099,000 -435,369,000 -20,099,000 715,918,000
2015 887,296,000 -25,952,000 -746,804,000 -25,952,000 913,248,000
2016 601,287,000 -37,653,000 -486,952,000 -37,653,000 638,940,000
2017 795,561,000 -36,015,000 -519,117,000 -36,015,000 831,576,000

Facts:

  • Cash from operating activities is $795.6 million.
  • And the cash from investing activities is -$36  million.
  • In addition, the net cash provided by (used for) financing activities is -$519 million.
  • While, capital expenditure is -$36 million.
  • Likewise, free cash flow is $831.6 million.

Explanation:

  • The five years of growth of cash from operating activities was 100 percent.
  • Net cash used for investing activities are purchases of property, plant, and equipment.
  • In addition, the net cash used for financing activities is long-term debt repayment, repurchase of treasury stock, and cash dividend payments.
  • While, capital expenditures are purchases of property, plant, and equipment.
  • Likewise, free cash flow has 88 percent growth in five years.

Interpretation

Lazard is capable of generating sufficient cash for its business operation.

Summary

Overall, Lazard is generating sufficient cash revenue for the business operation. In addition, the company was able to purchase properties, plant, and equipment for the operations. Moreover, the company was able to pay their long-term debt, repurchase treasury stock and cash dividend payments. Finally, free cash flow is growing.

B. LAZ BALANCE SHEET

LAZ BS

  Cash and Cash Equivalent Current Assets Total Assets Current Liabilities Total liabilities Equity Retained Earnings Total Debt Working Capital
2011 1,289,828,000 2,377,564,000 3,081,936,000 294,502,000 2,355,793,000 726,143,000 258,646,000 1,076,850,000 2,083,062,000
2012 1,142,684,000 2,100,632,000 2,986,893,000 273,411,000 2,417,237,000 569,656,000 182,647,000 1,076,850,000 1,827,221,000
2013 1,086,361,000 2,139,187,000 3,011,137,000 280,465,000 2,450,928,000 560,209,000 203,236,000 1,048,350,000 1,858,722,000
2014 1,274,340,000 2,487,802,000 3,332,236,000 336,178,000 2,625,492,000 706,744,000 464,655,000 1,048,350,000 2,151,624,000
2015 1,521,944,000 2,596,016,000 4,486,766,000 506,665,000 3,173,311,000 1,313,455,000 1,123,728,000 998,350,000 2,089,351,000
2016 853,887,000 1,889,508,000 4,302,303,000 587,059,000 3,001,161,000 1,301,161,000 1,058,189,000 990,488,000 1,302,449,000

Facts:

  • Cash and cash equivalent was $853.9 million in 2016.
  • And the current assets were $1.9 billion IN 2016.
  • In addition, total assets were $4.3 billion IN 2016.
  • While the current liabilities were $587 million IN 2016.
  • On the other hand, total liabilities were $3.0 billion IN 2016.
  • Moreover, retained earnings were $1.1 billion IN 2016.
  • And total equity was $1.3 billion IN 2016.
  • Rather, working capital was $1.3 billion IN 2016.
  • Total debt was $1.2 billion IN 2016.

Explanation:

  • Cash and cash equivalent have negative growth of 34 percent from 2011 at $436 million.
  • And the current assets have negative growth of 21 percent from 2011 at $488 billion.
  • Likewise, total assets have grown 40 percent in 2011 at $1.2 billion.
  • On the other hand, current liabilities increased by 99 percent from 2011 at $293 million.
  • And the total liabilities increased by 27 percent from 2011 at $645 million.
  • In addition, retained earnings had increased by 309 percent from 2011 at $800 million.
  • Similarly, total equity had increased by 79 percent from 2011 at $575 million.
  • And the working capital was erratic in movement and has decreased 37 percent from 2011 at $781 million.
  • Finally, the total debt had decreased by 8 percent from 2011 at $86 million.

Interpretation

As a result, the company is financially healthy and stable in the last six years of its business operations.

Summary

Overall, LAZ is liquid and capable of paying its short-term financial obligations using its cash and cash equivalents. Although its liability/equity ratio is 72/28 percent, respectively, meaning the company is using more of borrowed funds in its capital structures, in other words, creditors have more stake in the assets of the company than the investors. Moreover, total assets, retained earnings and equity were increasing year-over-year from 2012.

C. LAZ RATIOS

LAZ RATIOS

  Operating Margin Net Margin Return on Assets Return on Equity Asset Turnover Financial Leverage Debt to Equity
2011 12.90 9.56 5.38 25.38 0.56 4.24 1.51
2012 6.50 4.41 2.78 13.01 0.63 5.24 1.92
2013 10.90 8.07 5.34 28.36 0.66 5.38 1.90
2014 22.60 18.57 13.47 67.45 0.73 4.71 1.50
2015 -0.70 41.91 25.23 97.65 0.60 3.41 0.77
2016 22.20 16.62 8.57 30.41 0.52 3.69 0.97
2017 23.20 17.43 10.20 36.96 0.59 3.80 1.04

Facts:

  • The current operating margin is 23 percent; averaging 14 percent from 2011.
  • And the net margin was 17.43 percent; averaging 17 percent from 2011.
  • In addition, return on assets was 10.20 percent; averaging 10.14 percent from 2011.
  • Likewise, return on equity was 36.96 percent; averaging 43 percent from 2011.
  • Further, asset turnover was 0.59, averaging 0.61 from 2011.
  • And the debt to equity was 1.37; decreased by 0.47 from 2011 and averaging 1.37.
  • Financial leverage was 3.80; decreased by 0.44 from 2011 and averaging 4.35.

Explanation

  • Operating margin shows that management is efficient and shows a decent leftover on revenue after deducting operating costs.
  • And the net margin shows a decent return on revenue after deducting all expenses.
  • On the other hand, return on assets shows a return of 10 cents for every dollar invested in assets.
  • Moreover, return on equity shows a return of 37 percent on investments made in the stocks of LAZ.
  • Likewise, asset turnover shows that LAZ is generating 59 cents of net sales for every dollar invested in the assets.
  • While debt to equity shows that more assets are financed by debt than those financed by investors.
  • Hence, financial leverage is total assets over stockholders equity. LAZ uses more debt in its capital structure.

Interpretation

It indicates that LAZ is profitable, however, the company is utilizing more on borrowed funds to finance assets.

Summary

Overall, the results of ratios show that the company is profitable in its business operations and can generate a decent return on the investments made by investors. However, creditors have more stake in the assets of the company.

D. LAZ INCOME AND MARKET

LAZ INC AND MARKET

  Total Revenue Revenues, net of int expense Inc before inc taxes Net Income Intrinsic Value Market Cap
2011 1,919,638,000 1,829,512,000 235,499,000 174,917,000 1,377,240,000 3,680,180,000
2012 1,994,013,000 1,912,448,000 123,885,000 84,309,000 1,415,130,000 3,444,000,000
2013 2,064,733,000 1,985,352,000 216,807,000 160,212,000 2,237,800,000 5,472,000,000
2014 2,363,017,000 2,300,447,000 519,465,000 427,277,000 2,935,940,000 6,492,000,000
2015 2,404,767,000 2,353,608,000 -16,620,000 986,373,000 5,713,680,000 5,841,000,000
2016 2,383,663,000 2,235,055,000 517,461,000 387,698,000 6,220,410,000 5,064,000,000
2017 2,510,967,000 2,458,617,000 569,281,000 428,428,000 6,096,720,000 5,333,000,000

Facts

  • The current revenue is $2.5 billion; grown 31 percent from 2011.
  • The revenue net of interest expense was $2.46 billion; grown 24 percent from 2011.
  • Income before income taxes was $569 million; grown 142 percent from 2011.
  • Net income was $428 million; grown 145 percent in six years.
  • The current intrinsic value was $6.1 billion; grown 343 percent in six years.
  • Market capitalization was $5.3 billion; grown 45 percent in six years.

Explanation

  • Revenue is interest and dividend income.
  • Interest expense is approximately 2 percent of total revenue.
  • And the income before income taxes is 23 percent of total revenue.
  • Likewise, net income is 17 percent of the total revenue.
  • On the other hand, the Intrinsic value is increasing year-over-year at an average of 32 percent.
  • Moreover, the growth in market capitalization year-over-year was 9 percent.

Interpretation

The income statement of LAZ shows that the company is capable of generating sufficient income for its daily operation. Moreover, in 2016 and 2017 shows that the stock of LAZ is undervalued.

Summary

LAZ is efficient in generating sufficient revenue and earnings for its operations. It indicates that the company is profitable and financially stable.

E. LAZ KEY EXECUTIVE COMPENSATION

LAZ KEY EXEC COMPENSATION

  Key Executive Compensation Chairman and CEO – Kenneth M. Jacobs CEO of Lazard Asset Management – Ashish Bhutani COO and CEO, Fianancial Advisory – Alexander F. Stern General Counsel – Scott D. Hoffman
2011 40,684,344 12,461,056 11,985,709 5,238,088 3,878,514
2012 30,647,351 8,842,195 9,681,715 4,718,605 3,495,131
2013 29,836,142 8,615,321 9,628,768 4,689,013 3,255,326
2014 33,987,277 9,992,527 10,486,058 5,878,981 3,682,299
2015 37,363,585 11,679,538 10,443,083 6,806,199 4,064,935
2016 36,239,177 11,641,070 9,543,515 6,945,432 4,017,627

Facts:

  • The key executive compensation was $36 million.
  • The Chairman and CEO compensation are $ 11.6 million.
  • And the CEO of Lazard Asset Management compensation was $9.5 million.
  • In addition, the COO and CFO Financial Advisory compensation were $6.9 million.
  • Moreover, the General Counsel compensation was $4 million.

Explanation

  • The key executive compensation represents 1.5 percent of the total revenue.
  • The Chairman and CEO compensation represent 32 percent of the total key executive compensation.
  • And the CEO of Lazard Asset Management compensation represents 26 percent of the total key executive compensation.
  • While the COO and CFO Financial Advisory compensation represent 19 percent of the total key executive compensation.
  • And the General Counsel compensation represents  11 percent of the total key executive compensation.

Interpretation

The key executive compensation is composed of basic salary, bonus, restricted stock award, and other compensation.

Summary

Laz is paying its key executives a decent salary plus incentives and benefits.

 

F. LAZ LOBBYING AND CONTRIBUTIONS

LAZ LOBBY

  2012 2013 2014 2015 2016
Lobbying 0 630,000 610,000 560,000 360,000
Contributions 673,094 0 577,526 0 568,632

Facts

  • The company spent lobbying year-over-year, and in 2016 lobbying was $360,000.
  • Likewise, LAZ spent contributions and in 2016 contributions was $568.632.

Explanation

  • LAZ lobbying is spending made to candidates like Hillary Clinton and many others.
  • In addition, the contributions of $568,632 are composed of the following:
    • Contributions to candidates                           $351,148
    • Contribution to Leadership PACs                        7,900
    • Contributions to parties                                     183,584
    • Contributions to outside spending groups      26,000

Interpretations

Lazard is spending approximately 2 percent of revenue in lobbying and 2 percent of revenue in contributions.

Summary

Annually the company is spending lobbying to candidates and other figures. The company’s highest spending on lobbying was in 2009 in approximately $1 million.

G. LAZ FINANCIAL STRENGTH

LAZ FINANCIAL STRENGTH

  2011 2012 2013 2014 2015 2016 2017 2018
Score 2.99 2.81 3.68 4.12 3.09 2.91 2.98 3.05

Facts

  • The calculated score in 2011 was 2.99.
  • In 2012 score was 2.81.
  • And in 2013 score was 3.68.
  • Likewise in 2014 score was 4.12.
  • While in 2015 score was 3.09
  • Moreover, in 2016 score was 2.91
  • Future score for 2017 was 2.98
  • Finally, the future score in 2018 was 3.05

Explanation

Lazard has an erratic score from 2011. A score of above 1.8 to 3 indicates that the company might be headed to bankruptcy and a score of above 3 is considered financially stable.

Interpretation

The future score in 2018 is based on the current trend movement in 2017. It shows from 2016 to 2017 there was an upward trend in the score, therefore, the future score is up at the same ratio.

Summary

Multiple financial ratios were combined to form the score, it is a gauge of the company’s financial strength and the likelihood of bankruptcy. It indicates that LAZ is considered financially stable, although, the score in 2017 fall less than 3. The score went up from 2016, therefore, the future score is based on the current trend.

Overview

Lazard is generating sufficient cash revenue for the business operation. The company was able to purchase properties, plant, and equipment for the operations. Moreover, the company was able to pay their long-term debt, repurchase treasury stock and cash dividend payments. Above all, free cash flow is growing.

Further, Lazard is liquid and capable of paying its short-term financial obligations using its cash and cash equivalents. Although its liability/equity ratio is 72/28 percent, respectively. Meaning, LAZ is using more of borrowed funds in its capital structures. In other words, creditors have more stake in the assets of the company than the investors. In addition, total assets, retained earnings and equity were increasing year-over-year from 2012.

Furthermore,

The company shows profitability in its business operations and can generate a decent return on the investments made by investors. Moreover, the company is efficient in generating sufficient revenue and earnings for its operations. It indicates that the company is profitable and financially stable.

In addition, LAZ is paying its key executives a decent salary plus incentives and benefits. Further, the financial strength indicates that LAZ is considered financially stable, although, the score in 2017 fall less than 3, and the score went up from 2016, as a result, the future score is based on the current trend.

CITATION

https://www.sec.gov/Archives/edgar/

http://financials.morningstar.com/income-statement/is.html?t=LAZ

https://www.opensecrets.org/orgs/summary.php?id=D000035294&cycle=2016

Researched and Written by Criselda

Twitter: criseldarome

Chipotle Mexican Grill Inc Class A (CMG) Graph Analysis

May 16th, 2017 Posted by Graph Analysis No Comment yet

CMG logoChipotle Mexican Grill A (CMG) is a Delaware corporation which operates 2,198 Chipotle Mexican Grill restaurants all over the United States and 29 international Chipotle restaurants. Moreover, they operate 23 restaurants in non-Chipotle concepts. The company is a public    company listed on New York Stock Exchange (NYSE) with the symbol CMG. Its initial public offering was on January 26, 2006. Chipotle Mexican Grill A was founded on July 13, 1993, 23 years ago by Steve Ells. Headquartered in Denver, Colorado, United States. The company has more than 45, 200 employees.

A. CMG CASH FLOWS

CMG CF

B. BALANCE SHEET

CMG BS

C. RATIOS

CMG FINANCIAL RATIOS

D. INCOME AND MARKET

CMG INC MRKT

E. KEY EXECUTIVE COMPENSATION

CMG COMPENSATION

F. FINANCIAL STRENGTH

CMG STRENGTH
Thank you for reading.

Researched and created by Criselda

Amira Nature Foods Ltd (ANFI) Graph Analysis

May 13th, 2017 Posted by Graph Analysis, Uncategorized No Comment yet

ANFI logoAmira Nature Foods Ltd (ANFI) is an international producer of packaged foods, Indian specialty Basmati rice with its more than 200 related food products. The company’s key products are rice, organic ingredients, pulses, oil, and spices. Amira Nature Foods Ltd is founded in 1915 by B. D. Chanana and headquartered in the United Arab Emirates. The company’s initial public offering was on October 10, 2012,  under New York Stock Exchange (NYSE) with the company symbol ANFI.

A. CASH FLOWS

ANFI CF

B. BALANCE SHEET

ANFI BS

C. RATIOS

ANFI RATIOS

D. INCOME AND MARKET

ANFI INCOME AND MARKET

E. FINANCIAL STRENGTH

ANFI STRENGTH

F. KEY EXECUTIVE COMPENSATION

ANFI COMPENSATION

Thank you.

Researched and Written by Criselda

Twitter: criseldarome

Cherokee Inc (CHKE) Graph Analysis

May 11th, 2017 Posted by Graph Analysis No Comment yet

cherokee-inc-chkeCherokee Inc is an international brand marketing platform which manages the portfolio of fashion and lifestyle brands. Moreover, the company manages licenses and franchise agreements with retailers and manufacturers over 110 countries around the globe. Cherokee Inc was founded in 1973 by James Argyropoulos and was incorporated on May 17, 1988. The company was headquartered in Sherman Oaks, California, United States. Cherokee Inc initial public offering was on June 11, 1993, under NASDAQ with ticker symbol CHKE.

A. CASH FLOW

CHKE CF

B. BALANCE SHEET

CHKE BS

C. FINANCIAL RATIOS

CHKE RATIO

D. INCOME AND MARKET

CHKE INC AND MARKET

E. CHKE KEY EXECUTIVE COMPENSATION

CHKE COMPENSATION

F. FINANCIAL STRENGTH

CHKE STRENGTH

Thank you.

Researched and Created by Criselda

Twitter: criseldarome

C

Buckle Inc (BKE) Graph Analysis

May 4th, 2017 Posted by Graph Analysis No Comment yet

Buckle IncBuckle Inc is a retailer of casual apparel, footwear, and accessories for fashion-conscious young men and women. The company markets a wide selection of brand names and private label casual apparel. It includes denim, other casual bottoms, tops, sportswear, outerwear, accessories, and footwear. Further, they operate in 450 stores in 44 states. Founded in 1948 by David Hirschfield. The company is headquartered in Kearney, Nebraska, United States.  Furthermore, it began as Mills Clothing, a men’s clothing store.

A. Cash Flow

BKE CF

B. Balance Sheet

BKE BS

C. Ratios

BKE FINANCIAL RATIOS

D. Income and Market

BKE INC MRKT

E. Key Executive Compensation

BKE COMPENSATION

F. Buckle Financial Strength

BKE STRENGTH

Thank you.

Researched and written by Criselda

Twitter: criseldarome

Vera Bradley Inc (VRA) Graph Analysis

April 28th, 2017 Posted by Graph Analysis No Comment yet

Vera BradleyVera Bradley Inc (VRA) is a leading designer of luggage, handbags, accessories, travel and gift items. Founded by Barbara Bradley Baekgaard and Patricia R. Miller in 1982.  The company was incorporated on June 23, 2010, and headquartered in Fort Wayne, Indiana, United States. The company is listed on NASDAQ with company symbol VRA on October 2010.          

            

A. VRA CASH FLOW

VRA CASH FLOW

B. VRA BALANCE SHEET

VRA BS

C. VRA INCOME AND MARKET

VRA INC

D. VRA RATIOS

VRA RATIOS

E. VRA KEY EXECUTIVE COMPENSATION

VRA COMPENSATION

F. VRA FINANCIAL STRENGTH

VRA STRENGTH

Thank you.

Researched and created by Criselda

Twitter: criseldarome

YY Inc (YY) Graph Analysis

April 25th, 2017 Posted by Graph Analysis No Comment yet

YYY IncY Inc (YY) is one of the major live streaming social media platforms in China.  The company is leading in active monthly and daily users and total time spent by users compared to its industry peers. It engages users to communicate in real-time online group activities through voice, text, and video. YY Inc was incorporated on July 22, 2011. The company was listed on NASDAQ in November 2012 with company symbol YY.

A. CASH FLOWS

YY CF

B. BALANCE SHEET

YY BS

C. RATIOS

YY RATIOS

D. INCOME AND MARKET

YY Inc

E. YY FINANCIAL STRENGTH

YY Strength

Thank you.

Researched and created by Criselda

Twitter: criseldarome

Another New Challenge for ITT Educational Services Inc (ESI)

July 22nd, 2016 Posted by Company Updates No Comment yet

itt-tech-esi

ITT Educational Services Inc (ESI) received a letter from the US Department of Education (ED)

ED required ITT Tech to increase its existing guarantee of $79.7 million to $123.6 million. ESI have to comply within 45 days from the date of the ED letter to provide the Additional Amount of $43,938,303. This is either cash or letter of credit.

ESI had submitted a letter of credit for $79.7 million which is termed “ED Letter of Credit” in the beginning. The agreement was termed “ED Agreement” on December 16, 2015. Furthermore, with ED to maintain an escrow account, the “ED Escrowed Funds” until November 4, 2019.

The Problem

“Will the company be able to provide the required additional amount?” I think they can because Cerberus Business Finance LLC could finance their financial needs. Although ESI had originally borrowed $100,000 million, ESI was able to pay and the half of it with a balance $50,505 million as of March 31, 2016. In addition, ESI expects a $0 balance on December 31, 2016. The future cash earnings of ESI are already set for payment of their current obligations. Therefore it becomes a challenge for them to pay the additional escrow.  

ITT Tech SEC 8K Filing Report

Quoted from SEC 8k:

“The Financing Agreement entered into among the Company, Cerberus Business Finance LLC, as collateral agent and administrative agent, and the lenders’ party thereto (as amended, the “Financing Agreement”) permits the Company to incur certain types of indebtedness. Permitted indebtedness under the Financing Agreement includes indebtedness in respect of cash collateral under the ED Agreement in an aggregate amount not exceeding $120,000,000 at any time outstanding, as well as other indebtedness in an aggregate amount not exceeding $17,500,000 at any time outstanding, which amount is not currently represented by any existing type of indebtedness. Based on these permitted types and amounts of indebtedness, the Company does not believe that the Additional Amount, when provided, will constitute a default under the Financing Agreement.”

In conclusion,

The possible effect of the regulation imposed by ED could materially affect its liquidity. The company’s current situation, there is no certainty that they could fund the Additional Amount. However, through Cerberus Business Finance LLC they might be able to meet its obligation with the DOE.

To view the research report of ITT Tech please click here.

Research and Written by Cris

 

 

Interested to learn more about the company? Here’s investment valuation for a quick view, company research to know more of its background and history; and value investing guide for the financial status.

McDonalds mcd

McDonalds (MCD)Business Is Really Real Estate And Franchise

June 5th, 2016 Posted by Company Research Report No Comment yet

McDonalds company research.

MCD

McDonalds Company Research

Company’s History and Nature of Business

The business began in 1940; a restaurant opened by brothers Richard and Maurice McDonald in San Bernardino, California. The opening of a franchised was first acquired by Czech-American businessman Ray Kroc in Des Plaines, Illinois on 1955 which led its worldwide expansion and became listed on the public stock markets in 1965. Today, McDonald’s Corporation is the world’s largest chain of hamburger fast food restaurants which serves around 68 million customers daily in 119 countries globally.

The company was managing with its segment which includes the United States, Europe, Asia, the Middle East, and Africa. McDonalds’s offer variations to suit each consumer’s preferences and taste, its menu includes, hamburgers, cheeseburgers, several chicken sandwiches beverages, and many others. They have the passion for quality, that every single ingredient was tested and perfected to fit the operating system. As the company expands into international markets it becomes a symbol of globalization, its prominence has sometimes made as a topic of public debates about obesity, corporate ethics, and consumer responsibility.

How do they make money?

Mc Donald’s generates its income as an investor in properties, a franchiser of restaurants and an operator of restaurants. Around 154% of the restaurants are owned and operated by McDonald’s Corporation directly. Moreover, the business operates through a variety of franchise agreements and joint ventures, wherein they collect franchise fees and marketing fees and also collect rent which calculated on the basis of sales. The company’s policy includes organizing the supply of food and materials to the restaurant through approved third party logistics operators and strictly would not allow direct sales of food or materials to franchisees.

Moreover, the company retains all of the profit earned by company-owned restaurants, they also incur a cost that is largely fixed they ensure the profit of each restaurant is either maintained or increased. The owner of each franchised restaurant keeps all the profit they make through sales after paying McDonald’s a royalty for trading under the brand name and rent for operating in a company’s owned property. The main advantage of operating franchised restaurants is that it guarantees a stream of income as the company sees to it to reduce the level of risk while enabling.

Who is running the business and what is their background?

Corporate Governance is one of the main reason that these terms (CEO, CFO) exist. Corporate titles on company officials are means to identify its function and responsibility in the organization. Here are McDonald’s company official’s brief biographies.

CEO

Thompson, Donald

Mr. Donald has been President, Chief Executive Officer since July 2012, and was also elected as Director on 2011. Prior to that, he serves as President, McDonald’s USA from August 2006 to January 2010, Mr. Thompson has been with the Company for 22 years. Mr. Thompson provides a Company perspective in Board discussions about the business, particularly with respect to worldwide operations, competitive landscape, senior leadership and strategic opportunities and challenges for the Company. In addition, as an independent director of another public company, Mr. Thompson has gained additional perspectives, including on governance and operational matters relevant to the Company.

During his 23 years at McDonald’s, Thompson has helped drive business results and global strategic innovation across the organization. Since joining as an electrical engineer in 1990, he has held a variety of key leadership positions within the company including Regional Vice President, Division President, and Chief Operating Officer. Between 2006 and 2010, Thompson served as President of McDonald’s USA, the company’s largest business segment. Most recently as President and COO of McDonald’s Corporation, Thompson and his leadership team established three global growth priorities in support of the McDonald’s Plan to win: to optimize the menu, modernize the customer experience and broaden restaurant accessibility.

CFO   

Peter J. Bensen

Mr. Peter J. Bensen is Chief Financial Officer, Senior Executive Vice President of the company a position he has held since January 2008. He is responsible for all financials matter of the company including Accounting, Internal Audit, and Controls, Tax, Treasury and Investor Relation as well as IT, Shared Service, Facilities, and Aviation. Moreover, Mr. Bensen has joined McDonald’s in 1996 as Director of Financial Accounting & reporting and subsequently held positions of increasing responsibility. Prior to joining the company, He was a senior manager for Ernst & Young in Chicago, where he serves multi-national audit, clients. Mr. Bensen is a graduate of St. Joseph’s College in Rensselaer, Indiana.

Do you trust these people and are they confident?

Basing from their company’s profile, I do trust these people and I believe they are confident as they played some major roles. Each of their experiences is the best factors that they could contribute in order to the company’s progress.

McDonalds Value Investing

Financial Analysis

The above data shows that McDonald’s corporation has an average degree of liquidity; current ratios which have an average of 1.44 and the quick ratio was averaging to 1.18. It tells us that the company is capable of meeting its short-term obligations when the due date comes. Moreover, the solvency ratio has an average of 0.50, and the leverage ratio has an average of 0.85 percent, an indication that the company is solvent.

McDonald’s gross margin was averaging 38 percent and has a stable movement. Net margin was averaging 18.62 percent however, it is trending down year over year.

McDonalds Investment Valuation

The Investment Valuation has always been a topic in financial and business circles, the method used is the basic mathematical technique that calculates the value of an investment as the present value of all future cash flows expected to be generated by the investment.

McDonald’s has a sustainable growth rate of 17 percent, average, and the calculated margin of safety was 62 percent. Moreover, the market capitalization was $94.84 billion at a share price of $93.53 as of Aug.12, 2014.

The above table shows that the company has:

  • an average return on equity of 32.38,
  • book value per share was averaging of 14.45,
  • the price to earnings ratio has an average of 18.20, this is the price that the investors are willing to pay for the stock of the company.
  • Earnings per share were averaging $ 5.12 this is the company’s net earnings allocated to each share of common stocks.

CITATION

http://www.sec.gov/Archives/edgar/data/63908/000119312514140308/d666434ddef14a.htm http://www.reuters.com/finance/stocks/officerProfile?symbol=MCD&officerId=845631 http://news.mcdonalds.com/US/Executive-Team http://www.aboutmcdonalds.com/mcd/our_company/leadership/peter_j_bensen.html

Research and Written by Meriam

Edited by Cris

Keenly Monitoring List Of Companies To Keep Close Watch On

April 12th, 2016 Posted by Stock to Watch No Comment yet

Keenly monitoring list of companies. Totem focuses on different methods of filtering good companies from the US market. Moreover, we used fundamental analysis and other methods to value the companies.

Totem’s color-code:

Green To Buy
No color To Hold
Red To Sell

Evergreen –        Hold for five (5) years or more. Totem has classified its portfolio into the following categories:

Woody –              Similar to evergreen but will not reduce the holdings even if the company’s stock is fully priced. These are great growth companies in the process of maturing.

Deciduous –       Hold for two (2) to five (5) years. These are companies falling off after the stage of growth

Monocarpic –     Hold for one (1) or two (2) years. These are companies once profitable and then die.

Keenly Monitoring list of  Companies:

Rank Symbol Company Name Sub Type
1 AVG AVG Technologies NV List Deciduous
2 KORS Michael Kors Holdings Ltd List Deciduous
3 QIWI Qiwi PLC List Deciduous
4 BIDU Baidu Inc ADR List Deciduous
5 PCLN Priceline Group Inc List Deciduous
6 AAPL Apple Inc List Deciduous
7 LOPE Grand Canyon Education Inc List Deciduous
8 FSLR First Solar Inc List Deciduous
9 HFC HolyFrontier Corp List Deciduous
10 SB Safe Bulkers Inc Cream Monocarpic
11 ESI ITT educational Inc Cream  Monocarpic
12 AHGP Alliance Holdings GP LP List Monocarpic
13 ADS Alliance Data System Corp List Monocarpic
14 EMES Emerge Energy Services LP List Monocarpic
15 FHCO The Female Health Co. List Monocarpic
16 LYB LyondellBasell Industries NV List NP
17 VIPS Vipshop Holdings Ltd ADR A List NP
18 COH Coach Inc List NP
19 ROST Ross Stores Inc List NP
20 FB Facebook Inc List NP
21 SILC Silicom List NP
22 CTSH Cognizant Technology Solutions Corp List NP
23 TTC Toro Co List NP
24 CMI Cummins Inc List NP
25 BHP BHP Billiton Limited (ADR) List NP
26 WRLD World Acceptance Corp Cream NP
27 ATI Allegheny Technologies Incorporated Cream NP
28 FSTR L.B. Foster Co Cream NP
29 NUS Nu Skin Enterprises Inc List NP
30 TCK Teck Resources Ltd Class B Cream NP
31 TCPI TCP International Holdings Ltd Cream NP
32 FCX Freeport McMoran Inc List NP
33 SCHN Schnitzer Steel Industries Cream  NP
34 GRPN Groupon Inc List NP

We periodically updating and monitoring the current changes and filtering these companies. Therefore, it gives you a glimpse of the company’s status and current performance. Furthermore, it will serve as your guide.

Thank you for reading.

Written by Criselda

Twitter: criseldarome

Emerge Energy Services LP (EMES) Making Money Out Of Sand?

January 8th, 2016 Posted by Deep Analysis No Comment yet

Emerge Energy Services LP stock deep analysis on five-year historical data.

Emerge Energy Services LP

Emerge Energy Services LP’s stock has fallen since the announcement of dividend suspension in October 2015. The lowest stock price was on October 27, 2015, at $3.87 per share. Because of economic slowdown, the oil and gas industry has suffered a setback and so the frackers. Consequently, if the oil industry recovers, the frackers will progress again. Although Emerge is generating more revenue year over year, the company’s debt is also increasing year over year. Emerge is using borrowed funds more than the investor’s investment for their business operations.  Furthermore, the company’s cash and cash equivalent represents 1.5 percent of the total assets.

A Question of Liquidity

First of all, the company’s liquidity is a concern and the question asked, “Would Emerge be able to pay its obligations in due date in the future? The balance sheet shows that Emerge has good liquidity ratios hence, it has a sound balance sheet. The income statement has not seen any negative earnings from 2012 to 2014. Emerge Energy Services LP has an incredible yield of 73.96 percent and also payout ratio of 432.4 percent. As a result, the valuation shows that Emerge is worth a lot more than its current market price today. Probably, this is the right time to buy.  Let’s find out.

Problem

As a result of fracking, Emerge is involved in a legal dispute.  They use hydraulic fracturing or fracking to extract oil and natural gas from deep under the earth. Hydraulic fracturing or fracking is the process of drilling and injecting fluid into the ground at high pressure in order to fracture shale rocks to release natural gas inside. Furthermore, the environmentalist believed that this process creates environmental and also health risks.  

Effect

The fracking process could be dangerous to the environment and therefore, may contribute to health risks within the community. The process may affect groundwater and rather can cause pollution hazards according to the book, “What’s the fracking problem? Hydraulic fracturing, silica sand, and issues of regulation”, page 639. On the other hand, although, the extraction of the silica sand can provide employment and also has economic benefits.

The Process

  • To the site. Each gas well requires an average of 400 tanker trucks to carry water and supplies to and from the site.
  • Heavy Load. It takes 1 to 8 million gallons of water to complete each fracturing job.
  • Fracturing Fluid. Up to 600 chemicals are used in fracking fluid, including carcinogens and also toxins such as uranium, mercury, ethylene glycol, methanol, hydrochloric acid and also formaldehyde.
  • Down 10,000ft, the fracking fluid is then pressure injected into the ground through a drilled pipeline.
  • The Math.

500,000 active gas well in the US x 8 million gallons of water per fracking x

18 times a well can be fracked 

= 72 trillion gallons of water and 360 billion gallons of chemicals that are needed to run the current gas wells.

Characteristics in Fracking

  • Shale fracturing. The mixture reaches the end of the well where the high pressure causes the nearby shale rock to crack, hence creating fissures where natural gas flows into the well.
  • Gravity.
  • Contamination. During this process, methane gas and toxic chemicals leach out from the system and therefore contaminate nearby groundwater. Furthermore, Methane concentration is 17 times higher in drinking water wells near fracturing sites than in normal wells.
  • Drinking Water. Contaminated drinking water is used for drinking water for nearby cities and towns. In addition, there have been over 1,000 documented cases of water contamination next to areas of gas drilling and also cases of sensory, respiratory and neurological damage due to ingested contaminated water.
  • Left Behind. Only 30-50 percent of the fracturing fluid is recovered, while the rest of the toxic fluid is left in the ground and is not biodegradable.
  • The waste fluid is left in the open air pits to evaporate, releasing harmful VOC’s (volatile organic compounds) into the atmosphere, hence creating contaminated air, acid rain, and ground-level ozone.
  • In the end, hydraulic fracking produces approximately 300,000 barrels of natural gas a day, but at a price of numerous environment, safety, and health hazards.

Source: quote from Dangerous of Fracking

Solutions

Emerge has adopted measures to guard the safety of their employees, and quoted as follows:

“We adhere to a strict occupational health program aimed at controlling exposure to silica dust, which includes dust sampling, a respiratory protection program, medical surveillance, training, and other components. We designed our safety program to ensure compliance with the standards of our Occupational Health and Safety Manual and U.S. Federal Mine Safety and Health Administration (“MSHA”) regulations. For both health and safety issues, extensive training is provided to employees. We have organized safety committees at our plants made up of both salaried and hourly employees. We perform annual internal health and safety audits and conduct semi-annual crisis management drills to test our abilities to respond to various situations. Our corporate health and safety department administers the health and safety programs with the assistance of plant environmental, health and safety coordinators”.

Source: SEC Annual filings 2014.

Company History of Emerge

Company Profile

Emerge Energy Services LP (Emerge) is a Delaware limited partnership. The company was formed by Insight Equity, a private company based in Southlake, Texas in 2012. In addition, Insight Equity managed a portfolio of companies that own more than $800 million capital. Furthermore, Emerge Energy Services LP is the leading manufacturer of Northern White Silica Sand.

Emerge operates in fuel processing and distribution, and also the sand mining. The company wants to create a diversified portfolio of critical energy service operations.

Significant Company Events

July 25, 2014, The company completed the acquisition of mineral reserves and also related assets to help manage the supply and cost of raw sand to the company’s Wisconsin sand processing plants.
May 14, 2013, Emerge completed the acquisition of Direct Fuels’ net assets for $98.3 million. Direct Fuels operates a motor fuel terminal and transmit processing facility in Texas, in which it expands the company’s geographic presence in the Dallas-Fort Worth, Texas market.
May 2013 Emerge Energy Services was combined with Superior Silica Sands (SSS), Allied Energy Company (AEC), and Direct Fuels (DF) in a series of transactions which developed in the initial public offering of Emerge, stated on the company’s website.
2011 SSS expanded to Wisconsin with the construction of the new Auburn facility, which provides direct access to the highest quality frac sand in the industry.
2010 The company opened a second industrial sand plant in Kosse dedicated to processing sand mined at the Kosse quarry.
2009 SSS built a new state-of-the-art processing plant at Kosse, Texas, with the support of Insight Equity. The facility has the capacity to supply over 900,000 tpy of quality proppant (frac) sand from high-quality Wisconsin feed.
2008 Insight Equity acquired Superior Silica Sand.
Insight Equity acquired AEC, a wholesale distributor of renewable and petroleum-based refined products, with fuel distribution representing a majority of revenue. AEC was founded in 1962.
2003 Insight Equity acquired Direct Fuel (DF), the largest independent regional fuel distributor and specialty processor in North Texas. DF was established in 1997.

Place/Head Office

The corporate headquarters was located at 6000 Western Place, Suite 465 Fort Worth, TX 76107, telephone numbers 817.841.8070, office 888.446.5677, fax [email protected]

Company Sector/ Industry

Sector:  Energy Minerals

Industry: Oil Refining and Marketing

Branches

The company has four major plants.

  1. Clinton, WI – located in the township Clinton, WI, directly on a second class 1 railroad, the Canadian National.
  2. New Auburn, WI – located on the Progressive Rail Short Line that connects to the Union Pacific Railroad.
  3.  Kosse, Texas mine and dry plant.
  4. Arland, WI – Superior Silica Sands’ newest state-of-the-art, the all-weather facility is a close replica of Clinton, WI.

Date of IPO

On May 14, 2013, the company completed its initial public offering (IPO) and became a publicly traded partnership. The net proceeds from IPO were $116.2 million, in which the price was $16.55 per share.

Other significant company information

  • The company has a total of 100 employees.
  • The business was operational since 2008.
  • According to the company’s SEC filings, there are several factors that contributed to the increase in demand for frac sand in the past years and in the future. In addition, the increased drilling of horizontal wells over vertical and directional wells increased drilling efficiencies and also the increased use of sand per well, have forced demand for frac sand. Furthermore, the demand will remain strong in 2015 compared to 2014 as the technological technique will continue to be applied.
  • The company expects said that the demand for frac sand will continue to grow, however, in the first half of 2015 will be a period of relative growth stagnation for the industry due to lower rig count.

Material events affecting the Numbers

  • The sand revenue from 2013 to 2014 increased by $174.1 million or 104 percent, as a result of a 62 percent increase in total volumes sold.
  • The company has a lower cost of goods sold which consist primarily of direct costs. In addition, the cost of goods sold is the purchase of sand, transportation to the plant to trans-load facilities, mining processing costs, plant wages and also repairs and maintenance.

Run Rate

Frac sand production facilities as of December 31, 2014.

Wet Plant Location 2014  Production (thousands of tons) Plant Capacity (thousands of tons) Proven Recoverable Reserves(millions of tons)
New Auburn 1,332 2,000 27.8
Thompson Hills 322 1,600 49.6
FLS Mine 1,189 1,200 13.7
Church Road 378 1,200 7.0
LP Mine 1,005 1,000 7.4
Kosse, TX 306 1,600 27.8
Dry Plant Location 2014 Production Volumes (thousands of tons) Plant Capacity (thousands of tons)
Arland 124 2,500
Barron 2,224 2,400
New Auburn 1,394 1,400
Kosse, TX 299 600

EMES Reserves

The wet plant shows the proven recoverable reserves in millions of tons. Emerge reserves will supply them with 15 years of Northern white frac sand and 17 years of native Texas sand, according to the annual financial statement filed with SEC. Furthermore, Emerge own 100 percent of their mineral reserves in Texas and 6.6 percent in Wisconsin, with the remainder of the reserves.

Emerge leases from third-party landowners with leases expiring in different times between 2036 to 2038. In addition, as of December 31, 2014, the mineral reserves under the property, plant, and equipment was $30.18 million. The table above presents the production report of Emerge as of December 31, 2014, on its wet and dry plant locations. Furthermore, the report also shows the plant capacity and the production volumes in thousands of tons.

Beneficial Owner

EMES Beneficial owner

Facts:

  • Insight Equity has 7.2 million common units ownership.
  • Another, Goldman Sachs Asset Management LP has 3.0 million common units ownership.
  • Susquehanna Financial Group LP has 1.3 million common units ownership.
  • Also, Ted W. Beneski has 563 million common units ownership.
  • In addition, all directors and officers as a group of 11 persons have 8 million common units ownership.
  • The following persons have less than one percent ownership:
    • Rick Shearer
    • Victor L Vescoso
    • Warren B. Bonham
    • Robert Lane
    • Richard DeShazo
    • Kevin McCarthy
    • Francis J. Kelly III
    • Kevin Clark
    • Eliot E. Kerlin Jr.
    • Peter Jones

Explanation

  • The controlling equity owners of Insight Equity were Ted W. Beneski and Victor Vescovo. In addition, Insight Equity has 30.2 percent equivalent ownership.
  • Goldman Sachs Asset Management, LP has shared voting power and also shared dispositive power with respect to 3,011,858 units. In addition, the company has 12.7 percent equivalent ownership.
  • Susquehanna Financial Group, LLLP has shared voting and also shared the dispositive power of 1,340,225 units. Another, the company has 5.7 percent equivalent ownership.
  • Out of Ted Beneski’s beneficial ownership, 27,522 units are held in an irrevocable trust account in favor of his sons, in which he is the trustee of each trust account. In addition, Ted Beneski has 2.4 percent equivalent ownership.
  • Kevin McCarthy’s ownership includes unvested restricted units granted to the company’s independent directors. In addition, McCarthy has less than 1 percent ownership.

Interpretation

The percentage of units beneficially owned is based on a total 23,718,961 common units outstanding as of the Ownership Reference Date as stated in the company’s SEC Filings.

MAIN ACTIVITY

How the company makes money?

Emerge Energy Services LP is a diversified energy services company. The sand subsidiary of Emerge produces silica sand that is a key input for the hydraulic fracturing of oil and gas wells. Furthermore, the company’s sand facilities are located in New Auburn, WI, Barron County, WI, and Kosse, TX, with headquarters in Fort Worth, TX.

Products

Silica sand and also fuel segment.

Emerge

Operations

Fuel Processing and Distribution and Sand Mining

EMES products2

Source: Emerge website

 Superior Silica Sand (SSS)

EMES SSS

Source: Superior Silica Sand (SSS)

The image above presents how the superior silica sand is the leading supplier of the highest quality frac sand available in North America.

Properties of Silica sand:

  1. 16/30 Northern White Sand
  2. 20/40 Northern White Sand
  3. 30/50 Northern White Sand
  4. 30/70 Northern White Sand
  5. 40/70 Northern White Sand
  6. 100 Mesh Northern White Sand
  7. 40/70 “Native Star” Sand
  8. 100 Mesh “Native Star” Sand

Demand Trends Illustrated

EMES Proppant demand

Source: Emerge Energy Services LP Prospectus, page 127

The image above presents the forecasted historical demand trend for Proppant and Raw Frac Sand in the United States. Furthermore, the factors that drive the demand for frac sand is the level of horizontal drilling activity by exploration and production companies and also the level of hydraulic fracturing services.

Who is running the business?

The person in charge of the company

Rick Shearer, Chief Executive Officer (CEO) and Director

EMES - CEO

Mr. Rick Shearer was elected by the General Partners as the Chief Executive Officer in April 2012. In addition, on May 2014, he was appointed to the Board of Directors of General Partner.

Education

  • Bachelor of Science Degree at Alderson-Broaddus College
  • Masters of Business Administration degree from Eastern Michigan University.
  • A graduate of the Executive Management Program at Harvard University.

What did Mr. Rick Shearer work in the past and leading up to the present position?

Present Chairman of the Board of Black Bull Resources.
May 2010 to Present He served as President and Chief Executive Officer of SSS.
March 2007 to May 2010 President and Chief Executive Officer of Black Bull Resources, an entity that specializes in the mining, processing, and marketing of industrial minerals, a publicly traded company on the TSX Venture Exchange.
January 2004 to March 2007 Member of the Board of Directors of Excell Minerals, a global stainless steel metals recovery company based in Pittsburgh, Pennsylvania, prior to its acquisition by Harsco Corporation in February 2007.
August 1997 to January 2004 President and Chief Operating Officer of US Silica Company Inc., a silica sand supplier.
2003 to 2004 Founding Chairman of the Industrial Minerals Association of North America.
Vice Chairman of the National Industrial Sand Association of Europe.

 Joseph “Jody” C. Tusa, Jr., Chief Financial Officer (CFO)

EMES CFO

May 2015 to Present Served as Chief Financial Officer at Emerge Energy Services LP.
January 2008 to January 2015 Chief Financial Officer of USA Compression Partners, LP
2001 to December 2007 He was Chief Financial Officer of Comsys IT Partners, Inc., an IT staffing company and an affiliate of Metamor.
1997 to 2001 Served as Senior Vice President of Business Operations for Metamor Worldwide, Inc., an IT services company listed on NASDAQ.

Key Executive Compensation

EMES earnings and compensation

Facts:

  • The total revenue was $377 million in 2011 and year over year it is increasing at a rate of 27 percent. In addition, the growth rate is 194 percent at $1.1 billion in five years.
  • The total key executive compensation was $812 thousand, $17.7 million and $3.6 million in 2012, 2013 and 2014, respectively.
  • Rick Shearer, CEO has a total compensation of $455.6 thousand, $14 billion and $1.4 billion in 2012, 2013 and 2014, respectively.
  • Robert Lane, former CFO has a total compensation of $81.7 thousand, $431 thousand and $1.2 million in 2012, 2013 and 2014, respectively.
  • Richard Deshazo has $560 thousand total compensation in 2014.
  • Warren Bonham, VP has a total compensation of $274.6 thousand, $3.3 million and $439 thousand in 2012, 2013 and 2014, respectively.

Explanation

  • Emerge total revenue was trending up, however, its costs of revenue were averaging 90 percent.
  • Based on net income, the total executive compensation was 4.72, 50.46 and 4.05 percent in 2012, 2013 and 2014, respectively.
  • The total compensation of Robert Lane based on net income were 0.47, 1.23 and 1.38 percent in 2012, 2013 and 2014, respectively.
  • Compensation of Richard Deshazo was 0.63 percent in 2014.
  • Warren Bonham has the compensation of 1.60, 9.43 and 0.49 percent in 2012, 2013 and 2014, respectively.
  • Rick Shearer’s compensation based on net income was 2.65, 39.80 and 1.54 percent in 2012, 2013 and 2014, respectively.

Interpretation

Emerge is capable of generating more revenue year over year, however, the cost of revenue was high and the bottom line was below 10 percent, hence 5, 50 and 4 percent were distributed as compensation.

Key Executive Compensation

The graph below presents the distribution of the total key executive compensation in 2014.

EMES compensation piechart

The graph presents the three years historical key executive compensation. In 2013, the company paid a higher compensation to the key executives compared to 2012 and 2014.

Facts:

In 2014, out of the total key executive compensation,

  • Rick Shearer has a total compensation equivalent to 56.1, 78.9 and 38.1 percent in 2012, 2013 and 2014 percent, respectively.
  • Warren Bonham has a total compensation equivalent to 33.8, 8.7 and 12.2 percent in 2012, 2013 and 2014, respectively.
  • Richard Deshazo has a total compensation equivalent to 15.5 percent in 2014.
  • Robert Lane has a total compensation equivalent to 10, 2.4 and 34.2 percent in 2012, 2013 and 2014, respectively.

Explanation

  • Rick Shearer’s basic salary were $245, $313 and $425 thousand in 2012, 2013 and 2014, respectively.
  • Robert Lane’s basic salary were $34, $256 and $270,6 thousand in 2012, 2013 and 2914, respectively.
  • Richard Deshazo’s basic salary is $234,000 in 2014.
  • Warren Bonham’s basic salary were $150, $137 and $200 thousand in 2012, 2013 and 2014, respectively.

Interpretation

Finally, the basic salary of the executives was approximately 50 percent of their total compensation and the remaining percentage were non-equity compensation.

NUMBERS ANALYSIS

Equity and Shares Outstanding

EMES SHE

The graph presents the historical partners’ equity and also the share outstanding of Emerge.

Facts:

  • From 2010 to 2012, the partner’s equity was increasing yearly up to $20 million.
  • On the date of IPO in 2013, the partners’ equity soared to $170 million at approximately 650 percent.
  • In 2014 and the trailing twelve months the partners’ equity decreased by 9 and 46 percent, respectively.
  • The number of shares outstanding from 2010 to 2012 was zero since the company IPO was in 2013.
  • As a result of Emerge IPO in May 2013 the net proceeds was $116.2 million and also non-recurring charges of $11 million.
  • Furthermore, Emerge had a secondary offering made on June 2, 2014, with 3,515,388 common units at a price of $109.06 per common unit.

Explanation

  • The net income of $13,1 million from January 1, 2013, to May 13, 2013, was added to the total partners’ equity resulting to an increase in 2013.
  • Another reason for an increase in equity is the income of $22,0 million from May 14, 2013, to December 31, 2013.
  • A further reason for an increase in the proceeds from IPO, net of offering costs of $116.2 million in 2013.
  • Common units issued for the business acquired of $53.7 million was also added to the total partners’ equity in 2013. therefore the equity increase.
  • Distribution payments were deducted in the total partners’ equity in 2013 at $49.5 million, as a result, the total decreases.
  • A net income of $89.1 million in 2014 was added to the total partners’ equity, therefore the equity increase.
  • Equity-based compensation of $9.2 million in 2014 was added to the total partners’ equity.
  • Total distributions of $113.8 were deducted from the total partners’ equity in 2014, so the total decreased.

Interpretation

In 2013, the total partners’ equity had increased by 650 percent because of the proceeds from IPO and also the company’s net income. The partners’ equity decreased in 2014 due to significant distribution payments made, and yet the net income was added.

Cash Flow Graph Analysis

EMES CF2

The graph above presents the historical cash flows of Emerge Energy Services LP from 2011 to the trailing twelve months presented in a graph. In addition, this graph will show us the trend of cash generated and used year-over-year.

Facts:

  • The operating cash flows were positive and also increasing year over year from 2011 to 2014.
  • And, the cash from investing activities was negative due to investments.
  • Also, the cash provided by financing activities was positive due to debt issued.

 Explanation

  • Cash flow from operating activities is the money that the company brings in for the regular business activities.
  • Investing activities show the changes as a result of gains and losses in investments. In addition, the purchases of property, plant, and equipment at $77,884,000 and also the business acquisition at $11 million is significant.
  • Financing activities show the external activities of the company. Also, Emerge has proceeded from the line of credit borrowings of $371,657,000. In addition, there was a repayment of the line of credit borrowings of $243,603,000 in 2014. Furthermore, Emerge also has a distribution to unitholders at $113 million and payment of capital lease obligations at $5.8 million also, payments of financing costs at $2.3 million in 2014.

Interpretation

Emerge has a significant amount of purchases of properties and acquisitions in 2014. In addition, the company is also using the proceeds from the line of credit borrowings in financing activities. Furthermore, Emerge also made repayments of the line of credit borrowings and distributions to unitholders.

Valuation

EMES Value

Facts:

  • The book value in 5 years was $0.97.
  • The average return on equity was 74.13.
  • ROE ratio deteriorates 79 percent in 2015.
  • The return in book value in 5 years was $0.72.
  • Further, stock price in 5 years was $4.60. Another, the yield was 63 percent.
  • Moreover, the risk used was 15 percent.
  • Current price as of December 7, 2015, was $6.06 per share.
  • As a result, the intrinsic value of the stock is $30.93.

Interpretation

The stock price of Emerge is undervalued.

Return on Earnings Analysis

Du Pont Analysis on Return on Equity (ROE)

The DuPont extended analysis concludes whether a company can make a higher yield on equity.  In this analysis, the Return on equity (ROE) is divided into two parts, the net profit margin, and also the equity turnover ratio. Therefore, the equation for this analysis was:

ROE = (net income / sales) * (sales / assets) * (assets / shareholders’ equity)

This formula breaks the return on equity into three components, such as the net profit margin, the asset turnover, and the equity multiplier.

ROE = (net profit margin) * (asset turnover) * (equity multiplier)

The Three-Step DuPont Calculation

EMES DuPont1

This the first step in the DuPont extended Return on Equity analysis. The return on equity is broken down into two components, the net profit margin, and also the equity turnover ratio.

Facts:

  • The net profit margin shows an upward trend from 2012 to 2014, however, in the trailing twelve months, the trend fall by more than 50 percent.
  • Further, the net profit margin was averaging 4.45 percent, however, it has an erratic movement.
  • Return on equity means the return on shareholders’ investment.
  • Furthermore, the equity turnover ratio was erratic in its movement in the last 4 years, furthermore, it is averaging 12.43 percent.

Explanation

  • The equity turnover is a measure of how well a company uses its equity to generate revenue.
  • As a result, DuPont equation provides a wider picture of the return on the company’s earnings on its equity. In addition, it tells where the company’s strength lies. Furthermore, it tells where there is room for improvements.

The Three-Step DuPont Analysis in Graph

EMES 3 step DuPont graph

Facts

  • Return on equity was erratic in movement with an average ratio of 45.98 percent.
  • Asset turnover was averaging 2.61.
  • Therefore, it means that EMES is generating an average of $0.26 of profit for every $1 of assets.
  • The equity multiplier was averaging 4.57.
  • Moreover, the return on equity was erratic in movement in the last 4 years, with an average of 45.98.

Explanation

  • ROE is broken down into three components, the net profit margin, the asset turnover, and the equity multiplier.
  • Net profit margin is also called the bottom line profit.
  • Asset turnover tells us how effective the company is utilizing its assets.
  • The return on equity measures on how much the shareholders earned for their investment in the company.

Interpretation

Now, it’s getting clearer, it broadens our understanding of the company’s ROE. If the ROE increase because of the company’s net profit margin or either due to an increase in asset turnover, it is a positive sign for the company. On the other hand, if the equity multiplier is the cause of the increase in ROE, consequently it could mean that the company is already leverage,

Conclusion

Emerge Energy Services LP is an emerging growth company. It is worth more than its current market price today. The company has a sound balance sheet and also the income statement has not seen any negative earnings. In addition, cash from operating activities is positive in the last four years. Emerge has an incredible yield of 73.96 percent and also a payout ratio of 432.4 percent.

The oil and gas industry had suffered a setback because of the economic slowdown, if the oil and gas industry recovered, frackers will be more profitable. Furthermore, the demand for silica sand will continue to rise. Therefore, the potential for growth is high for Emerge. In conclusion, the stock of Emerge Energy Services LP is best for a Buy.

CITATION

Emerge Energy Services, company website

Form 10K, 10-K 1 a10k141231-q4.htm 10K

https://www.sec.gov/Archives/edgar/data/1555177/000162828015001343/a10k141231-q4.htm#s8219e3567cc74c0d8d878bcebad2e86f

Prospectus, 10-Q 1 a10q15930-q3.htm 10-Q

https://www.sec.gov/Archives/edgar/data/1555177/000162828015008914/a10q15930-q3.htm

Form 10-Q 1 a10q15930-q3.htm 10-Q

http://www.sec.gov/Archives/edgar/data/1555177/000104746913005885/a2215166z424b4.htm#ck13401_historical_financial_and_operating_data

http://www.dangersoffracking.com/

Research and Written by Criselda

Twitter: criseldarome

Actively Following List of Companies to Keep an Eye

December 2nd, 2015 Posted by Stock to Watch No Comment yet

It is important for an investor to keep an eye to different companies he/she is monitoring and investing in. It may be in the form of a document or uses the web to stay updated. Just like any other investors, we at Totem, have our own list. We are revealing again our list of actively following stocks.

Before anything else, let me familiarize you with the table below.

Rank:

  • Green means to buy
  • No Color means to hold.

Symbol: Company symbol.

Name Complete name of the company.

Type:

  • Deciduous is stocks that we will hold for two to five years while
  • Monocarpic is stocks that we will hold for less than two years (most likely around one year).

List of Companies

Rank Symbol Name Type
1 KORS Michael Kors Holdings Deciduous
2 BIDU Baidu Inc (ADR) Deciduous
3 PCLN Priceline Group Inc Deciduous
4 AAPL Apple Inc.
5 LOPE Grand Canyon Education Deciduous
6 FB Facebook Inc Deciduous
7 FHCO Female Health Deciduous
8 FSLR First Solar, Inc.
9 CTSH Cognizant Tech Deciduous
10 HFC HollyFrontier Corp Deciduous
11 LULU Lululemon Athletica inc.
12 KING King Digital Entertainment Monocarpic
13 SB Safe Bulkers, Inc. Monocarpic
14 ESI ITT Educational Monocarpic
15 JOY Joy Global Inc. Monocarpic
16 COH Coach Inc Monocarpic

We are filtering dozens of public companies and add to our list those that we think undervalued and of a good balance sheet. However, monitoring all these can be overwhelming at times and we cannot put equal attention to each. That’s why we continuously filter this list and keep those that we think still substantial to us.

Written by: Maydee

alibaba

What Are You Actually Buying With Alibaba Group Holdings Limited (BABA)?

November 23rd, 2015 Posted by Investment Valuation No Comment yet
Alibaba Group Holding Limited (BABA) is a Chinese multinational conglomerate specializing in e-commerce, retail, Internet, and technology. Wikipedia

Alibaba has marked an amazing record of Singles’ Day sales of $14.3 billion (91.2 billion Yuan) on November 11, 2015. BABA is a super online and mobile marketplace around the globe. This giant company is contributing a lot to the economy of the People’s Republic of China (PRC) with regards to its success and high growth. The company has an attractive return on equity at 29.97 and has a huge potential for more future growth. However, Alibaba Group had a different corporate legal structure and ownership structure.

Furthermore, the company is using the “variable interest entity” (VIE) structure. In 2000, this structure was created to bypass PRC’s restrictions in certain industries like communications and technology. We have provided a graphic presentation, illustration, and interpretation of this corporate and ownership structure for easy understanding. It will help you understand the flow of ownership. Find out in this article what investors are really buying in the shares of Alibaba Group China in the initial public offering in the United States.

Company Research

Alibaba

Problem

Alibaba Group Holdings Limited is experiencing a counterfeit problem. Jack Ma said, that, the sale of one fake product could lead to a loss of five customers. Further, Ma said, fighting against counterfeits is not a matter for BABA as they are servicing in different parts of the globe.

Effect

  • Counterfeit problems affect Alibaba and also the Chinese economy according to Xinhua.
  • The company is spending additional expenditures, hundreds of million Yuan, in tracking and fighting counterfeits, according to Jack Ma in an interview with Xinhua.
  • In addition, BABA is also spending on refunding and compensating for their customers who bought counterfeits products.

Cause

According to Jack Ma, counterfeits could fundamentally damage the Chinese manufacturing sector. Further, Jack Ma said, “It leaves visible wounds on Alibaba, but it could severely affect the economic transition”.

Solutions

  • Shops involved with counterfeit products are closed according to Jack Ma.
  • Alibaba is tracking and fighting these counterfeit attack.
  • According to Jack Ma, improving Chinese laws could help honest businesses to build competitive brands.
  • The company is monitoring the sale of counterfeit products and kept the market watchdog informed, according to Jack Ma.
  • Further, the counterfeit issue can only be solved with the help of the internet and big data, Ma stated. He further stated that in the company’s internet, they have an evaluation system for the goods.
  • And with big data, they can locate those who produce and sell counterfeits.

About the Company

Company Profile

Alibaba Group Holding Limited (BABA) is a super online and mobile marketplace around the globe by revenue. BABA is the Cayman Islands holding company operating in China through its subsidiaries and variable interest entities (VIE) as a whole, engaged in online and mobile commerce activities of buy and sell of products, services, and technology. The giant company helps small businesses to communicate and connect with their consumers by their technology services and online marketplace. Further, they believed that small businesses have all the chance to grow and prosper by making it easy for them to do business online.

BABA have maintained their culture since the founding of the company and it has been the key to its success. The company cares and look with the interests of its customers and employees. Mr. Jack Ma sees to it that every policy they make with regards to the business, the customer’s concerns come first. Ma is responsible for the company’s strategic plans, culture, and customers concerns.

Company History

Its first website is English-language Alibaba.com, a global wholesale marketplace. On June 2011, Taobao Mall (currently known as Tmall.com) is spun off from Taobao Marketplace as an independent platform. On July 2005 Aliwangwang, a personal computer-based instant messaging tool that facilitates text, audio, and video communication between buyers and sellers, is launched on Taobao Marketplace.

Special Events

2014

October 2014, Taobao travel becomes an independent platform and is a brand named “Alitrip”.
Ant Financial Services Group, a related company of Alibaba Group previously known as Small and Micro Financial Services Company, was formally established.
September 2014 Alibaba Group goes public on the New York Stock Exchange (NYSE).
July 2014 Completes its investment in digital mapping company AutoNavi.
Establishes a joint venture with Intime to develop a 020 business in China.
June 2014 The company completes the full acquisition and integration of mobile browser company UCWeb.
The company starts offering mobile virtual network operators (MVNO) services in China under the All Telecom brand.
Completes acquisition of an approximately 60% stake in movie and television program producer ChinaVision (currently known as Alibaba Pictures Group).
February 2014 Tmall Global is officially launched as an extension of Tmall.com to enable international brands to offer products directly to consumers in China.

2010 – 2013

Sep 2013 Alibaba Group officially launches its mobile social networking app, Laiwang.
Aug 2013 Relocates its campus to Xixi District in Hangzhou.
Jul 2013 Unveils the Alibaba Smart TV OS.
May 2013 Taobao’s 10th anniversary is marked with a global gathering of Alibaba Group employees in Hangzhou.
Sep 2012 Completes an initial repurchase of shares from Yahoo! In a restructuring of the companies’ relationship.
Jan 2012 Establishes the Alibaba Foundation with a sizeable fund dedicated to social causes.
Nov 2010 Alibaba.com announces the acquisition of One-touch, a provider of one-stop services for exporters in China.
Aug 2010 The Mobile Taobao App is launched.
Jul and Aug 2010 Alibaba.com acquires Vendio and Auctiva, providers of e-commerce solutions to US small businesses.
July 2010 The Alibaba Partnership is established to ensure the sustainability of the Alibaba Group mission, vision, and values.
May 2010 Announces that it will earmark 0.3% of its annual revenue to fund efforts designed to spur environmental awareness and conservation in China and around the world.
Apr 2010 Officially launches AllExpress to enable exporters in China to reach and directly transact with consumers around the world.
Mar 2010 Renames its China marketplace 1688.com
Taobao Marketplace introduces online group buying marketplace Juhuasuan.

2005-2009

Sep 2009 Alibaba Cloud Computing (currently known as AliCloud) is established in conjunction with Alibaba Group 10th anniversary celebration.
Alibaba.com announces the acquisition of HiChina, China’s leading internet infrastructure service provider.
Sep 2008 Alibaba Group R&D Institute is established.
Ap 2008 Taobao Mall (currently known as Tmall.com), a dedicated platform for third-party brands and retailers, is introduced to compliment Taobao Marketplace.
Nov 2007 Alibaba Group launches Alimama, an online marketing technology platform.
Alibaba.com completes its initial public offering on the Main Board of the Hong Kong Stock Exchange.
Jul 2006 The Taobao University program is launched, providing e-commerce trading and education to buyers and sellers.
Oct 2005 Takes over the operations of China Yahoo!.
Aug 2005 Form a strategic partnership with Yahoo!

2001-2004

Dec 2004 Alipay, currently a related company of Alibaba Group, is launched as a third-party online payment platform.
Jun 2004 Alibaba Group organizes its first Nentrepreneur Summit, a gathering of internet entrepreneurs, and honors the first 10 Netrepreneurs of the Year.
Feb 2004 The company raises USD82 million from several first-tier investors in the largest private equity commitment ever in the Chinese Internet sector.
May 2003 Online shopping website Taobao Marketplace is founded, again in Jack Ma’s apartment.
Alibaba Group continues to operate in spite of the SARS epidemic and quarantine measures that prevent staff from coming to work.
Dec 2002 Alibaba Group becomes cash flow positive for the year.
Dec 2001 Alibaba.com surpasses 1 million registered users
Outlines its mission and corporate values.

1999-2000

Sep 2000 Alibaba Group organizes the first West Lake Summit, a gathering of internet business and thought leaders.
Jan 2000 Organizes the first West Lake Summit, a gathering of internet business and thought leaders.
Oct 1999 Raises USD 5 million from a consortium of investors
1999 Launches a China marketplace (currently known as 1688.com) for domestic wholesale trade
1999 Established by its 18 founders led by Jack Ma, working out of Jack Ma’s apartment in Hangzhou

Source: Alibaba website

The Company’s significant subsidiaries:

  • Taobao Holding Limited, an exempted company incorporated with limited liability, under the laws of the Cayman Islands. In addition, it is a wholly-owned subsidiary and also the indirect holding company of the PRC subsidiaries relating to the company’s Taobao Marketplace and Tmall platform.
  • Taobao China Holding Limited, a Hong Kong limited liability company. It is the direct wholly owned subsidiary of Taobao Holding Limited. In addition, it is the direct holding company of the PRC subsidiaries relating to the company’s Taobao Marketplace and Tmall platform. Furthermore, it is an operating entity for the overseas business of the company’s Taobao Marketplace and also Tmall  Global.
  • Taobao (China) Software Co. Ltd., a limited liability company incorporated under the laws of PRC. It is the indirect subsidiary of Taobao Holding Limited, and also a wholly foreign-owned enterprise. In addition, it provides software and also technology services for the company’s Taobao Marketplace.
  • Zhejiang Small Technology Co., Ltd., a liability company incorporated under the laws of the PRC. It is an indirect subsidiary of Taobao Holding Limited and also a wholly-foreign owned enterprise. Furthermore, it provides software and also technology services for the company’s Small platform.

More of Company’s Subsidiaries

  • Alibaba.com Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands. It is the company’s wholly-owned subsidiary and the indirect holding company of the PRC subsidiaries relating to the company’s Alibaba.com, 1688.com and AliExpress businesses.
  • Moreover, Alibaba.com Investment Holding Limited, a company incorporated with limited liability under the laws of the British Virgin Islands. It is the direct wholly owned subsidiary of Alibaba.com Limited. In addition, it is also a lower level holding company of the PRC subsidiaries relating to the company’s Alibaba.com, 1688 and AliExpress businesses.
  • Alibaba Investment Limited, a company incorporated with limited liability under the laws of the British Virgin Islands. It is the company’s wholly-owned subsidiary and the principal holding company for the company’s strategic investments.

Source: Form 20-F Alibaba Group Holding Limited

Date of Incorporation

Alibaba Group Holding Limited was incorporated in the Cayman Islands on June 28, 1999.

Place/Head Office

The registered office of the company is located at Trident Trust Company (Cayman) Limited, 4th floor, One Capital Place, P.O. Box 847, George Town Grand Cayman, Cayman Islands.

The Headquarters is located at 969 West Wen Yi Road, Yu Hand District, Hangzhou 311121, People’s Republic of China.

Telephone Number: +86-571-8502-2077

The service company office in the US is located at 1180 Avenue of the Americas, Suite 210, and New York, New York 10036.

Company’s website: www.alibabagroup.com

Founder/Founding

Alibaba Group Holdings Limited was founded on June 28, 1999, by a group of 18 people headed by Mr. Jack Ma, a former English teacher from Hangzhou, China.  It all started when Jack Ma founded Alibaba.com, a website that connects Chinese manufacturers with overseas buyers, a business to the business portal, in 1999.

Branches

Alibaba Group Holdings Limited is operating worldwide through the internet doing services like online shopping.

Date of IPO

Alibaba Group Holdings Limited started its Initial Public Offering (IPO) on September 19, 2014, in which the company had sold 368,122,000 ADSs, with the proceeds of $10 billion. The company is listed on the New York Stock Exchange (NYSE) with a ticker symbol BABA. Registered in the United States after Jack Ma could not achieve status with Hong Kong regulators.

Other Significant Company Information

  • A total of 34,985 full-time employees as of March 2015 are based in China.
  • Alibaba is recently involved in medical industry chain as compared with BIDU and Tencent. The company has better internet resources in online medical care, which could give a head start in cultivating more products, according to Xinhua news agency.
  • Simon Xie, one of the founders of Alibaba Group Holdings Limited, Vice President of China Investment team.
  • Jack Ma tried to raise funds with Silicon Valley but rejected because his business model was unprofitable. However, Goldman Sachs and SoftBank invested $5 million and $20 million, respectively in Alibaba Group.

Material Events Affecting the Numbers

MAJOR SHAREHOLDERS

BABA Major shareholders

The table above presents the major shareholders of Alibaba Group Holdings Limited with respect to beneficial ownership of the company’s ordinary shares. 

Facts:

  • Jack Ma owned 190.67 million ordinary shares at 7.6 percent of the total ordinary shares.
  • Joseph Tsai owned 78.4 million ordinary shares at 3.1 percent.
  • Softbank owned 797.7 million ordinary shares at 31.80 percent.
  • Yahoo! owned 383.57 million ordinary shares at 15.30 percent.
  • All directors and executive officers as a group owned 328.5 ordinary shares at 13.10 percent.

Explanation

  • It represents 2,033,177 ordinary shares held directly by Jack Ma.
  • Tsai has 35 million shares held by APN Ltd, a Cayman Islands company. In addition, Jack Ma holds 70 percent equity interest in the Cayman Islands.
  • Ordinary shares held directly by Tsai was 1,437,964.
  • While 15 million ordinary shares held by APN Ltd. in which Tsai holds a 30 percent equity interest.
  • SoftBank Corp. owned 466,826,180 ordinary shares, and also 15 million ordinary shares owned by SBBM Corporation (Tokyo). In addition, 315,916,800 ordinary shares owned by SB China Holdings Pte Ltd (Singapore).
  • Yahoo! Inc. (USA) owned 92,626,716 ordinary shares, and also 290,938,700 ordinary shares owned by Yahoo! Hong Kong Limited.
  • The ordinary shares outstanding as of June 23, 2015, were 2,512,427,504 shares.
  • The 1,015,779,482 ordinary shares at 40.4 percent of the company’s total outstanding shares were held by 159 record shareholders in the US.
  • The number of beneficial owners of the companies American Depository Shares (ADSs) in the US is much greater than the number of record holders of the company’s ordinary shares in the US.

Interpretation

Jack Ma owns only 7.6 percent ownership interest in the company. Investors from Alibaba IPO will not have direct ownership of Alibaba Group Holdings Limited instead, will only have a claim to the profits of the Chinese-owned variable interest entities.  Restrictions under the People’s Republic of China laws a risk is involved in the ownership.

Alibaba Group Holdings Limited Corporate Legal Structure

BABA corporate structure

Source:  Latest F-1 filing with the SEC

The illustration above presents the corporate legal structure of Alibaba Group with its significant subsidiaries and the variable interest entities. The structure is a combination of variable interest entities (VIE), wholly foreign-owned subsidiaries (WFOS ) and 100 percent owned intermediate holding companies, which use equity interests and contractual obligations to operate within China.

Alibaba’s Contractual Arrangements With Investors 

The People’s  Republic of China has a different structure when it comes to ownership of companies operating in China and listed in the United States. Foreign investment is restricted or prohibited in the PRC through wholly-foreign owned enterprises, majority-owned entities, and variable interest entities. The variable interest entities of the companies are owned by Jack Ma and Simon Xie with 80 and 20 percent ownership, respectively. Further, Zhejiang Taobao Network Co., Ltd. represents 90 and 10 percent ownership of Jack Ma and Simon Xie, respectively. 

The company has entered into contractual agreements which will enable them to exercise effective control over the variable interest entities and realize substantially all of the economic risks and benefits arising from the variable interest entities, a statement taken from the F-1 filings filed with SEC. In other words, it indicates that Jack Ma and Simon Xie holds a very significant share of Alibaba Group Holdings Limited and all other properties that the company is operating in PRC.

Ownership Structure and Contractual Arrangements

BABA Ownership structure

Source: Latest F-1 Filings with the SEC

The illustration above presents the ownership structure and contractual arrangements. The wholly foreign-owned subsidiaries and the variable interest entities profits go to Alibaba Group Holdings Limited, a Cayman Island ownership. The company is using the term “variable interest entities” for its Chinese assets.

The investors from Alibaba IPO has no direct ownership in the Chinese-based companies, however, they can claim to the profits. This is due to the PRC restrictions on foreign entities in having ownership of the Chinese assets. In other words, investors in the US IPO is buying shares in Cayman Islands entity the Alibaba Group Holdings Company Limited and not shares of Alibaba China. This applies to all foreign investors of Alibaba Group including Yahoo! and SoftBank. Moreover, the laws of PRC applies to all companies incorporated in China and listed under the United States, like BIDU and other Chinese companies.

Other significant information

There are significant risks that Alibaba had stated in their F-1 Filings. They indicate that this kind of structure might be illegal in  Chinese law since it ignores the prohibitions on foreign investments.

Moreover, the following statement  from the company’s F-1 Filings with the SEC may be significant to the holders of the American Depositary Shares (ADSs), quoted,

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and most of our directors and all of our executive officers reside outside the United States.

MAIN ACTIVITY

How Does the Company Make Money?

Alibaba Group Holding Limited is doing business by providing online and mobile commerce to small businesses in China and other parts of the globe. Moreover, the company provides retail and wholesale marketplaces through its subsidiaries and make it available through personal computers and mobile devices. What makes Alibaba Group Holdings Limited different with other giant companies in other parts of the globe is that BABA has a concern with their customers and every policy that they make, they make sure that the customers come first and everyone is benefited, according to Jack Ma.

Products

The major business activities and products of Alibaba Group Holdings Limited were E-commerce, online auction hosting, online money transfers, and mobile commerce.

Market

Alibaba Group Holdings Limited is doing its business operations online where they can reach customers around the world with its high internet resources.

Who is running the Business?

Person-in-charge of the Company

JACK YUN MA, Lead founder, Executive Chairman, and Chief Executive Officer

BABA Jack MA

Jack Yun Ma is the head founder and the Executive Chairman since May 2013. Ma is the Chairman and Chief Executive Officer from 1999 to May 2013.

Jack Ma was born on September 10, 1964, in Hangzhou, Zhejiang Province, China. His real Chinese name, Ma Yun was difficult to pronounce and his foreign friends named him Jack.

Ma the head founder of Alibaba Group, called the Chinese business magnate and philanthropist. Also known as the richest man in China as of November 2014, and the 18th richest person in the world with its estimated net worth of $24.1 billion according to Wikipedia.  

Education:

  • In 1988, he graduated in Hangzhou Teacher’s Institute with a bachelor’s degree in English.
  • In the late 1980s, he started his career as lecturer/teacher in English and International Trade at the Hangzhou Dianzi University
  • Earned his MBA from Cheung Kong Graduate School of Business when he was already establishing Alibaba in early 2000.
  • Jack Ma also earned a Doctoral Degree with honors in addition to his MBA at Cheung Kong University.

What did the person worked on in the past and leading up to the present position?

Present Serve as Board member of SoftBank Corp., a major shareholder of Alibaba Group Holdings Limited and a Japanese corporation listed on Tokyo Stock Exchange.
Director of Huayi Brothers Media Corporation, an entertainment group in China listed on The Shenzhen Stock Exchange.
Chairman of The Nature Conservancy’s China board of directors.
2013 to Present Director of UCWeb Inc.
September 2013 Director of the Breakthrough Prize in Life Sciences Foundation
May 2013 Jack Ma stepped down as Chief Executive Officer.
2010 to Present Director of The Nature Conservancy
2007 to Present Director of SoftBank Group Corporation.
1999 Jack Ma founded Alibaba Group Holdings Limited
1999 to May 2013 Chairman, Chief Executive Officer and President of Alibaba Group Holdings Limited
Co-Founder of Yunfeng Capital and Yunfeng Fund II LP
1999 to Present Chief Executive Officer of Alibaba Taobao.com
Chief Executive Officer of Alibaba.com He was responsible for the overall strategy of Alibaba.com and Alibaba Group.
1998 to 1999 Ma headed an information technology company established by the China International Electronic Commerce Center (CIECC).
President of CIECC and became keen with the e-commerce needs of small and medium-sized businesses.
Early 1999 Ma left MOFTEC and launched Alibaba.
Ma began a career as an English teacher.
Chairman of Zhejiang Alibaba Finance Credit Network Technology Co., Ltd., Alipay (China) Information Technology Co. Ltd., Alibaba (China) Software Co. Ltd., Alipay Software (Shanghai) Co. Shangcheng (Shanghai) Commercial Factoring Co. Zhejiang Alibaba Cloud Computing, Hangzhou Alibaba Online Goods Trading Co., Chongqing Alibaba Small Loan Co., Beijing Yahoo Network Information Technology Co. Ltd., Inter China Network Software (Beijing) Co, and many other companies which he served as Chairman.
1995 Jack Ma founded China Pages.
May 1991 Founded Ever Team International Corp.
Mid 1990’s Mr. Ma sees a great business opportunity in technology.

 

Daniel Zhang, Chief Executive Officer

BABA Daniel Yong Zhang

Daniel Zhang is the Chief Executive Officer of Alibaba Group Holding Limited starting May 10, 2015. Mr. Zhang, the former Chief Operating Officer replaced Jonathan Lu who has a strong understanding of business.

Education

  • Bachelor’s Degree in Finance from Shanghai University of Finance and Economics.
  • Member of the Chinese Institute of Certified Public Accountants.

What did the person worked on in the past and leading up to the present position?

Apr 30, 2014, to Sep 7, 2015,

Mar 2014 to Present Non-Executive Director and Member of Strategic Committee of Haier Electronics Group Co.
Jul 2014 to Present Non-Executive Director of Intime Retail (Group) Company Limited
2015 Non-Executive Director, Health Information Technology Limited
2014 to Present Director of Weibo Corporation
Aug 2005 to Aug 27, 2007 Chief Financial Officer and Vice President of Shanda Interactive Entertainment.
Sep 2005 Financial Controller of Shanda Interactive Entertainment Ltd.
Aug 2007 to Jun 2011 Chief Financial Officer of Taobao
Since Jun 2011 President of Tmall.com and General Manager for 3 years.
2002 to 2005 Senior Manager at PricewaterhouseCoopers’ Audit and Business Advisory Division in Shanghai, China.

Maggie Wei Wu, Chief Financial Officer (CFO)

BABA Maggie Wei Wu

Ms. Maggie Wei Wu was the Chief Financial Officer of Alibaba lding Limited since May 2013 to the present. Ms. Wu joined the company in July 2007 as Chief Financial Officer of Alibaba.com and responsible in the establishment of financial systems and organization which lead to the initial public offering in Hong Kong.

Education

Ms. Wu has a Bachelor’s Degree in Accounting from the Capital University of Economics and Business.

What did the person worked on in the past and leading up to the present position?

October 2011 to May 2013 Served a Deputy Chief Officer of Alibaba Group Holdings Limited.
2012 Co-lead the privatization of Alibaba.com
2010 Voted as Best CFO in FinanceAsias’s Annual
Poll for Asia’s Best Managed Companies.
Prior to 2007 Became an audit partner at KPMG in Beijing.
Lead audit partner for IPO and some large capitalization companies listed in international capital markets. She provides audit and advisory services to major multinational corporations operating in China.
Member of the Association of Chartered Certified Accountant (ACCA)
Member of the Chinese Institute of Certified Public Accountants.

NUMBERS ANALYSIS

Equity and Retained Earnings

BABA Historical SHE RE

Facts:

  • The shareholders’ equity growth in the past five years was 1,861 percent.
  • Retained earnings growth in the past five years was 98 percent.
  • While shareholders’ equity dropped by 100.08 percent from 31.5 billion to -24 million CNY in 2013.
  • Equity rose by 122,000 percent from negative RMB 24 million to RMB 29 billion in 2014.
  • Moreover, equity rises again by 396 percent RMB 29 billion to RMB 145 billion in the trailing twelve months.
  • On the other hand, retained earnings in 2013 have dropped by 263 percent and suffered negative results of RMB 20 billion.
  • Retained earnings increased by 106 and 2000 percent in 2014 and 2015, respectively.

Explanation:

  • Acquisition of shares at RMB15.9 billion in 2013 deducted in shareholders equity.
  • And, repurchase and retirement of ordinary shares at RMB 45 billion deducted to shareholders equity. In addition, in 2013, a reduction in retained earnings at RMB 41 billion.
  • Deconsolidation of subsidiaries at 8.6 billion RMB added to equity in 2013.
  • Issuance of ordinary shares at 16.4 billion RMB in 2013 added to shareholders’ equity.
  • Net income of RMB 23.4 billion added to equity in 2014.
  • RMB 24.26 added to retained earnings in 2015.
  • Acquisition of subsidiaries at RMB 14.7 added to equity in 2015.
  • Amortization of compensation cost at RMB 13 billion in 2015 added to equity.
  • Proceeds from the issuance of ordinary shares – IPO at RMB 61.5 billion in 2015 added to shareholders equity.
  • Conversion of convertible preferred shares at RMB 10.3 billion in 2015 added to equity.

Interpretation

The shareholders’ equity and the retained earnings have increased significantly due to the company’s net income and also the proceeds from the issuance of ordinary shares during its IPO.

In addition, the decline from Fiscal 2012 to 2013 was primarily due to the repurchase of ordinary shares from Yahoo! in September 2012. Moreover, the privatization of Alibaba.com partially offset by the issuance of ordinary shares to finance the repurchase.

The Trend Graph

BABA SHE RE Trend

The graph above presents the historical movement of the company’s shareholders’ equity and retained earnings. Consequently, in Fiscal 2013 both the shareholders’ equity and retained earnings were below zero.

Historical Number of Shares Outstanding

BABA # of shares

The table above presents the historical shares outstanding from 2011 to the trailing twelve months. Ordinary shares of 149,220,834 issued on Alibaba’s IPO in September 2014.

VALUATION

BABA valuation model

Facts:

  • The book value growth rate of Alibaba in the past two years was 16 percent.
  • Future book value in 5 years was $25.77
  • While the average return on equity from 2007 to the trailing twelve months was 45.74.
  • In addition, the return on book value in five years was $11.78.
  • The price of the stock of Alibaba in five years was $403.01.
  • On the other hand, the present value of the stock was $174.23.
  • There was a zero percent dividend yield.
  • The risk used was 15 percent.
  • Moreover, the current price of the stock of Alibaba as of November 19, 2015, was $77.69 per share.
  • The intrinsic value of the stock of Alibaba was $104.54 per share.

Statement of Cash Flows

BABA Statement of CF

Facts:

  • The cash from operating activities was 50.70 CNY.
  • While capital expenditure was 7.7 billion CNY.
  • Also, the net cash used for investing activities was -31.7 billion CNY.
  • The net cash provided by financing activities was -10.6 CNY.

Explanation

  • The cash from operating activities was increasing year over year in the past five years at an average rate of 109 percent.
  • On the other hand, capital expenditures are the investment in properties, plant, and equipment.

Interpretation

Alibaba has decent net cash from operating activities and was increasing year over year. Further, the company has a free cash flow higher than the net income for five years. Therefore, it indicates that the company has good free cash flow and Alibaba is a healthy company.

Conclusion

Alibaba Group Holdings Limited (BABA) is a high growth and a healthy company. However, Alibaba has unusual corporate and ownership structures due to the laws and regulations brought about in China. Hence, investors in the US IPO might hesitate to buy shares of Alibaba China. Because they are buying shares in the Cayman Islands entity named Alibaba Group Holdings Company Limited. In addition, investors will not have direct ownership, but rather access to the profits. Furthermore, this may play a significant factor in making a decision on the stock of Alibaba Group Holdings Limited. A Hold position is recommended on the stock of Alibaba due to its ownership structures.

CITATION

http://www.sec.gov/Archives/edgar/data/1577552/000119312514333674/d709111df1a.htm#toc709111_11

https://www.sec.gov/Archives/edgar/data/1577552/000104746915005768/a2225010z20-f.htm

http://www.alibabagroup.com/en/about/overview

http://www.alibabagroup.com/en/about/history

https://www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm#toc709111_2

http://www.alibabagroup.com/en/about/history

Researched and Written by Criselda

Twitter: criseldarome

michael kors

Michael Kors: Does Investors Need To Be Fashionable In Life And Portfolio?

October 15th, 2015 Posted by Deep Analysis No Comment yet

Michael Kors Inc  (KORS) is a luxury lifestyle brand, company around the globe.

Michael Kors (KORS) Company Research

KORS Logo2

KORS Company Profile

Michael Kors Inc  (KORS) is a luxury lifestyle brand, company around the globe. KORS operates its business through three segments namely, the retail, wholesale and licensing. The company has a distribution network in other parts of the globe of company-operated retail stores, leading department stores, specialty stores, and select licensing partners. The company’s retail segment contributed nearly 50 percent of their total revenue in their Fiscal 2015. The company’s retail segment includes 343 North American retail stores, including concession and their U.S. e-commerce site. And, the 183 international retail stores, including arrangements in Europe and Japan.

Significant collections

KORS offers two significant collections, the Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury collection. The company has also collections that offer accessories, footwear, and apparel. The licensing segment is committed to providing licenses to third parties, which include some production, sales, and/or distribution rights. The company also sells fragrances in its retail stores and by Estee Lauder to wholesale customers. In addition, the company also sells beauty products like nail lacquers, lip products, powers and a collection of body and sun products.

KORS PRODUCTS

The company’s products are accessories, apparel, footwear, and licensed product. Accessories include handbags and high quality and exotic skins small leather goods. “The Company has engagement with Fossil Partners, LP, (Fossil), which help them create a line of watches and jewelry. The company’s product licensees, in addition to “Fossil”, are the “Aramis” and Designer Fragrances division of The Estee Lauder Companies Inc. (Estee Lauder) for fragrance and beauty, and Luxottica Group (Luxottica) for eyewear, among others. Fossil has been the company’s exclusive watch licensee since April 2004, which is sold in the company’s retail stores.

Jewelry, Eyewear

In addition, Fossil has been the exclusive fashion jewelry licensee since December 2010. Moreover, Luxottica became the company’s exclusive eyewear license in January 2015. It is sold in the company’s retail stores, which serve as the key category. Prior to January 2015, “Marchon” was their exclusive eyewear license. The jewelry product line is bracelets, necklaces, rings, and earrings.

Beauty Products

In addition, the company also sells beauty products like nail lacquers, lip products, powders and a collection of body and sun products. Through its retail and wholesale sections, KORS sells its products in three principal geographic markets: North America, Europe, and Asia. Through its licensing section, KORS enters into agreements that license to third parties. They used the company’s brand name and trademarks, other production, and sales and/or distribution rights. Moreover, revenues generated in these agreements are initially earned in North America and Europe.

Competitors

The Company competes with:

  • Coach, Burberry,
  • Ralph Lauren,
  • Hermes,
  • Louis Vuitton,
  • Gucci,
  • Marc Jacobs,
  • Chloe,
  • Tori Burch,
  • Prada.

2. Date of Incorporation

Michael Kors Holdings Limited (MKHL and its subsidiaries, the Company) was incorporated in the British Virgin Islands (BVI) on December 13, 2002.

3. Place/Head Office

The corporate office of Michael Kors Holding Limited is in 33 Kingsway, London, WC2B 6UF, United Kingdom.

Phone: 44 2076 328 600

Website: http://www.michaelkors.com

4. Founder/Founding

In 1981, Michael David Kors, an American designer established Michael Kors Holdings Ltd., known for handbags and accessories and is based in London, United Kingdom.

5. Company Sector/Industry

Company Sector:    Consumer Discretionary

Industry:                 Textiles, Apparel, and Luxury Goods

Sub-industry:          Apparel, Footwear, and Accessory Design

6. Date of IPO

The company’s initial public offering (IPO) was on December 15, 2011, with its ordinary shares traded on the New York Stock Exchange (NYSE) under the symbol “KORS”. During IPO the stocks were then traded at $24.20 per shares.

7. Other Significant Company Information

  • The company has a total of 9,184 employees.
  • And the company has no unresolved staff comments.
  • On March 28, 2015, there were 199,656,833 common shares outstanding at a closing sale price of $66.97. Further, the company has 303 common shareholders at the record as of March 28, 2015.
  • During fiscal 2013, KORS completed its secondary offerings of 25,000,000 ordinary shares at $47.00 per share. An additional 3,750,000 shares at $47.00 per share were offered because the underwriters exercised their additional shares purchase option.

More Information

  • In September 2012, KORS completed its secondary offering of 23,000,000 ordinary shares at $53.00 per share. An additional 3,450,000 shares at $53.00 per share were offered in October 2012 because the underwriters exercised their purchase option.
  • And on February 2013, completed a secondary offering of 25,000,000 ordinary shares at $61.50 per share.
  • The company did not receive proceeds from the sale of the secondary offerings, which they incurred $1.7 million fees and were charged to selling, general and administrative expenses in Fiscal 2013.

8. Material Events Affecting the Numbers

Ms. Cathy Marie Robinson, executive officer of Michael Kors Holdings Limited was reappointed on August 27, 2015, as executive officer of Michael Kors Holdings Limited with a new title of Senior Vice President of corporate strategy and Chief Operations Officer, after her resignation on the same date, August 27, 2015.

Moreover, Ms. Robinson will receive a grant of restricted share units valued at around $1.5 million under the Michael Kors Holding Limited Amended and Restated Omnibus Incentive Plan. Likewise, the employment agreement was effective May 12, 2014, between Ms. Robinson and Michael Kors (USA), Inc. and it remains in effect without modification.

KORS MAIN ACTIVITY

How Does the Company Make Money

Michael Kors Ltd is a global luxury lifestyle brand led by a world-class management team and an award-winning fashion designer.  The company’s products are handbags, footwear, accessories, apparel, watches, and others.

Products

KORS ProductsA1

The Market

As of March 29, 2014, the company managed 405 retail stores, including concessions. In addition, the store sales growth increased by 26 percent from fiscal 2013 due to increases in sales on accessories line and watches during fiscal 2014. Further, the sales in a comparable store had increased by $255.3 million in fiscal 2014 due to an opening of 101 new stores since March 30, 2013.

What do People Think about the Company’s Products or Services?

Here is one of the comments from the customers of Michael Kors Holding Limited.

What is this lawsuit about?

The lawsuit alleges that Michael Kors deceptively and misleadingly labeled and marketed merchandise that it sells at its Michael Kors Outlet Stores, including by using allegedly misleading price tags on its Michael Kors Outlet Products, which Plaintiffs claim resulted in damages to Plaintiffs and the Settlement Class. Michael Kors maintains that its marketing and labeling is not deceptive or misleading and is entirely proper and permitted by law. (source: https://www.michaelkorsoutletsettlement.com/Content/Documents/Long%20Form%20Notice.pdf )

Who is running the Business?

Person-in-charge of the Company

Michael David Kors, Honorary Chairman and Chief Creative Officer of MKHL

KORS Michael Kors

Michael Kors is a New York-based fashion designer of American sportswear. He was the first women ready-to-wear designer for the French house Celine, from 1997 to 2003. He was born Karl Anderson, Jr. on August 9, 1959, in Long Island, New York, USA. Kors was married to Lance LePere on August 16, 2011. His parents were Karl Anderson and Joan Hamburg, a former model. His mother remarried Bill Kors when he was five and choose to change his name to Michael David Kors.

Further, Michael Kors graduated from John F. Kennedy High School and studied at Fashion Institute of Technology in New York City. Michael Kors started from a small-time sportswear designer to the head of the company.

Employment

On May 20, 2015, Michael Kors (USA), Inc. (the Company) and Michael Kors Holding Limited (MKHL) has entered into an amended and restated employment agreement with each Michael Kors, the Honorary Chairman, and Chief Creative Officer (“the Kors Agreement”), and John D. Idol, Chairman and Chief Executive Officer (“the Idol Agreement”), as required under the terms thereof.

The Kors Agreement is a continuation of terms in prior agreements. The Mr. Kors’ employment agreement will terminate upon his death, permanent disability or for “Cause”, defined in Kors Agreement. The Kors Agreement gives Mr. Kors imaginative and artistic control over the products produced and sold under the MICHAEL KORS trademarks and related marks, including exclusive control of the design of such products, so long as the control is commercially reasonable. Source: SEC filings

Intellectual Property

All intellectual property generated by or at Mr. Kors’ order in the course of his employment is the exclusive property of the Company. Mr. Kors is obliged to retain the confidentiality of the Company’s proprietary information. In addition, the Company has agreed that they will not enter into any new line of business without Mr. Kors’ consent, if he is reasonable, determines that such line of business is detrimental to the company’s trademarks.

Benefits

The Company provides health and medical insurance to Mr. Kors at its own cost without contribution from him. The whole life insurance premium policy and the $500,000 term life insurance policy. The Company provides automobile and chauffeur for transport to and from the Company’s offices and for other business purposes. Upon termination of the agreement, he will be allotted to a pro-rate of his bonus, however, if Mr. Kors terminates his employment without the consent of the Company, he will be an independent and exclusive design consultant for the Company with an annual fee of $1.0 million and will not challenge with the Company, for the remainder of his lifetime. Source: SEC filings

KORS Salary

In addition, Kors was entitled to a salary of not less than $1.0 million annually, under the new Agreement. Mr. Kors’ total basic compensation in the last fiscal year was $15.13 million USD, out of which, 17 percent were the total annual compensation and 32 percent was restricted stock awards.

Special events:

He was discovered by Dawn Mello, Fashion Director of Bergdorf. He turned the fashion house with successful accessories and a critically acclaimed ready-to-wear line. The MICHAEL line includes women’s handbags and shoes and ready to wear apparel. The KORS line is footwear and jeans. He was honored by the Couture Council of The Museum at the Fashion Institute of Technology (FIT) with the 2013 Couture Council Award for Artistry of Fashion.

As a teen, He starts designing clothes and selling them.
1977 He enrolled at Fashion Institute of Technology, after dropping out after nine months, got a job in Bergdorf Goodman boutique and was able to sell his design in a small space given to him.
1981 Kors launched Michael Kors womenswear line at Bloomingdale’s, Bergdorf Goodman, Lord & Taylor, Neiman Marcus, and Saks Fifth Avenue.

1984 – 1999

1984 Michael Kors first runway show for the Michael Kors fall collection and was successful in making the Company into a global luxury lifestyle brand.
1993 Forced him to discontinue the Kors line because of bankruptcy.
1997 He was able to recover and launched a lower-priced line and was named the first women’s ready-to-wear designer for French house Celine.
1998 – 2004 Serve as Creative Director of Celine, the French luxury brand.
1999 Mr. Kors was the recipient of numerous industry awards, including the CFDA Womenswear Designer of the year 1999 and Menswear Designer of the Year 2003.

2003 – 2009

2003 Kors left Celine
2002 Kors launched his menswear line.
2004 The MICHAEL Michael Kors and KORS Michael Kors lines were launched.
2006 Awarded as the Accessories Council ACE Award for Designer of the Year 2006.
2009 Fashion Group International’s Star Honoree at its annual Night of Stars Awards in 2009.

2010 – 2013

2010 The CFDA acknowledge Mr. Kors with their most prestigious honor, the Lifetime Achievement Award.
2010 At age 50, Michael Kors became the youngest person ever to receive a lifetime achievement award from the Council of Fashion Designers of America.
2011 Marked Kors thirtieth year in business. He received the Award of Courage from the American Foundation for AIDS Research (amfAR).
2013 Kors was selected for The Time 100, the magazine’s annual list of the 100 most influential people in the world.

2014 – Present

January 2014 Forbes reported that KORS has a personal fortune of more than $1 billion, making him the latest fashion industry billionaire.
Present Michael Kors has full collection boutiques in New York, Beverly Hills, Palm Beach, Manhasset, and Chicago

Further, Mr. Michael Kors is a renowned award-winning designer and is instrumental in defining the brands and designing the company’s collections. His unique role as the founder, Chief Creative Officer and the namesake behind the brand provides the Board of Directors with valuable leadership and insight into the company’s design, marketing, and publicity strategy.

John D. Idol, Chairman of Michael Kors, and Chief Executive Officer (CEO) and a Director

December 2003 to Present

KORS John Idol

 

 

 

 

 

Special events:

July 1, 2001 – July 2003 Chairman and Chief Executive Officer and a director of Kasper ASL, Ltd., whose lines included the Anne Klein brand.
July 1997 – July 2001 Chief Executive Officer and a director of Donna Karan International Inc.
1994 – 1997 Ralph Lauren’s Group President and Chief Operating Officer of Product Licensing, Home Collection, and Men’s Collection.

Employment Agreement

It is required in the terms, John D. Idol has entered into an amended and restated employment agreement with Michael Kors Holding Limited, (“the Idol Agreement”). The conditions under the Idol Agreement extend Until March 31, 2018, and will be automatically renewed for an additional one-year term, unless there is an advance written notification of non-renewal by either Mr. Idol or the Company. Mr. Idol will serve as Chairman and Chief Executive Officer of the Company and MKHL, reporting to MKHL Board.

Regarding Retirement and Fringe Rights

Mr. Idols’ employee retirement and fringe rights remain the same under the Idol Agreement. The company will pay the premium up to a maximum of $50,000 per annum, for his $5.0 million whole life insurance policy. He was likewise supplied with an auto and driver for transportation to and from the Company’s offices and for business purposes as provided in the Agreement.

Idol Agreement

The Idol Agreement will terminate upon a change of control and upon his death or total impairment. Mr. Idol can terminate the agreement without good reason upon 10 days advance written notice, subject to his having certain rights to meet with the MKHL Board, and a majority of the MKHL Board approves his dismissal. Moreover, a pro rata portion of his bonus will be given upon the termination of the agreement. Plus severance equal to double the sum of his current base salary and the annual bonus paid or payable to him during the last fiscal year. And payable in a single lump sum within 30 days after the termination.

New Agreement

Mr. Idol agreed, that all rights to the Company’s intellectual property will remain the sole and sole property of the Company and he will remain bound to preserve the confidentiality of the Company’s proprietary information. Under the new agreement, Mr. Idol is entitled to receive not less than $1.0 million annual salaries. Likewise, John D. Idol totals basic compensation was $15.01 million USD, of which 17 percent were the total annual compensation and 32 percent was restricted stock award.

Special Events:

July 3, 2007, President 2007, Secretary of Global Brands Acquisition Corporation
Since September 2011 Chairman of Michael Kors Holding Limited.
January 2003 Chief Executive Officer of Michael Kors Corporation
Since December 2003 Chief Executive Officer and Director of Michael Kors Holdings Limited.
July 2001 to July 2003 Chief Executive Officer of Kasper ASL Ltd.
July 1997 to July 2001 Chief Executive Officer and Director of Donna Karan International, Inc.
1994 to 1997 Group President and Chief Operating Officer of product licensing, home collections and men’s collection at Ralph Lauren.
1984 to 1990 Vice President at Ralph Lauren
July 2001 Chairman of Kasper ASL Ltd.
1980 Mr. Idol began his career at J.P. Stevens.

Key Executive Compensation 2015

KORS Executive compensation graph

The graph above shows the compensation for fiscal 2015. It shows the total amount of compensation for each executive from the highest to the lowest with the percentages against the total key executive compensation. Also, it includes all other benefits received by the executives.

The Historical Key Executive Compensation

KORS Executive compensation

Facts:

  • The key executive compensation in Fiscal 2015 was $39 million and it represents 3 percent of the total sales, general and administrative expenses.
  • Michael Kors’ total annual compensation was $15.1 million in Fiscal 2015, it represents 39 percent of the total key executive compensation.
  • And also, John D. Idol has $15.08 million total annual compensation in Fiscal 2015 and it represents 38.8 percent of the total key executive compensation.
  • In addition, Joseph B. Parsons has a total annual compensation of $3.0 million and it represents 8 percent of the total key executive compensation.
  • Moreover, Cathy Marie Robinson, Senior Vice President Global Operations has a total annual compensation of $3.6 million, equivalent to 9 percent of the total key executive compensation.
  • Finally, Pascale Meyran, Senior Vice President, and Chief Human Resources Officer have total annual compensation of $$2.0 million and it represents 13.6 percent of the total key executive compensation.

 Explanation

  • The composition of the total compensation was: salary, restricted stock award, securities options, non-equity compensation, and other compensation.
  • Moreover, Mr. Michael Kors and Mr. John Idol have the same amount of salary, restricted stock award, securities options, and non-equity compensation as follows, $2.5, $4.9, $2.6 and $5 million, respectively.

KORS Numbers Analysis

1. Equity and Retained EarningsKORS Historical SHE REFacts:

  • Shareholders’ equity growth in 5 years was 1,567 percent, from $125 million to $2.1 billion, Fiscal 2011 until the trailing twelve months.
  • The year over year growth was increasing or trending up yearly at an average rate of 97 percent.
  • And the retained earnings growth in the last five years was 2,783 percent.
  • The year over year growth was increasing at an average rate of 107 percent.

Explanation

  • In the fiscal year 2015, a net income of $881 million was added to the shareholders’ equity.
  • And the foreign currency adjustments of $91 million were deducted from stockholders’ equity.
  • A net gain on derivatives amounting to $31 million was added.
  • The exercise of an employee share option, equity compensation expense, and tax benefit on exercise of share options in the amount of $15, $49 and $45 million recorded as additional paid-in capital were added, respectively.
  • Also, the purchase of treasury shares in the amount of $495.3 million of 6,800,101 shares was deducted in 2015.

Interpretation

The shareholders’ equity had increased by 24 percent due to an increase in net earnings by 33 percent in the fiscal year 2015 from the fiscal year 2014.

The Equity and Retained Earnings Graph

KORS SHE RE Graph

The graph above shows that the shareholders’ equity and the retained earnings are trending upward from fiscal 2011 to fiscal 2015. In addition, the trailing twelve month shows that retained earnings have a slight increase, no more than 10 percent. Nevertheless, the shareholders’ equity falls down by no more than 10 percent.

Shares Outstanding

The number of shares outstanding is the company’s stock currently held by all its stockholders.

KORS Shares outstanding

Facts:

  • Fiscal 2015 and the trailing twelve months shares outstanding was 206 and 196.4 million shares.
  • And the growth from Fiscal 2011 to Fiscal 2015 was 10 percent.
  • The trailing twelve months shows a decreased of 5 percent or $9.55 million.

Explanation:

  • The number of shares increases year over year due to an issuance of restricted shares at 18,541, 250,654 and 413,108 shares in 2013, 2014 and 2015, respectively.
  • And the exercise of employee share options at 8.7, 2.6 and 1.8 million shares in 2013, 2014 and 2015, respectively.
  • In addition, in the trailing twelve months, there was a forfeiture of restricted shares at 8,252 shares which were deducted from the total number of shares.
  • Likewise, the exercise of employee share options in the trailing twelve months was 706,343 shares.

Interpretation

The company’s outstanding shares were increasing year over year due to the exercise of employee share options and the issuance of restricted shares.

Details on Share Repurchase Program

  • On October 30, 2014, the Board of Directors of KORS authorized a $1.0 billion shares repurchase program.
  • While, on May 20, 2015, The Board of Directors authorized an additional $500 million under the existing share repurchase program and extended the program through May 2017.
  • In the three months ended June 27, 2015, the company repurchased 6,960,352 shares at a cost of $350.0 million through open market transactions.
  • As of June 27, 2015, the remaining available under the repurchase programs was $658.1 million.

Share Repurchase Program

  • The company has also a “withhold to cover” repurchase program, which allows the company to withhold common shares from certain executive officers to satisfy maximum tax withholding obligations relating to the vesting of their restricted share awards.
  • Moreover, in the three month period ended June 27, 2015, and June 28, 2014, KORS withheld 22,500 shares and 11,022 shares, respectively at a cost of $1.1 million and $1.0 million, respectively, in satisfaction of maximum tax withholding obligations relating to the vesting of restricted share awards.

2. The Valuation Model

Using the valuation model, the following results were summarized in the table below.

KORS Value Model

Facts:

  • Book value growth rate in 5 years was 47 percent.
  • And the book value in 5 years is $74.29 per share.
  • Also, the average return on equity is 45.62 percent.
  • In addition, the return on book value in 5 year period was $33.89.
  • While stock price in 5 years is $335.51.
  • The present value of the stock was $145.05.
  • Dividend yield was zero percent.
  • On the other hand, the risk that was used was 15 percent.
  • Current price as of October 1, 2015, was $43.53
  • Intrinsic value was $87.03 per share.
  • A share price of Michael Kors Holdings Limited was undervalued by 50 percent.

Explanation

Using the Value Model, the market price of KORS as of October 5, 2015, was undervalued 51 percent because the intrinsic value or the true value of the stock was higher than the market price.

Detailed Financial Analysis

A. BALANCE SHEET

Financial Health Ratios

KORS Liquidity

Facts:

  • The current ratio was averaging 4.66 and the trailing twelve months ratio was 5.35.
  • And the quick ratio was averaging 2.96 and the trailing twelve months ratio was 3.19.
  • While the financial leverage was averaging 1.59 and the trailing twelve months ratio was 1.22.
  • Moreover, the debt to equity ratio was averaging 0.16 and there was zero debt to equity ratio from 2013 to the trailing twelve months.
  • And debt to assets ratio was averaging 0.05 and there was zero debt to assets ratio from 2013 to the trailing twelve months.

Explanation

  • The current ratio is a financial health ratio that proves the ability of the company in meeting its financial current obligations using its current assets. KORS is very capable of meeting its current obligations using its current assets because the current assets are 5 times more than its current liabilities. Cash represents 45 percent of the total current assets for the trailing twelve months.
  • While the quick ratio is a financial health ratio, which tests the ability of the company in paying its current financial obligation using only its quick assets. Quick assets are current assets minus inventory. KORS has the ability to pay its current obligations using its quick assets because its quick assets are three times greater than its current liabilities.

Further,

  • Financial leverage is the total assets divided by the total shareholders’ equity. For every $1 in equity that was invested, KORS had $1.59 in total assets.
  • While the Debt to Equity ratio is a measure of how much is financed by debt or creditors compared with its owners. KORS has zero debt to equity ratio of 2013 for the trailing twelve months, meaning, the operation of the business is financed solely by the stockholders.
  • Moreover, the Debt to Assets ratio is a measure of how much of the total assets are financed by creditors. KORS has a zero debt to equity ratio of 2013 to the trailing twelve months, meaning, the company’s total assets are financed by the stockholders.   

Interpretation

The liquidity and solvency ratios tell us that KORS is capable of meeting its current and long-term financial obligations on its due date using its current assets. In addition, the company is capable of paying its current financial obligation using only its quick assets.

Efficiency Ratios

KORS Efficiency

Facts 

  • The day’s sales outstanding were averaging 31.97 or 32 days in a period.
  • And the day’s inventory was averaging 105 days in a period.
  • While the payables period was averaging 36 days in a period.
  • On the other hand, the cash conversion cycle (CCC) was averaging 101 days in a period.
  • The receivables turnover was averaging 12 times in a period.
  • Likewise, the inventory turnover was averaging 4 times in a period.
  • Similarly, the fixed asset turnover was averaging 9 times in a period.
  • The asset turnover was averaging 2 times in a period.

Explanation

  • Days sales outstanding or average collection period or days sales in receivables, measure the average number of days a business takes to collect its average receivables in a period. It measures the liquidity and efficiency of sales collection activities.
  • The day’s inventory is the average number of days that it took to sell the average inventory in a period.
  • Payable Period measures the number of days the company takes to pay its suppliers, or it is the average payment period that the company set in making payments to its creditors.
  • The cash conversion cycle (CCC) measures the number of days, cash is tied up in the production, in the sales process of its operations and the benefits, it gets in payment terms from creditors.

More Explanation

  • Receivables turnover measures how many times a firm collects its average accounts receivable balance during a certain period. In other words, it measures the efficiency of the business to collect credit sales. Higher results are favorable and a lower result is unfavorable.
  • While the inventory turnover is the number of times per year that inventory turns over.
  • In addition, the fixed assets turnover ratio or the sales to fixed assets ratio. This ratio measures how efficient is the company in utilizing its fixed assets to generate revenue. The ratio is calculated by dividing net sales over average fixed assets.
  • Moreover, asset turnover measures the management efficiency in utilizing its average total assets in generating sales or revenue.

Interpretation

  • The day’s sales outstanding tells us that, it will take an average of 32 days for the sales or services to be converted into cash.
  • And the days’ sales in inventory tell us, that, it will take 105 days for the average inventory to be sold during a period.
  • Moreover, the payable period indicates that the average period for the company to pay its suppliers is 36 days from the date of purchase.
  • Likewise, the cash conversion cycle (CCC) indicates, that it takes 101 days for the company to turn assets into cash. It also indicates that the company is efficient in managing its working capital and the ability to pay off its current liabilities.

More of Interpretation

  • The receivables turnover ratio shows that the company collects its average accounts receivables 12 times in a year.
  • Likewise, the fixed asset turnover tells us that the company generates $9.28 of revenue for every $1 investment in net fixed assets over the year.
  • And the asset turnover ratio, tells us, that KORS is generating $2.02 of sales for every $1 invested in average total assets. In other words, net sales of KORS is equal to average total assets. This ratio looks at revenue and not profit.

Condensed Balance Sheet

KORS Condensed BSFacts:

  • In the trailing twelve months,
    • Total cash was 32 percent of the total assets, a decreased of 4 percent in 2015.
    • And the current assets were 71 percent of the total assets, a decreased of 4 percent in 2015.
    • On the other hand, current liabilities represent 13 percent of the total liabilities and stockholders’ equity.
    • Similarly, total liabilities represent 18 percent of the total liabilities and stockholders’ equity, a one percent increase from 2015.

Explanation

  • Cash was increasing year over year at an average rate of 167 percent in five years. Cash and cash equivalents are highly liquid investments with original maturities of three months or less.
  • And the total current assets were increasing year over year at an average rate of 57 percent in the last five years.
  • Moreover, net property, plant, and equipment were increasing year over year at an average rate of 40 percent in the last five years. The property is stated at cost less accumulated depreciation and amortization.
  • Total assets increased year over year at an average rate of 50 percent in the last five years.
  • On the other hand,  current liabilities are increasing year over year at an average rate of 25 percent in the last five years.
  • Likewise, the total liabilities increase year over year at an average rate of 15 percent in five years.
  • Lastly, stockholders’ equity increases year over year at an average rate of 97 percent in the last five years.

Interpretation

Michael Kors Holdings Ltd is a fast developing company. The company has seen 3,738 percent growth in cash, its total assets have seen 540 percent growth and the shareholders’ equity has seen 1,567 percent growth in the last five years.

 

B. INCOME STATEMENT

Profitability Ratios

KORS Profitability

Facts:

  • The gross margin was averaging 59 percent and the trailing twelve months ratio was 60 percent.
  • Operating margin was averaging 25 percent and the trailing twelve months ratio was 28 percent.
  • Net margin was averaging 16 percent and the trailing twelve months ratio was 20 percent.
  • Return on assets was averaging 31.07 percent and the trailing twelve months ratio was 36 percent.
  • Return on equity was averaging 46 percent and the trailing twelve months ratio was 42 percent.

Explanation

  • Gross profit margin is the percent of profit after deducting the cost of sales from the total sales.
  • Operating margin is the percent of profit after deducting the operating expenses from gross profit.
  • Net margin is the percent of profit after deducting interest, income tax expenses from the operating income.
  • Return on assets ratio is the ratio of net income to average total assets. It measures the efficiency of the management in using the company’s assets in generating net earnings. It indicates the number of cents for every dollar of average total assets.
  • Return on equity or return on capital is the ratio of the company’s net income over its stockholders’ equity during a period. It evaluates the profitability of the stockholders’ investment to the company. A higher ratio is better.

Interpretation

The company generates revenue in its divisions or segments around the world. In the 2015 fiscal period, KORS generated $2.13 and $2.1 billion, and $172 million in retail net sales, wholesale net sales, and licensing revenue, respectively. Its highest sales were in North America, followed by Europe.

The gross, operating and net margin increases in 2013 has remained stable going forward at a rate of 60, 29 and 20 percent, respectively. Return on assets tells us that the management is efficient in managing its assets. The return on equity ratio indicates that the company is capable of generating a decent return on the shareholders’ investment in the company.

The Profitability Graph

KORS Profitability Graph

Facts:

  • The graph shows that the gross margin was between 50 to 60 percent in the last five years.
  • Operating margin was ranging from 15 to 30 percent in the last five years.
  • Net margins have not seen negative and it was ranging from 7 to 20 percent in the last five years

Explanation

  • The company’s gross margins remain stable in the last five years.
  • Operating profit of KORS had increased by 52 percent in 2013 and remain stable at an average 29 percent going forward.
  • Net income had increased by 61 percent in 2013 and remain stable at 20 percent going forward.

Interpretation

The graph above shows that the management is efficient and capable of generating decent revenue year over year.

The Earnings Growth Rate

KORS Profitability and Growth

Facts:

  • Gross profit growth in the last five years was 452.5 percent, or from $803 million to $4.4 billion.
  • Growth in the trailing twelve months was 2 percent from 2015.
  • Operating income growth in the last five years was 798 percent, from $137 million to $1.2 billion.
  • The trailing twelve months growth was negative 2 percent from 2015.
  • Net earnings growth in the last five years was 1,097 percent, from $72 million to $868 million.
  • The trailing twelve months growth was negative 2 percent from 2015.

Explanation

  • Gross profit increases year over year at an average rate of 43 percent in the last five years.
  • The net sales from retail stores in Fiscal 2015 represent 49 percent of the total revenue, at $2,134,578,000, a 34 percent increase from Fiscal 2014.
  • The net sales from wholesale in Fiscal 2015 represent 47 percent of the total revenue, at $2,065,088,000, a 31 percent increase from Fiscal 2014.
  • Revenue from licensing in Fiscal 2015 represents 4 percent of the total revenue, at $171,803,000, a 22 percent increase from Fiscal 2014.
  • Total revenue in Fiscal 2015 was $4, 4 billion, compared to the total revenue of $3.3 in Fiscal 2014, having a 32 percent increase.

Interpretation

The company’s revenue was running in three segments, which is the retail, wholesale and licensing. In Fiscal 2015, Accessories contribute the highest sales equivalent to 68 percent of the total sales, Apparel had total sales equivalent to 13 percent, and footwear had total sales equivalent to 11 percent of the total sales. The total revenue from licensed products was equivalent to 8 percent of the total sales.

The Earnings Growth

KORS Earnings Growth Graph

The graph indicates that the earnings of Michael Kors Holdings Limited were trending up from 2011 for the trailing twelve months. Nevertheless, in the trailing twelve months, the development remains stable from Fiscal 2015. The operating income and the bottom-line show that earnings are getting higher year over year.

C. STATEMENT OF CASH FLOWS

KORS Statement of Cash Flows

Facts:

  • The cash from operating activities has a growth of 730 percent in the last 5 years, from $110 million to $915 million.
  • The capital expenditures were $421 million in the trailing twelve months.
  • Free Cash Flows have a growth of 841 percent in the last five years, from $52.47 million to $494 million.

Explanation

  • The cash from operating activities was increasing year over year at an average rate of 67 percent.
  • Capital expenditures are investments in property, plant, and equipment and it is increasing year over year.
  • The free cash flow is trending up year over year at an average rate of 158 percent. The growth rate in 2013 was 841 percent.

Interpretation

The cash from operating activities and the free cash flows were impressive. The management has the capability of generating sufficient cash from the company’s resources to be utilized for the business operations and for future investments and for paying dividends to its stockholders.

INVESTMENT VALUATION

The Enterprise Value (EV) Approach

Enterprise Value (EV) is the present value of the whole company. EV takes into account the balance sheet, so in my own opinion, it is a much more definite measure of a company’s true market value than market capitalization. It assesses the value of the productive resources that are capable of producing products or services, both equity capital (market capitalization) and debt capital. Market capitalization is the value of the whole company’s equity shares.

EV is a company’s presumed takeover price because the buyer would have to purchase all of the stock and pay off existing debt while taking all the remaining cash. This gives the buyer a strong case for making its offer.

The table below shows us the summary of the historical enterprise value.

KORS EV

Facts:

The trailing twelve months show that,

  • Market capitalization was $8.4 billion USD.
  • The share price as of October 5, 2015, was $43.53.
  • Total debt was zero.
  • Cash and cash equivalent were $809 million.
  • Calculated enterprise value was $7.6 billion.
  • Calculated enterprise value per share was $39.35.
  • Total shares outstanding were 193,421,990 million shares.

Explanation

  • Market capitalization growth of KORS was 64 percent in the last five years.
  • The company has zero debt from 2013 to the trailing twelve months.
  • Cash and cash equivalent represent 11 percent of the enterprise value for the trailing twelve months.

Interpretation 

In purchasing the entire business of KORS as of October 5, 2015, the investor would be paying t $7.6 billion at $39.35 per share. The equation in buying would be 100 equity and zero debt.

 

The Discounted Cash Flow (DCF) Approach on KORS

Discounted cash flow (DCF) is a valuation method used to estimate the value of the entire company today based on future cash flows. DCF calculates the present value of the future cash flows using a discount rate. A present value estimate is then used to evaluate a potential investment. It is described as “discounted” cash flow because of the principle of “time value of money”. In other words, the amount of cash that the company will receive today is worth more than the dollar in the future.

DCF Formula

Where:

  • Vo is the value of the equity of a business today.
  • CF1 to CFn represent the expected cash flows (or benefits) to be derived for periods 1 to n. The discounted cash flow model is based on time periods of time of equal length. Because forecasts are often made on an annual basis in practice, we use the terms “periods” and “years” almost interchangeably for purposes of this theoretical discussion.
  • r is the discount rate that converts future dollars of CF into present dollars of value.

The Historical Cash Inflows

KORS Historical CF

The EBITDA growth was 759 percent in the last five years, from $162 million to $1.4 billion. In addition, the EBITDA was increasing year over year at an average rate of 75.69 percent.

The Projected Cash Inflows

KORS Projected Cash Inflows

Facts:

  • The projected cash inflows in Year –
  • 1 or in the year 2016 was $1,534,937,800 billion.
  • 2 or in the year 2017 was $1,688,431,580 billion.
  • 3 or in the year 2018 was $1,857,274,738 billion.
  • 4 or in the year 2019 was $2,043,002,212 billion.
  • 5 or in the year 2020 was $2,247,302,433 billion.
  • The calculated terminal value was $13,829,828,353 billion.
  • The estimated present value discounted using the calculated required rate of return in Year –
  • 1 or in the year 2016 was $1,312,374,785.
  • 2 or in the year 2017 was $1,234,291,275.
  • 3 or in the year 2018 was $1,160,853,567.
  • 4 or in the year 2019 was $1,091,785,248.
  • 5 or in the year 2020 was $1,026,826,346.
  • The present value of the terminal value was $6,319,056,975.
  • The future enterprise value was $12,145,188,196 at $62.79 per share.

Explanation

  • The current growth rate of cash inflows in Fiscal 2015 was 28 percent, however, this is less than the growth in fiscal 2014 by 31 percent. And, from 2013 to fiscal 2014, the growth diminished by 81 percent.
  • The present value of the projected cash inflows was calculated utilizing the required rate of return (RRR) (shown in the table below), with the following formula:

 Present Value = Projected Cash Inflows ^n / (1+ discount rate) ^n

  • The enterprise value was the sum of the present value at year 1 to year 5 plus the present value of the terminal value. In other words,

Enterprise Value = PV^1 + PV^2 + PV^3 + PV^4 + PV^5 + PV (terminal value)

Interpretation

The present downswing of the luxury wholesale and retail sales globally might continue in the coming more years, due to this, the historical current cash inflow growth rate is not applied.

The Terminal Value

KORS Terminal Value

Facts:

  • The calculated Terminal Value using the Gordon Growth model was $13.8 billion.
  • The final projected year cash flows of $2,247,302,433.
  • The long-term cash flows growth rate of 0.61%.
  • And the calculated discount rate or the required rate of return of 16.9588 percent.

Explanation

Terminal value or continuing value is the value of the firm beyond the projected period. In other words, it is the future discounted value of all future cash inflows beyond a given date.

Interpretation

It needed to come up with a terminal value of cash inflows after projecting the future cash inflows at year 5. If the terminal value or the value of future long term value is not considered, it will be assumed that KORS stopped operating at the end of 5 year projection period.

The Fair Value or Intrinsic Value and the Margin of Safety

KORS Fair Value

Facts

  • Intrinsic Value or Fair Value was $11.17 billion at $57.73 per share.
  • The net debt was -$978,922,000.
  • Net Debt = Short term liability + Long term liability – cash and cash equivalent
  • Share price as of October 5, 2015, was $43.53.
  • The margin of safety was $14.20 per share or 25 percent of the intrinsic value.
  • The stock of KORS is undervalued.

The Discount Rate or the Required Rate of Return (RRR)

KORS RRR

Facts:

  • The calculated required rate of return or the discount rate was 16.9588 percent.
  • The risk-free rate was 7.17 percent.
  • The long-term cash flow growth, which is the average long term Gross Domestic Product (GDP) in the United Kingdom was 0.61 percent from 1955 until 2015.

Explanation

  • Risk-Free Rate is the rate of return from an investment with zero risks over a specified period.
  • Market Risk Premium is the return expected over and above the risk-free rate.
  • Beta is a measure of the stock volatility in the stock price fluctuations in the overall market.
  • GDP Growth Rate represents the overall market value of all the goods and services that a country produces over a specific time period – you can think of it as the size of the economy.

Interpretation

The required rate of return (RRR) is the minimum annual return that an investment must provide to support or justify the purchase of an investment. The investor’s decision to invest in a new project depends on their risk tolerance.

Present Value

This method of valuation tries to work out the value today of the projected cash flows in the future, now let us walk through the calculation of the present value of the projected cash inflow in year 5.  I will walk you through by the following formula:

PV

or PV = FV (1+r) n

Where:

PV = Present Value

FV = Future Value

r    = Rate of Return

n   = Number of Periods

Present Value at year 5:

PV = $2,247,302,433 / (1 + 16.9588%) ^5

= $2,247,302,433 / (1.169588) ^5

= $ 1,026,826,346 

Therefore:

PV = $1,026,826,346

FV = $2,247,302,433

r    = 16.9588%

n   = 5

Present Value of Terminal Value

PV = $13,829,828,353 / (1 + 16.9588%) ^5

= $13,829,828,353 / (1.169588) ^5

= $6,319,056,975

Therefore:

PV = $6,319,056,975

FV = $13,829,828,353

r    = 16.9588%

n   = 5

The present value of the future projected cash inflows at year 5 is $1,026,826,346. On the other hand, the present value of the terminal value was $6,319,056,975.

KORS Monthly Stock Trends

What is the stock trends? Stock trends are the general direction in which a market is heading, it is the movements of the highs and lows.  The stock trend is a significant factor in technical analysis.

KORS Stock Trend

Facts

  • The chart above illustrates a descending price movement from September 30, 2014, until April 30, 2015.
  • Then followed by a horizontal or sideways price movement from May 31, 2015
  • Until the trailing twelve months. The sideways pattern has a small price move.
  • As a result, a break of a trendline usually indicates a strong trending characteristic either up or downwards.
  • Moreover, the chart shows a little price movement in either direction and the chance to get an opportunity for profit is little, for a short term investor.

Explanation

The trend line shows a descending one-year movement from September 30, 2014, until the trailing twelve months at an average of negative 3.8 percent. Further, the one-year price growth of KORS is negative 40 percent, from $71.39 to $43.07, therefore, the price has a descending trend in a period of one year.

Historical Market Data

KORS Historical Market Data

Facts:

  • The Price to Earnings in the trailing twelve months was 10.63.
  • Earnings per Share for the trailing twelve months was $4.24 and it has a growth of 1185 percent in the last five years. Likewise, EPS is increasing year over year at an average rate of 77 percent in the last five years.
  • Price to Book value in the trailing twelve months was $4.10 per share.
  • Book Value per share in the trailing twelve months was $10.80 and it has a growth of 588 percent in the last 4 years.
  • EV/EBITDA in the trailing twelve months was 6 times.
  • The Share Price in the trailing twelve months was $45.12 and it has a growth of 60 percent in the last five years.
  • EV/EBITDA in the trailing twelve months was 6 times.
  • Market capitalization in the trailing twelve months was $8.4 billion and it has a growth rate of 63 percent.
  • The computed price target of KORS using the Price to Earnings was 45.84.

Explanation:

  • Price to Earnings (P/E) is the most popular metrics in stock analysis. It calculates the market value of the stocks relative to the earnings of the company. Likewise, it tells us what the market is willing to pay for the earnings of the company. The higher the P/E, the more the market is willing to pay for the earnings of the company.
  • In addition, Earnings per Share is a measure of profitability and how the management is handling the business operation. Moreover, it is a number of profits that accrue to each shareholders’ based on a number of shares they owned.
  • Moreover, Price to Book ratio is a financial ratio that compares the market price to the book value of the stock.

More Explanation

  • Book Value per share is the amount of shareholders’ equity over the number of outstanding shares, it is an indicator of the value of the company’s stock.
  • While the Enterprise Value/Earnings before Interest, Tax, Depreciation, and Amortization (EV/EBITDA), determines the value of the company.
  • Price Target forecast what the company is worth and compare to market price. It is a function of risk tolerance and the length of time in holding the security.

Interpretation

The financial ratios of KORS were improving year over year and the increase was acceptable. It indicates, that the management was efficient in handling the operation of the business.

In conclusion,

The stock trend graph has a descending trend and has a little movement. It is either up or down and a chance for a profit is small, for a short term investor. Hence, KORS stock is a good BUY for a long-term asset.

CITATION

https://www.sec.gov/Archives/edgar/data/1530721/000119312515201923/d900571d10k.htm#tx900571_13

http://www.michaelkors.com

https://www.michaelkorsoutletsettlement.com/Home/FAQ

https://www.michaelkorsoutletsettlement.com/Content/Documents/Long%20Form%20Notice.pdf

https://en.wikipedia.org/wiki/Michael_Kors

Researched and Written by Criselda

Twitter: criseldarome

itt-educational-services-esi

Is there a future for ITT Educational Services Inc (ESI) in US Education?

July 21st, 2015 Posted by Deep Analysis No Comment yet

ITT Educational Services Inc (ESI) is one of the largest publicly traded for-profit educational institution, headquartered in Indianapolis, USA

On May 12, 2015, the US Securities and Exchange Commission announces fraud against ITT Tech and Kevin Modany, the Chief Executive Officer. And Daniel Fitzpatrick, the Chief Financial Officer. The Securities and Exchange Commission affirmed that ITT Tech, who is running the for-profit colleges and its two executives. Mr. Modany and Mr. Fitzpatrick, has fraudulently hidden the poor performance of the threatening financial impact of the two private student loan program, the PEAKS, and the CUSO, which ITT Tech had financially guaranteed.

About ITT Educational Services Inc (ESI)

ESI established and provide the two student private loan programs after the breakdown of the private student loan market.  ITT Tech provides a limited risk of loss to attract investors to invest in these two private student loans programs. The two executives made various material distortion and eliminations in the disclosures to hid the default in the performance of the two student loan programs, stated on the Sec’s complaint.  Further, for-profit colleges are run by companies that operate under the demands of investors and stockholders.  Moreover, private loan programs are privately operated to earn money for their investors. Howbeit, for-profit colleges can get up to 90 percent of their revenue from federal student aid.

On the other hand, according to Kevin Modany in August he would be stepping down as Chief Executive Officer effective February 2015, further, he said that he would remain until the company has found somebody to replace him. Moreover, Daniel Fitzpatrick said, that he planned to retire October 29, 2015, from his position.

ESI Current Problems the Company is Facing  

  • The company was charged with fraud by the US Securities and Exchange Commission by concealing actual situation of the PEAKS and CUSO private loan program, and not telling the whole truth to the investors and its auditors. The company has misinformed the auditors repeatedly, therefore, the financials need to be restated.
  • Moreover, ESI has to face a federal lawsuit which was filed last year by the Consumer Financial Protection Bureau by exploiting students of predatory lending by pushing students in a private loan that cost higher than other private loans that may have a tendency to end in default.
  • In addition, after the announcement made by the SEC, the share price of ESI has nose-dive right after the publication at 44 percent, however, right after the filing of its financial statement ending December 31, 2014, to the SEC, the price started to rise to $4.37 from $2.41 per share. The stock price still remains unstable.
  • Moreover, ESI has been receiving punches from the regulators and could not defend themselves in a public arena because no evidence has been presented yet to the charges.

More about ESI’s concerns

  • One legislator is calling on the Department of Education to further investigate ITT Educational Services and its two executives, for not revealing the problems in the two private student loan program which could create a great impact on the financials.
  • Moreover, California Rep. Jackie Speier wrote a letter to the Department of Education demanding an investigation of alleged deceptive and predatory lending practices by the company.
  • In addition, the two programs were poorly run in 2012, which pushed the ESI’s guarantee obligations. Instead of telling the truth to the investors, the operators made a variety of actions that would appear that the company’s exposure was more limited, according to the Sec’s complaints.

Regarding Accounting Issues

  • Further, the SEC disclose complicated accounting issues that the company published years ago. The company affirmed in covering up losses by making payments on delinquent accounts to avoid exciting millions in guaranteed payments, which they have settled in 2011 and continued until 2013. According to SEC Enforcement Director Andrew Ceresney, the senior-most executives made a number of material misstatements and omissions in its disclosures to cover up poor performance of student’s loan programs that ITT created and guaranteed.

Statement from the SEC:

 “The SEC alleges that the national operator of for-profit colleges and the two executives fraudulently concealed from ITT’s investors the poor performance and financial impact of two student loan programs that ITT financially guaranteed.”

ITT formed both of these student loan programs, known as the “PEAKS” and “CUSO” programs, to provide off-balance sheet loans for ITT’s students after the collapse of the private student loan market. To induce others to finance these risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools.”

Issues that ESI is facing

  • ESI claimed that the US Securities and Exchange Commission had mistaken decision to bring an enforcement action against ESI. In addition, the company claimed that the evidence does not support the Sec’s claims.
  • Another problem of the company is the delay in the submission of the 2014 financial statement, which is one reason for the share price to decrease. However, recently, after the company had filed their 2014 financial statement with the SEC, the price immediate went up, unstable.
  • Moreover, the company have decided to consolidate the financial result of the PEAKS Trust program, beginning February 28, 2013, the Company’s Audit Committee concluded that the Company will need to restate the unaudited financial statements in its Quarterly Reports for each of the quarters ending March 31, 2013, June 30, 2013, and September 30, 2013, and the previously submitted annual report ended December 31, 2013, and the quarter ending March 31, 2014, as these were no longer reliable.

What are the Effects? 

  • Initially, the company’s future was placed into uncertainties and the reputation was affected.
  • The market price has dived at 44 percent from $4.02 to $2.27 per share, after the announcement of fraud against the company, Kevin Modany, Chief Executive Officers and Daniel Fitzpatrick, Chief Financial Officer.  However, after the filing of its 2014 financial statement, the price rise by 44.85 percent, but the price was still unstable.
  • Moreover, these private student loans program and the default rates have expanded in the US during recent years, which cause worries that it could trigger the next financial crisis.

From ITT’s Financials, quote:

“The level of student loan debt hit a record high of almost $1.2tn in the first quarter of 2015, with delinquencies of 90 days or more reaching about 11.1 percent, according to a report by the Federal Reserve Bank of New York released on Tuesday” 

If the allegations of Congresswoman Jackie Speier is true,  “ITT Educational Services has engaged in deceptive and predatory lending practices, pushing students into high-interest loans they know cannot be repaid, at costly taxpayer expense,” Speier wrote.These students become saddled with unforgivable debt, and their inability to repay it ruins their future job prospects while harming taxpayers who are stuck with the bill,” a statement gathered from the website of Congresswoman Jackie Speier.

ITT’s PEAKS PROGRAM

From ITT, quote,

In order to meet the price of tuition fees in addition to Federal loans and grants, ITT partnered with a Wall Street investment bank to create a lending program that, through an impressively complex series of financial transactions, may meet the definition of a “private” loan that ITT may count toward the 10 sides of the 90/10 calculation.”

ESI PEAKS flowchart

From ITT, quote:

“The program has begun with Liberty Bank, who issued $346 million in loans to ITT students. ITT took a 28 percent discount on these loans and received $246.7 million in cash from Liberty Bank. The loans were then sold to a trust that then issued a $300 million in senior debt to a group of Wall Street investors. In exchange for their discount on the loans, ITT received a subordinated note from the trust and additionally guaranteed the senior debt holders payment of principal interest, certain call premiums, and administrative fees and expenses, regardless of whether the loans are repaid.”

The PEAKS program has an interest rate ranging from 4.75 to 14.75 percent.

ITT’s CEO describes the PEAK’s program as, quoted:

“A third party private student finance where our students apply for private lending to fill the gap financing need that they have, if a student gets a loan, for example, for a thousand dollars, there’s less than that amount that is transferred to the company, so some amount of that loan stays behind to provide excess of collateralization for the performance of the portfolio. And then in addition to that, the company provides guarantees on the performance of the program, and to the extent that the excess of collateralization would not be sufficient to cover the return on the investment that the senior notes that the investors put into the trust to fund the program.”

Further,

“As of June 30, 2011, ITT has exhausted the lending capacity of the PEAKS program and it’s no longer originating additional PEAKS loans, although the company has indicated they are interested in reinstituting a similar program. Between January 2010 and June 2011, in addition to Federal loans and grants, approximately $345 million in loans were made to ITT students. In 2009, the year before PEAKS funding was available, ITT’s 90/10 ratio was 70 percent. For 2010, this ratio fell to 60.8 percent. While it is unclear as to the extent PEAKS is responsible for this drop, the program is likely responsible for at least a portion of this decline.” 

Partnering with Wall Street

The adviser and creator of the two private student loan program were ITT Technical Institute and ESI, who partnered with Wall Street investment bank or group of Wall Street investors. The company has the sole decision whether to extend credit to its students and is independent of the Originating Lender’s evaluation of prospective borrowers in accordance with the underwriting criteria established under the PEAKS Program.  Moreover, the Trust Equity Holder is the Administrator of the Trust, is responsible for identifying to the Trust the private education loans eligible for purchase under the PEAKS Program.  Therefore, the Trust Equity Holder has the power to direct the activities that are essential to ensuring that loans purchased by the Trust are of the quality specified under the PEAKS Program, which ultimately impacts the economic performance of the Trust.

Comments and Response from SEC gov:

Comment:

Please tell us whether the Trust is contractually required to use Liberty Bank as an exclusive underwriter and lender for the PEAKS program.  If not, which party would make the determination to use a different underwriter/lender?

Response:

“Pursuant to the applicable contractual provisions between the Trust and Liberty Bank, the Trust has agreed to purchase private education loans made by Liberty Bank to the Company’s students, if originated in accordance with the program guidelines and to the extent of available funds in the Trust.  The Company further understands that the Trust was established by the Trust Equity Holder and the owner trustee of the Trust (an entity AFFILIATED with the Sponsor) as a limited purpose trust to purchase and own private education loans originated by the Originating Lender under the PEAKS Program.

Liberty Bank is the designated Originating Lender (i.e., underwriter and lender) for the PEAKS Program pursuant to an origination and sale agreement (the “Origination and Sale Agreement”) among the Trust, the Originating Lender, the Origination Agent, an AFFILIATE of the Sponsor who serves as the lender trustee (“Lender Trustee”) of the Trust and the Company.  The Origination and Sale Agreement can be terminated only in limited, non-discretionary circumstances, which generally include:

The following:

  • a party’s failure to timely observe or perform its obligations under the Origination and Sale Agreement in any material respect and such failure remains uncured and materially adversely affects the value of the private education loans originated under the PEAKS Program:
  • a party’s representations, warranties, and covenants made in connection with the Origination and Sale Agreement or any sale of private education loans under the PEAKS Program are materially and adversely incorrect and the value of the private education loans is materially adversely affected; and
  • Changes in the laws or regulations that make the performance of obligations under the Origination and Sale Agreement impractical or unlawful.

“If the Origination and Sale Agreement is so terminated, the non-terminating parties have agreed to negotiate in good faith for the continuation of the origination and sale activities under the PEAKS Program on substantially the same terms with one or more additional parties.”

Quote from ITT Educational Services Internal Email, November 18, 2009, re PEAKS (ITT 00147688), ITT Educational Services, Private Education Loan Application and Solicitation Disclosure by Liberty Bank (ITT 00080791)

Solutions 

In the quarter ending September 30, 2014, filings, the following statement was gathered.

“The assets of the PEAKS Trust consist primarily of cash and the PEAKS Trust Student Loans. The liabilities of the PEAKS Trust consist primarily of the PEAKS Senior Debt. The assets of the PEAKS Trust serve as collateral for and are intended to be the principal source of, the repayment of the PEAKS Senior Debt. Moreover, the carrying values of the assets and liabilities related to the PEAKS Program that had been included as balance sheet items related to our Core Operations and consisted of the Subordinated Note, a guarantee receivable. In addition, the contingent liability, were eliminated from our Condensed Consolidated Balance Sheets as of September 30, 2014, and 2013.”

Primary Beneficiary of PEAKS Trust

Another statement gathered from ITT’s Q3 2014 financial statement:

Based on our analysis, we concluded that we became the primary beneficiary of the PEAKS Trust on February 28, 2013. This was the first date that we had the power to direct the activities of the  PEAKS  Trust that most significantly impact the economic performance of the PEAKS Trust, because we could have exercised our right to terminate the servicing agreement that governs the servicing activities of the PEAKS Trust Student Loans (the “PEAKS Servicing Agreement”), due to the failure of the entity that performs those servicing activities for the PEAKS Trust Student Loans on behalf of the PEAKS Trust to meet certain performance criteria specified in the PEAKS Servicing Agreement.

Further,

We have not, however, exercised our right to terminate the PEAKS Servicing Agreement. As a result of our primary beneficiary conclusion, we consolidated the PEAKS Trust in our consolidated financial statements beginning on February 28, 2013 (the “PEAKS Consolidation”). Prior to February 28, 2013, the PEAKS Trust was not required to be consolidated in our consolidated financial statements, because we concluded that we were not the primary beneficiary of the PEAKS Trust prior to that time. “

Furthermore,

“Our consolidated financial statements for periods as of and after February 28, 2013, include the PEAKS Trust because we were considered to have control over the PEAKS Trust beginning on February 28, 2013, under ASC 810, as a result of our substantive unilateral right to terminate the PEAKS Servicing Agreement. We do not, however, actively manage the operations of the PEAKS Trust, and the assets of the consolidated PEAKS Trust can only be used to satisfy the obligations of the PEAKS Trust. Our obligations under the PEAKS Guarantee remain in effect until the PEAKS Senior Debt and the PEAKS Trust’s fees and expenses are paid in full. See Note 13 – Commitments and Contingencies, for a further discussion of the PEAKS Guarantee.”

Another solution to the existing problems of ESI is to clear the charges made by the US Securities and Exchange Commission against the company, as the company is claiming, that, the evidence does not support the Securities’ charged.

What would be the results if they take options above? 

If the company is cleared of all the charges made by the SEC against them, the following results may happen.

  • The Company’s financials may start to rise again. One reason why the net earnings of the company drop by 119 percent in 2013 are due to the consolidation of the financial statement that includes the PEAKS Trust and the 2009 Entity.
  • Recently, the company had released its 2014 financial statement and made filings with the SEC, immediately after, the share price of the stock had risen by 44.85 percent.

Company History

Company Profile 

ITT Educational Services, Inc. (ESI) provides post-secondary degree programs in the United States.   Further, the Company provides master, bachelor and associate degree programs and short-term information technology and business learning solutions. In 1965 until 1994, ITT Tech was a fully owned subsidiary of ITT Corporation (as “ITT/ESI”). ITT’s Initial Public Offering was in 1994, with a ticker symbol of ESI under the New York Stock Exchange (NYSE). The company has 3,120 employees.

Key Dates

  • 1963: Textbook publisher Howard W. Sams opens Sams Technical Institute in Indianapolis, Indiana.
  • 1966: Sams is purchased by New York-based ITT Corp.
  • 1968: ITT incorporates its education subsidiary as ITT Educational Services.
  • 1981: ITT creates its new Business Division.
  • 1984: Employer Services Division is created.
  • 1992: ITT initiates Vision 2000, a growth strategy plan aimed at offering more degree programs and adding more colleges to the system.
  • 1994: Parent company ITT Corp. spins off 17 percent of ITT Educational in a public offering.
  • 1998: ITT Corp. is purchased by Starwood Hotels and Resorts Worldwide Inc.; ITT introduces its information technology program.
  • 1999: Starwood sells off all remaining ITT Educational stock in a public offering.

Incorporation/Head Office 

  • In 1968, ITT incorporates its education subsidiary as ITT Educational Services.
  • ESI’s head office was located at 13000 North Meridian Street, Carmel, IN 46032-1404, United States.

Company Sector/Industry 

ITT Educational Services was operating under the following category:

  • Sector: Consumer Discretionary
  • Industry: Consumer Services
  • Sub-Industry: Educational Services

Founder/Founding 

ITT Technical Institute was founded in 1946 as Educational Services Inc. ITT Technical Institute is a wholly owned subsidiary of ITT Corporation.

Senator Dianne Feinstein’s husband, California Regent Richard C. Blum has been a significant shareholder of the stock despite allegations of conflict of interest. Board member Vin Weber has also been a key political operative for the company since 1994.

The company’s first President, William Renner, late in 1969, however, he drops the position and replaced in 1970 by Burton Sheff. Sheff resigned in May 1972 and was replaced by Neil Cronin, who stayed only for a short period.

The next leader

In 1974, Richard McClintock became the next leader. McClintock, who had been employed by ITT Corporation and its subsidiaries since 1957. He had served previously as the company’s comptroller and treasurer. On the onset of his leadership in 1974, he immediately set about implementing new administrative structures and procedures. Moreover, two of his first initiatives were to establish an executive committee for the company and to begin establishing curriculum advisory committees for each region. On the other hand, Richard McClintock served ITT for 10 years, until his death in October 1984. In addition, the company’s executive committee took over the governance and operation until Rene Champagne took over the position in September 1985.

Other Significant Information 

  • After the conference call on June 2, 2015, the price went down by 12.42 percent, from $4.67 to $4.09 per share. Although the earnings meet investors’ expectations.
  • Moreover, ESI has a financing agreement dated December 4, 2014, with Cerberus Business Finance LLC as collateral agent and administrative agent. Further, ESI borrowed a principal amount of $100.0 million senior secured term loan. The loan is intended to be used as collateral for the $89.2 million letters of credit that are outstanding.
  • Large institutional investors in the company include Blum Capital Partners (which owns 15.8 percent of the company), Wellington Management Company (13.99 percent), Select Equity Group (6.5 percent), and Providence Equity Group (5.6 percent).

Material Events Affecting the Numbers 

Key Executive CompensationESI compensation

Facts:

  • The key executive compensation in 2013 and 2014 were $6 and $7.36 million, respectively.
  • While Kevin M. Modany’s total compensation in 2013 and 2014 were $3 and $3.2, respectively.
  • In addition, Daniel M. Fitzpatrick’s total compensation in 2013 and 2014 were $1.0 and $1.1 million, respectively.

Explanation:

  • The executive compensation in 2014 had increased by 23 percent from 2013.
  • While Kevin M. Modany’s total compensation in 2014 had increased by 8 percent from 2013.
  • In addition, Daniel Fitzpatrick’s total compensation in 2014 had increased by 13 percent from 2013.

Interpretation:

  • The total executive’s compensation had a growth of 41 percent in the last five years.
  • Moreover, Modany’s total compensation had a growth of 58 percent in the last five years.
  • While Fitzpatrick’s compensation has a growth of 37 percent in the last five years

MAIN ACTIVITIES

1. How Does the Company Make Money? 

ITT Educational Services, Inc. (ESI) offers post-secondary education in master, bachelor’s and associate degree program. It provides technology-oriented undergraduate and graduate degree programs through its accredited post-secondary institutions, ITT Technical Institutes, and Daniel Webster College. The Company owns and operates more than 130 ITT Technical Institutes and Daniel Webster College. ESI serves approximately 55,000 students in 39 states and online.

2. What do People Think of the Company’s Services? 

Here are some of the consumer’s complaints and reviews for ITT Educational Services:

  • Frank of Antelope, CA on May 11, 2015

Satisfaction rating (one star)

All I can say is that I owe $33,000 and it’s going down the drain for no real reason. The school hasn’t helped me get my real career together. I have just been laid off from a job that I looked for on my own. I got a 2 year Associates degree graduated in December 2013 and ever since I’ve been nothing but positive attitude looking for work. I’m not paying anyone for this mess. NEVER EVEN GOT MY GRADUATION PICTURES!!!

  • Michael of Towson, MD on May 9, 2015

Satisfaction rating (one star)

I graduated in 2013. CST was my major. They promised me a well-paying job. Did NOT fulfill their promise! Now I have a job but not even close to my major. They refuse to help me anymore. They won’t even return my phone calls. I have been calling just about every day!

  • Daniel of Sandiego, CA on May 5, 2015

Satisfaction rating (one star)

I was returning back to school at ITT Technical Institute. When I was trying to sign into my student portal I did not have access to it. I went to the dean’s office and 1 guy told me that the dean said that I am NOT allowed back at the school and I am NOT allowed back on the premise so I asked him why and he said something I did in the past. Then I asked him what did I do and he said I don’t know.

Further, I tried to contact the Dean, so I sent emails to the Dean and the Dean ignores me and never give me a response or a dismissal letter or anything, so I lost a lot of educational time for looking for another school. I should have graduated this year, but ITT Technical Institute causes me to fall back and waste a gap in my career.

  • Andrew of Tamarac, FL on April 29, 2015

Satisfaction rating (one star)

ITT Technical Institute in Fort Lauderdale, Florida tricked me into signing up for high-interest private student loans that were never explained to me. Private student loans were never once mentioned to either me or my mother and father. They rushed us through the entire sign up process and I was just an excited 18 years old fresh out of high school thinking I was doing the right thing. I don’t think I passed the entrance exam but the ITT Technical Institute salesman told me that I did anyway. I wanted so badly to believe him and so I did. All I ever wanted to do was go to college and get a decent education and a great paying job. I had no idea that it was all smoke and mirrors.

More of the Story

I attended between 2004 and 2006 and here is my experience of that time there. What they offered me was absolutely in no way what was described or advertised. My grades and GPA were artificially inflated by the administration in order to keep the school’s average GPA up, they were actually caught doing this. The classrooms were completely outdated, the computers were outdated by at least 6 years and software such as Photoshop was always at least 5 versions behind the current version.

Management

Most of the instructors knew less than a lot of the students in each classroom. Instructors were fired and hired at least a few times per course per semester. The new instructor would never know exactly where the previous instructor left off and it was just a complete disaster. Some instructors would just read directly from the book, some would just sit around and try to make friends with the students and let everyone does whatever they wanted.

This is not a way to run the school and I feel absolutely scammed that I am going to be paying $117,000 with interest on a $60,000 loan for a degree that most employers seem to shun. That being said, I would like a refund for the absolute lack of education I received. The fact that ITT Technical Institute is currently being sued by the CFPB for predatory practices is exactly why I am here. Predatory lending is exactly what I experienced among myriad other disasters and major shortcomings that a major “college” chain should have a standard.

  • Christina of Grand Rapids, MI on April 17, 2015

Satisfaction rating (one star)

itt-education-esi

I made the worst mistake of my life by signing up. When I first started things seemed pretty good. Class size was around 50 students per class. Many of them were Army Veterans that, gave me a sense or the illusion that I did not make the wrong decision in deciding to attend this school. By the second quarter, half of the students enrolled had to drop out and never returned. I just thought Maybe College was not for them and I continued to stick it out. Then I started noticing things like labs don’t ever work, teachers changing grades, passing people that were putting very little effort into their studies and never getting my books on time.

Further,

Then when I entered my second year in my Associate’s program in Computer Network Systems I was pulled out of class to meet with the finance department about financial aid. The school had told me that I was out of funding and I would have to take out loans to a different lender in order to continue my program. The financial aid adviser told me that the school offers a “Temporary Credit” where the school would fund me the money I needed at 0% interest until the loan was paid in full. Sounded as though, a good idea instead of trying to find a private lender to finance through.

I continued my program and graduated then I signed up to do the bachelor’s program but before signing up I asked the financial aid department if I had all the funding available that I needed to finish the program without needing to find alternate sources. I was assured I had plenty of funding available.

Furthermore,

So I started the bachelor’s program and by then the class size was no larger than 8 people and sometimes I was the only student in my class. Any times I was forced to take online classes even though I was told that online was an option. I continued on and at the last 4 quarters of my program, I get pulled out of class again by financial aid to advising me that I have run out of funding for my program and I would have to find other funding in order to complete my degree.

At this point, I was extremely angry and they offered to give me more money on the “Temp Credit” account so for me to graduate. I was too far into the program to just give up on it all so I agreed to add to the temp credit. A week after meeting with financial aid I get a letter in the mail saying that I have to start making payments on my temp credit account.

More of the Story

I called the school to verify this because when I sign up for the temp credit and was told I did not have to start making payments until 6 months after graduation. The financial aid adviser then told me that if I wanted to return to school I would have to set up a payment arrangement because I cannot just go to school for free. And had already invested too much time and money in this school I was not about to quit now so I set up a payment arrangement of $75.00 a month to stay enrolled.

Finally,

I ended up completing my bachelor’s degree program and have no assistance at all with career services or any help with internships, never getting any responses back on job prospects. I started getting statements in the mail about my temp credit. They sent 2 different statements that said different amounts on them. I called financial aid again to get verification and she said: “one statement was wrong and the other was right.” I then asked her “what happened to the balance that I had to my temporary credit when I first signed “up” and she said, “those loans were sold to private lenders.” And the nightmare continues. Stay away from this school. Also, if you are a victim of the predatory lending and abuses that ITT-Technical Institute has caused, please join us in the fight to get our loans forgiven. We are building a movement. Hope to see you there.

Who is Running the Business? 

The two officers that are directly responsible for the business operations of ITT Educational Services Inc. (ESI) were, Mr. Kevin M Modany, Chief Executive Officer (CEO) and Mr. Daniel M. Fitzpatrick, Chief Financial Officer (CFO).

Mr. Kevin M. Modany, Chief Executive Officer

ESI Modany

Mr. Kevin M. Modany has been the Chief Executive Officer of ITT Educational Services Inc. since April 1, 2007.   Mr. Modany served as the Chairman of the Board of ITT Educational Services Inc. from February 1, 2008, to August 4, 2014, and as its Director from July 25, 2006, to August 4, 2014.

History

  • April 26, 2005 – March 2009 – served as the President of ITT Educational Services Inc.   April 26, 2005 – April 1, 2007 – served as Chief Operating Officer of ITT Educational Services Inc.
  • And on  January 2003 – June 6, 2005 – served as its Chief Financial Officer from
  • While in July 2002 – April 26, 2005, – served as Senior Vice President
  • In addition, in June 2002 to December 2002 – he served as Director of Finance at ITT Educational Services Inc.
  • Moreover, in October 2000 – May 2002 – served as Chief Financial Officer and Chief Operating Officer of Cerebellum Software, Inc., a software development, and professional services company.
  • Also in October 1998 – September 2000 – served as President of USA Clean, LLC, a specialty chemical division of Gemini Holdings, Inc. and a distributor of products and chemicals for the textile care industry,
  • February 1995 – September 1998 – served as Executive Vice President, Chief Financial Officer, Director of Finance and Controller of Consolidated Products Systems, Inc., a food distribution and retail services merchandising company.

Modany’s Career

  • Modany began his career with a National accounting firm where he worked in the audit/financial consulting division and was consistently rated as one of the top performers in the local office. During his tenure, he served as the Sr. Auditor-In-Charge for the two largest audit engagements of the Pittsburgh office.
  • In addition, he obtained his Bachelor’s degree in Accounting (with an additional program focus in Finance) from Robert Morris University (formerly Robert Morris College-Pittsburgh, PA) and is a Certified Public Accountant.
  • Moreover, the annualized base salary as of February 10, 2014, was $824,076
  • Dollar increased over the prior year was $24,002 (3.0 percent)

Mr. Daniel M. Fitzpatrik, The Chief Financial Officer

ESI Fitzpatrick

Mr. Daniel M. Fitzpatrick has been the Chief Financial Officer and Executive Vice President at ITT Educational Services Inc. since April 2009 and served as its Principal Accounting Officer since September 2005.

  • June 6, 2005 – March 2009, Mr. Fitzpatrick served as Senior Vice President and Chief Financial Officer of ITT Educational Services Inc.,
  • Until June 2005 – served as Senior Vice President and Controller of Education Management LLC (alternate name: Education Management Corporation).
  • Prior to Education Management LLC, Mr. Fitzpatrick worked for Arthur Andersen LLP as an Engagement Manager providing audit, accounting, and business advisory services.
  • Annualized base salary as of February 10, 2014, was $412,000.
  • Dollar increase over prior year $12,000 (3.0 percent)

What do people think about the person or what do people say about the person?  

Here are some comments gathered from consumers affairs.com/education/itt

  • March 27, 2014                                                                                  

“Extremely greedy CEO-Kevin M. Modany has ruined the quality of an ITT Technical Institute education.”

Former Employee – Student Representative in Phoenix, AZ

Pros

Employees that care
Some students are a perfect fit for the ITT model.

Cons

Forcing, coercing, manipulating students to enroll is the unspoken mantra of HQ. Companywide Senior Student Reps were let go almost entirely due to not forcing enough students to enroll. The company has nearly eliminated all full-time teaching positions (sans Nursing, most state boards will not allow them too) so adjunct teachers make same teaching 10 students as they get for teaching a section of 30 plus students. Students forced into online classes that came to ITT to get classroom teacher instruction and attention. The Nursing programs are the only thing keeping some of the campuses open. The one program that state oversight keeps HQ from gutting the quality.

Advice to Management

  • Local campus management has their hands tied by HQ.
  • The abject greed and tone deaf “leaders” of HQ will be the downfall of this company. Very sad as there are some very dedicated educators and employees at the various campus.
  • Greed and arrogance ruined a very good company. Truly a perfect example of why the “for profit” education companies are under fire.
  • March 26, 2014                                                                          

“Educational Recruiter”  

Former Employee – Admissions Representative

I worked at ITT Technical Institute full-time (More than 3 years)

Pros

The people in the recruitment department were easy to get along with. My coworkers were the best part of working there. We had to bond with each other to make it through such a toxic environment.

Cons

Let me start by saying I am not a disgruntled employee. I was not fired. I do not have a personal vendetta against the school or anyone who works there. The truth is that ITT is a sham of a college. Prospective employees AND prospective students should research thoroughly before starting at ITT.

ITT is more like a factory than a school. Students’ needs are always second to company profits. From an admissions perspective, students are numbers, not people. They will enroll anyone who can breathe. I have personally witnessed people who cannot read/write be admitted into this school. They will take ANYONE as long as they qualify for federal student loans. The company is cheating the students AND ripping the government off at the same time. ESI specifically target low income, low information individuals and convince them that a 45k associate’s degree will somehow solve all their problems. More often than not what happens is that students sign up for loans, never graduate (because they had a slim chance from the start) and get stuck with debt and no degree. The facilities and equipment appear to be from the 80s, yet the commercials depict a high technical, state of the art environment.

They have an ‘any means necessary’ method of recruiting. Every day in the recruitment department was a struggle between maintaining my personal integrity and successfully doing my job. Admissions reps are taught to LIE and sell dreams to people who don’t know any better. It’s a sad situation to be in.

Advice to Management

Have some integrity. Do not force employees to work mandatory 6 days of work weeks.

Numbers Analysis

1. Equity and Retained Earnings Analysis

ESI SHE RE10yrs

Facts:

  • ITT’s stockholders’ equity growth in 10 years was negative 34.55 percent.
  • And the retained earnings growth for 10 years was 233.48 percent.
  • The shareholders’ equity in 2004 and the trailing twelve months of 2015 were $235 and $154 million, respectively.
  • Moreover, retained earnings in 2004 and the trailing twelve months were $294 and $980 million, respectively.
  • In addition, shareholders’ equity is deteriorating year over year except in 2008 where it shows a 166 percent increase.
  • The retained earnings are increasing year over year except in 2010 where it shows a 27 percent decrease.

Explanation:

  • A net income of $139 million was added to retained earnings in 2012, which cause an increased in the retained earnings.
  • Equity award vesting and exercises amounting to $4.8 million were deducted in retained earnings in 2012.
  • Issuance of shares for directors’ compensation amounting to $1 thousand was deducted in retained earnings in 2012.
  • A net loss of $$27 million was deducted in retained earnings in 2013.
  • Net income of $29 million was added to retained earnings in 2014.
  • Issuance of shares for directors’ compensation amounting to $32 thousand was deducted to retained earnings in 2014.
  • Common shares repurchased of $208 million and shares tendered for taxes of $1.45 million were deducted to shareholders’ equity in 2012.
  • And the net loss of $27 million, tax benefit from equity awards of $5.4 million and shares tendered for taxes of $395 thousand, were deducted from shareholders’ equity in 2013.
  • Other comprehensive income of $11 million and stock-based compensation of $11.6 million were added to shareholders’ equity in 2013.
  • Net income of $29 million and stock-based compensation of $10 million were added to shareholders’ equity in 2014.
  • Other comprehensive loss of $1.9 million, tax benefits from equity awards of $4.4 million and shares tendered for taxes of $914 thousand, were deducted from shareholders’ equity in 2014.in 2012

Interpretation:

The retained earnings growth in the last 10 years shows impressive at 233 percent, however, the shareholders’ equity has a negative growth of 35 percent. The decline in the stockholders’ equity was due to common shares repurchased in the amount of $208 million.

1.1 The Trend Graph

ESI trend graph

The shareholders’ equity was high in 2004 and 2005, however, it falls down in 2006 at 66 percent and down again in 2007 at 32 percent, then rise at 166 percent in 2008. From 2009 to 2014, the equity is moving stable at an average of $140 million.

On the other hand, retained earnings are moving upward from 2004 up to 2009, then it fell down in 2010 at 27 percent and the following period, it starts to rise up again until 2014. The movement of retained earnings is quite impressive.

2. Valuation

ESI Value model

Facts

  • Using Totem’s value model, the book value growth was 7 percent in the last 5 years.
  • The calculated book value in 5 years was $9.30
  • The average return on equity in the last 5 years was 98.59 percent.
  • While the calculated return on book value in 5 years was $9.17.
  • And the calculated present value of the stock was $27.36.
  • ITT has a zero percent yield.
  • Percent of risk that was used was 15 percent.
  • In addition, the current stock price as of July 21, 2015, was $4.46 per share.
  • On the other hand, the calculated intrinsic value of the stock was $16.42. 
  • Therefore, compare the current market price to the intrinsic value, the stock price of ITT was undervalued.

Detailed Financial Analysis

A. BALANCE SHEET

1. Condensed Consolidated Balance Sheets as of March 31, 2015, December 31, 2014, 2013, 2012 and 2011. ESI condensed

Facts:

  • The cash and cash equivalents were $146 and $136 million as of March 15, 2015, and December 31, 2014, respectively.
  • The total current assets were $293 and $291 million as of March 31, 2015, and December 31, 2014, respectively.
  • Total assets were $737 and $749 million as of March 31, 2015, and December 31, 2014, respectively.
  • And the total current liabilities were $316 and $323 million as of March 31, 2015, and December 31, 2014, respectively.
  • In addition, the total long-term debts were $82 and $125 million as of March 31, 2015, and December 31, 2014, respectively.
  • On the other hand, the CUSO secured borrowing obligations, excluding the current portion, were $96 and $100 million as of March 31, 2015, and December 31, 2014, respectively.
  • In addition, the total liabilities were $583 and $601 million as of March 31, 2015, and December 31, 2014, respectively.
  • Shareholders’ equities were $154 and $148 million as of March 31, 2015, and December 31, 2014, respectively.

Explanation:

  • There was an increase of $10 million in cash and cash equivalent as of March 31, 2015. The increase was due to, net cash flows from operating activities of $33.5 million, partially offset by repayment of the following principal, $15.6 million related to PEAKS senior debt, $4.0 million related to CUSO secured borrowing obligation and $2.5 million under the financing agreement.
  • The working capital as of March 31, 2015, and December 31, 2014, were negative $23.8 and negative 31 million, respectively.
  • Current assets were lesser by 8 and 11 percent against current liabilities as of March 31, 2015, and December 31, 2014, respectively.  It represents 40 and 39 percent of the total assets as of March 31, 2015, and December 31, 2014, respectively.
  • The property and equipment represent 21 percent of the total assets as of March 31, 2015, and December 31, 2014, respectively.
  • The total current liabilities represent 43 percent of the total liabilities and shareholders’ equity as of March 31, 2015, and December 31, 2015.
  • Total liabilities represents 79 percent of the total liabilities and shareholders’ equity.
  • Shareholders’ equity represents 21 percent of the total liabilities and shareholders’ equity.
  • ESI had a treasury stock of $1.0 billion as of March 31, 2015, and December 31, 2014.

Interpretation:

The company will have a hard time paying its current liabilities when the due date comes because they have negative working capital, in other words, its current assets is lesser by 8 percent against its current liabilities.  Moreover, the company is utilizing 80 percent of borrowed funds from creditors and only 20 percent of the shareholders’ equity in the operation of the business. Furthermore, the debt to equity ratio was 1.75 or 175 percent, it tells us that ESI is high leverage.

2. Financial Health

2.1 The Company’s Debts

2.1.1 The Assets and Liabilities of PEAKS Trust and CUSO secured borrowing obligations ESI CUSO assets and liabilities

Facts:

  • In 2013, the total assets of PEAKS were $87.4 million compared with its total liabilities of $242.7 million.
  • In 2014, the total assets of PEAKS were $68.6 million compared with its total liabilities of $76.4 million.
  • The total assets of PEAKS were $65.8 million compared with its total Liabilities of $62 million in the trailing twelve months.
  • Moreover, in 2014, the total assets of CUSO were $26.6 million compared with $122 million in total liabilities.
  • And in the trailing twelve months, the total assets of CUSO were $25 million compared with its total liabilities of $119 million.

Explanation:

  • In 2013, the total assets of PEAKS represent 36 percent of its total liabilities, in other words, total liabilities was 278 percent of its total assets.
  • In 2014, the total assets of PEAKS represent 90 percent of its total liabilities, in other words, total liabilities was 111 percent of its total assets.
  • And in the trailing twelve months, total assets of PEAKS represents 106 percent of its total liabilities, in other words, total liabilities were 95 percent of its total assets.
  • Moreover, in 2014, the total assets of CUSO represent 22 percent of its total liabilities, in other words, total liabilities were 460 percent of its total assets.
  • The total assets of CUSO represent 21 percent of its total liabilities, in other words, total liabilities were 477 percent of its total assets in the trailing twelve months.

Interpretation:

The PEAKS Trust senior debt was improving year over year when it comes to its assets versus its liabilities, however, its total assets are deteriorating year over year.  The liabilities of PEAKS have decreased by $180 million at 74 percent from 2013 to the trailing twelve months. The assets of the PEAKS Trust is used only for payment of the obligations of PEAKS Trust. Payment of the administrative fees and expenses; the principal and interest owed on the PEAKS senior debt are guaranteed by the company under the PEAKS Guarantee. In 2014, the company made payments totaling $170.3 million, relating to PEAKS and CUSO program.  The company projected that they will be able to make payment of $30 million under PEAKS guarantee within 2015.

The assets of the CUSO can only be used for the obligations of the CUSO. The Company made payments under the CUSO RSA of approximately $9,139 in 2014. ESI projected that they will make payment of $11.6 million under the CUSO RSA within 2015. The company was limited in making payments to PEAKS and CUSO by $45 million under the Financing Agreement.

2.1.2 The Revenue and Expense of the PEAKS Trust, 2015 Q1

ESI PEAKS revenue and expenses

Facts:

  • The revenue for three months ended March 31, 2015, and March 31, 2014, were $2.4 and $3.1 million, respectively.
  • The revenue had decreased by 30 percent at $720 thousand.
  • Total expenses were $4.6 and $7.5 million for the three months ended March 31, 2015, and March 31, 2014, respectively.
  • Student services and administrative expenses were $541 thousand and $1.4 million in the three months ended March 31, 2015, and 2014, respectively.
  • Provision for private education loan losses were $803 thousand and $0 in the three months ended March 31, 2015, and 2014, respectively.
  • On the other hand, interest expenses were $3.3 and $6 million for the three months ended March 31, 2015, and 2014, respectively.
  • Moreover, the losses were negative $2.1 and negative $4.4 million for the three months ended March 31, 2015, and 2014, respectively.

Explanation:

  • The revenue consists of interest income on the PEAKS Trust student loans.
  • The servicing, administrative and other fees incurred by the PEAKS Trust were included in the Student services and administrative expenses under the Condensed Consolidated Statement of Income. Student services and administrative expenses represent 12 and 19 percent of the total expenses for the three months ended March 31, 2015, and 2014, respectively.
  • Moreover, the provision for private education loan losses represents the increase in the allowance for loan losses that occurred during the period.
  • Provision for private education loan losses represents 17 and zero percent of the total expenses for the three months ended March 31, 2015, and 2014, respectively.
  • Allowance for loan losses related to the PEAKS Trust Student Loans represents the difference between the carrying value and the total present value of the expected principal and interest collections of each loan pool of the PEAKS Trust Student Loans, discounted by the loan pool’s effective interest rate as of the end of the reporting period.
  • Interest expense represents interest expense on the PEAKS Senior Debt, which includes the contractual interest obligation and the accretion of the discount on the PEAKS Senior Debt.
  • Interest expense represents 71 and 81 percent of the total expenses for the three months ended March 31, 2015, and 2014, respectively.
  • And the losses before provision for income tax were negative $2.2 and negative $4.4 million for the three months ended March 31, 2015, and March 31, 2014, respectively.

Interpretation:

The company made payments on Q4 2012 through January 2014, on behalf of certain student borrowers under the PEAKS Program to the PEAKS Trust to avoid defaults by those borrowers on their PEAKS Trust Student Loans (“Payments on Behalf of Borrowers”), which defaults would have triggered much larger contractually required payments by ESI under the PEAKS Guarantee, according to ESI.

“At the time we made Payments on Behalf of Borrowers, we believed that those payments were contractually permitted and a form of payment to the PEAKS Trust that would satisfy obligations that were contractually required. Since that time, however, we have determined that Payments on Behalf of Borrowers are not permitted or required to support the PEAKS Trust. If we had not made Payments on Behalf of Borrowers, we would have had to make contractually required payments under the PEAKS Guarantee in greater amounts.”

Moreover,

Prior to the PEAKS consolidation, payments on Behalf of Borrowers were reflected in the financial statements as a reduction to the company’s contingent liability after the PEAKS Consolidation. Payments that were made on Behalf of Borrowers were not reflected in the company’s financial statements. Since those payments were inter-company transactions that were eliminated from the company’s financial statements as a result of the PEAKS Consolidation, stated in the ESI filings.

2.1.3 PEAKS Guarantee Payments and Payments on Behalf of Borrowers

ESI PEAKS guarantee payments

Facts:

  • The company’s payment under the PEAKS guarantee for the three months ended March 31, 2015, and March 31, 2014, were $13.6 and $40.7 million, respectively.
  • Moreover, the payments made on behalf of borrowers were $0.00 and $1.8 million for the three months ended March 31, 2015, and March 31, 2014, respectively.
  • In addition, the total payments made by ESI under PEAKS guarantee and of behalf of borrowers were $13.6 and $42.5 million for the three months ended March 31, 2015, and March 31, 2014, respectively.

Explanation:

In accordance with the terms of the PEAKS Letter Agreement, the company paid $40,000 on March 20, 2014, which is considered to be a payment under the PEAKS Guarantee and was applied primarily to make a mandatory prepayment of the PEAKS Senior Debt.

The company has agreed that after the date of the PEAKS Letter of Agreement, ESI will not make any more payments on behalf of any borrowers in respect of a private education loan made under the PEAKS Program. Further, any such payments in lieu of making payments to maintain the applicable required Asset/Liability Ratio would constitute a breach of the terms of the PEAKS Guarantee and an event of default under the indenture and credit agreement for the PEAKS Program

Interpretation:

ESI make payments on behalf of the borrowers to maintain the Asset/Liability Ratio of 1.40/1.0 under the PEAKS Program.

2.1.4 Revenue and Expenses of CUSO Program

ESI CUSO revenue and expense

Facts:

  • The revenue in the three months ended March 31, 2015, under the CUSO Program, was $1 million.
  • The total expenses of CUSO were $4.48 million in the three months ended March 31, 2015.
  • Student services and administrative expenses were $396 thousand in the three months ended March 31, 2015.
  • Further, the provision for private education loan losses was $441 thousand in the three months ended March 31, 2015.
  • Moreover, interest expense paid was $3.6 million in the three months ended March 31, 2015.
  • In addition, the loss before provision for income taxes was $3.4 million in the three months ended March 31, 2015.

Explanation:

  • The revenue of the CUSO is consists of the interest income on the CUSO student loans and an administrative fee paid by the CUSO participants to the CUSO on a monthly basis.
  • On the other hand, the expenses under the CUSO program were, student services and administrative expenses, provision for private education loan losses and interest expense.
  • Total expenses under the CUSO program represents 421 percent of the revenue, in other words, expenses are greater by 321 percent of its revenue.
  • The student services and administrative expenses represents 9 percent of the total expenses of CUSO in the three months ended March 31, 2015.
  • Moreover, the provision for private education losses represents the allowance for loan losses during the period. The allowance for loan losses represents the carrying value and the present value of the expected collection of the principal and interest in a loan pool.
  • In addition, the provision for private education losses represents 10 percent of the total expenses of CUSO in the three months ended March 31, 2015.
  • Interest expense represents the interest expense in the CUSO secured borrowing obligations.
  • In addition, the interest expense represents 81 percent of the total expenses of CUSO in the three months ended March 31, 2015.

Interpretation:

The Company did not recognize any revenue and expense in its consolidated income statement for the three months ended March 31, 2014, because the CUSO consolidated was effective September 30, 2014.

2.1.5 The CUSO-RSA / Payments made to CUSO related to ESI’s guarantee obligations under the CUSO RSA

ESI Payments made to CUSO

Facts:

  • The regular payments made by ESI under the guarantee obligations for the three months ended March 31, 2015, and 2014 were $2.3 and $1.2 million, respectively.
  • On the other hand, the discharge payments made for the three months ended March 31, 2015, and 2014 were $2.7 million and $0, respectively.
  • In addition, the total payments made to CUSO related to Guarantee obligations under the CUSO RSA for the three months ended March 31, 2015, and 2014, were $$5 and $1.2 million, respectively. 

Explanation:

  • The regular payments made to CUSO of $2.3 million in the three months ended March 31, 2015, is the net of $290 million of recoveries. This came from charged-off loans owned by the company that they have offset against the amount they owed under the CUSO RSA.
  • ESI made advances to the CUSO under the Revolving Note prior to 2012, so that, CUSO could use the funds to provide to provide additional funding to the CUSO to purchase private educational loans made under the CUSO program.
  • Moreover, ESI offsets $8.47 million owned by ESI under the CUSO RSA against amounts owed to them by the CUSO under the Revolving Note, instead of making additional payments in that amount. The amounts owed to ESI under the Revolving Note, excluding offsets, was approximate $8.2 million, according to ESI.

Interpretation:

Under the CUSO RSA, the company is entitled to all amounts with regard to recoveries from CUSO loans that have been charged-off. This will goes on until all payments that ESI have made to the CUSO loans have been fully paid to the company. The company claimed they have the right to offset payments in which the SEC did not agree.

2.2 Shares Repurchase Activity of ESI

ESI repurchase

Facts:

  • The beginning authorized common stock repurchase were 7.8, 5.8 and 4.8 million in December 31, 2013, 2012 and 2011, respectively.
  • And the additional repurchase authorization was 0, 5.0, 5.0 million on December 31, 2013, 2012 and 2011, respectively.
  • Further, the number of shares repurchased was 0, 3.0, 4.0 on December 31, 2013, 2012 and 2011 respectively.
  • The repurchase authorization at year ended December 31, 2013, 2012 and 2011 were 7.8, 7.8 and 5.8 million, respectively.
  • Furthermore, the total cost of shares repurchased were $0.00, $207.90 and $282.70 on December 31, 2013, 2012 and 2011, respectively.
  • In addition, the average cost per share were $0.00, $68.72 and $69.98 in December 31, 2013, 2012 and 2011, respectively.

Explanation:

  • The proceeds from the stock options in the year ended December 31, 2013, 2012 and 2011 were $0.00, $8.4 and $5.6 million, respectively.
  • Excess tax benefits from the exercise of stock options were $0.00, $1.4 and $1.2 million in December 31, 2013, 2012 and 2011, respectively.

Interpretation:

ESI has no stocks repurchase in 2013, although they have repurchase authorization of 7.8 million. In 2012, the total number of repurchased represents 28 percent of the total authorized to repurchase. In addition, in 2011, the total number of repurchased represents 31 percent of the total authorized to repurchase.

3. Analyzing Liquidity and Solvency Ratios

Liquidity is the ability of the management to pay its current financial obligations using its current assets when the due date comes. Solvency is the ability of the management to meet its long-term financial obligations in due time, such as obligations to banks, creditors, and investors.

ESI liquidity   Facts:

  • The current ratio of ITT was averaging 1.12 and its trailing twelve months ratio was 0.92.
  • Quick ratio was averaging 0.93, in 2013 and the trailing twelve months ratio was 0.64.
  • The financial leverage ratio was averaging 5.09 and it is trailing twelve months as 4.79.
  • And the debt to equity ratio was averaging 1.09 and its trailing twelve months ratio was 1.39.
  • In addition, debt to asset ratio was averaging 0.28 and its trailing twelve months was 0.37.

Explanation:

  • Short-term liquidity means, the company’s ability to meet its current obligations. ESI’s current ratio beginning 2013 up to the trailing twelve months was less than 1.0. It tells us that the company might have a hard time meeting all its current financial obligations when the due date comes using its current assets.
  • While the quick ratio beginning 2013 up to the trailing twelve months was less than 1.0 ratio. It indicates, that the company is not capable of paying all its short-term financial obligations using its quick assets.
  • Also financial leverage indicates that ESI is high leverage, in other words, the company uses more debt in its capital structure.
  • In addition, debt to equity ratio tells us that, total debt, which is the short and long-term debt are higher than its equity,  in other words, total debt is 152 percent of its equity.
  • Moreover, the debt to asset ratio is a solvency ratio that measures the company’s total liabilities against its total assets. The table shows that the company’s total liabilities is averaging 80 percent compared to its total assets.

Interpretation:

The ratios indicate that the company is high leverage.

4. Shares Outstanding

ESI shares outstanding

Facts:

  • The share outstanding in 2014 and the trailing twelve months was 24 million shares.
  • And the shares outstanding in 2009 and in the trailing twelve months were 38 and 24 million, respectively.
  • The share outstanding had decreased by 14 million or 37 percent in the last five years.

Explanation:

Shares outstanding are the company’s stock currently held by all its shareholders.  The historical shares outstanding is deteriorating year over year in the last five years at an average rate of 7 percent. The 5 years growth of shares outstanding was negative 37 percent.

Interpretation:

ESI 2014 annual report indicated that the Board of Directors has authorized the company to repurchase 7,771,025 common stock shares in the open market. Or through privately negotiated transactions in accordance with Rule 10b-18 of the Exchange Act (the “Repurchased Program”). Further, the shares that remained available for repurchase under the Repurchase Program were 7,771,025 shares as of December 31, 2014.

B. ESI INCOME STATEMENT

Ratio

1. Analyzing Efficiency Ratio

1.1  CCC and Turnovers

ESI CCC Facts:

  • Day’s sales outstanding was averaging 21.01 and its trailing twelve months ratio was 23.65.
  • The payable period was averaging 48.30 and its trailing twelve months ratio was 57.81.
  • Receivables turnover was averaging 18.64 and its trailing twelve months ratio 15.44.
  • Fixed assets turnover was averaging 6.77 and its trailing twelve months ratio was 6.03.
  • Asset turnover was averaging 1.79 and its trailing twelve months ratio was 1.26.

Explanation:

  • Days sales outstanding or average collection period or days sales in receivables measures the average number of days a business takes to collect its credit sales. It measures the liquidity and efficiency of sales collection activities.
  • Payable Period measures the number of days the company takes to pay its suppliers.
  • Receivables turnover measures how many times a firm collects its average accounts receivables balance during a certain period. In other words, it measures the efficiency of the business to collect credit sales. A higher result is favorable and a lower result is unfavorable.
  • The fixed assets turnover ratio or the sales to fixed assets ratio. This ratio measures how efficient is the company in utilizing its fixed assets to generate revenue.
  • Asset turnover measures management efficiency in utilizing its assets in generating sales or revenue.

Interpretation:

  • The day’s sales outstanding in the trailing twelve months 23.65 or 24 days. In other words, it will take 24 days for the sales to be converted into cash.
  • The payable period indicates that the average period for the company to pay its suppliers is 58 days from the date of purchase.
  • Receivables turnover ratio shows that ESI collects its receivables 15 times in one year.
  • Fixed assets turnover tells us that the company generates $6 for every $1 investment in fixed assets.
  • And the asset turnover ratio, tells us that, the company is generating $1.26 of revenue for every $1 invested in assets. This ratio looks at revenue and not profit.

 1.2. Profitability Ratio

ESI Margins  Facts:

  • Gross margin was averaging 59 percent in the last five years. The margin decreases year over year at an average of 4 percent.
  • While the operating margin was averaging 21 percent in the last five years. The margin decreases year over year at an average of 22 percent.
  • In addition, the net margin was averaging 12 percent in the last five years. The margin decreases year over year at an average rate of 80 percent.
  • Moreover, return on equity was averaging 109 percent in the last five years. The ratio decreases year over year at an average rate of 70 percent.

Explanation:

  • Gross profit margin is the percentage of profit after deducting the cost of revenue from the total revenue. In the trailing twelve months, the gross profit was 59 percent.
  • While, operating margin is the percentage of profit after deducting the general, sales and administrative expenses from the gross profit. In the trailing twelve months, the company’s student services and administrative expenses that were deducted from the gross profit was 38 percent of the revenue.
  • Also, net margins are the percentage of earnings after deducting provision for income taxes, interest and adding or deducting other income or expenses. In other words, it measures the overall operating efficiency of the firm. It shows that, after deducting income taxes, interest, and other expenses from the operating income, there were a 3.8 percent net earnings left.
  • Moreover, return on equity measures the overall efficiency of the company in managing its total investments in assets and in generating a return to its stockholders. It indicates that the company was able to generate a 26.43 return on the stock investments in the trailing twelve months.

Interpretation:

The profitability ratios indicate that the company’s revenue and profit are deteriorating in the last five years. It may indicate, that the management is getting more and more inefficient in managing the business.

2. Company’s Profitability

2.1. Amount/Growth rates

ESI growth

Facts:

  • Total revenue growth in the last 5 years was negative 28 percent.
  • Total expenses have negative growth of 10 percent.
  • The net income has an average growth of 88 percent in the last five years.
  • The year over year growth of net earnings was erratic in movement.

Explanation:

  • The revenue of ESI is deteriorating year over year at an average rate of 4.5 percent.
  • Total expenses are decreasing year over year in the last five years in an erratic movement.
  • Net income falls very steep in 2013 at a rate of 119 percent and managed to increase by 208 percent in 2014.

Interpretation:

Overview, the profitability test of ITT Educational Services indicates that the business is not generating enough revenue for the business operation.

2.2 Profitability Graph

ESI Profitability

Explanation

As seen in the graph above, the highest revenue was in the year 2010, then in 2011 onwards, it shows that revenue is gradually decreasing. The net income was approximately 20 percent in 2009 and in 2010 going forward the earnings is decreasing year over year.  While in 2013 and 2014, the net earnings were 3 percent of the revenue. Total expenses were high. In addition, in 2013 and 2014, it almost leveled the revenue, this is due to the consolidation of the financial statement.

C. ESI STATEMENT OF CASH FLOWS 

A Statement of Cash Flows is one of the main financial statements. It reports the incoming or where the money comes from and the outgoing of cash or where the company spends its money in a given period of time. In other words, it reports the sources and uses of cash in operating activities.

ESI CF

Facts:

  • Cash from operating activities was averaging $245 million.
  • While capital expenditure was averaging negative $18 million.
  • Also the Free Cash Flows was averaging $224 million.

Explanation:

Cash from operating activities and free cash flows were decreasing year over year in the last four years. However, in 2014, it shows an upward trend in both accounts.

Interpretation:

The decreased in the operating activities and free cash flows were due to the decreasing revenue and net earnings year over year.

ESI Valuation

1. The Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value (EV) is the present value of the entire company. EV is a more accurate measure of a company’s true market value than market capitalization. EV measures the value of the productive assets that produced its product or services. Both equity capital (market capitalization) and debt capital. Market capitalization is the total value of the company’s equity shares. In essence, EV is a company’s theoretical takeover price. Because the buyer would have to buy all of the stock and pay off existing debt while taking any remaining cash. This gives the buyer solid grounds for making its offer.

ITT Educational ESI

Facts:

The market capitalization of ESI was deteriorating year over year in the last five years. The growth of market capitalization was negative 95 percent. While the total debt was 124 percent and its cash and cash equivalent was 66 percent of the enterprise value for the trailing twelve months. On the other hand, the enterprise value was $220 million while the market capitalization of $94.5 million. Buying the ESI, an investor would be paying 42 percent equity and 58 percent of the debt.

The takeover price of the entire business is $234 million at $9.75 per share, while the current share price of $4.46, as of July 21, 2015.

2. The Discounted Cash Flow Approach

Discounted Cash Flow is a method of valuing the intrinsic value of a company (or asset). In simple terms, discounted cash flow tries to work out the value today. Based on future projections of all of the cash that the company could make available to investors in the future. In other words, the amount of cash that the company will receive in the future is worth less than the cash today.

DCF Formula

Where:

  • Vo is the value of the equity of a business today.
  • CF1 to CFn represent the expected cash flows (or benefits) to be derived for periods 1 to n period.  The discounted cash flow model is based on time periods of time of equal length. We use the terms “periods” and “years” almost interchangeably for purposes of this theoretical discussion.
  • r is the discount rate that converts future dollars of CF into present dollars of value.

ESI DCF Historical CF

Facts:

The historical EBITDA was used as cash inflows because it represents the cash earnings excluding tax, depreciation, and amortization. It shows that EBITDA has an erratic movement. Moreover, in 2010 shows the highest record and 2013 shows the lowest record. Because of the losses incurred in the two private student loan programs. However, in 2014, the figures increased by 583 percent and followed by an increase of 14 percent in the trailing twelve months. Further, the growth of EBITDA in the last five years was negative 27 percent.

ESI DCF Projected CF

Facts:

The growth using the United States Gross Domestic Product (GDP) annual growth rate average of 3.24 percent. 

  • The projected cash inflows at:
    • year 1 (n1) are $108 million.
    • at year 2 (n2) are $111 million.
    • at year 3 (n3) are $115 million.
    • year 4 (n4) are $119 million.
    • in year 5 (n5) are $122 million.
    • The terminal value was at $987 million. 

ESI Terminal value

Where:

ESI TV (2)

  • Terminal Value = $122,451,874 * (1+3.24%) / (16.0498% – 3.24%)  = $986,895,306
  • While Enterprise Value was $841,455,404, it is the sum of future cash inflows in year 1 to year 5.
  • In addition, the Fair Value of the company was $703,811,404, the table below will show us the calculation.

ESI FV

Explanation

Net debt is the sum of short and long-term debt minus cash and cash equivalent.

  • The Intrinsic Value is the Fair Value of the company.

ESI IV

Explanation

The Intrinsic Value was $29.33 per share. On the other hand, the Margin of Safety was at $24.87. Compared with the current price of $4.46 per share, as of July 21, 2015. The stock price was undervalued.

  • The Required Rate of Return (RRR) or the Discount Rate.

ESI RRR

Explanation:

  1. The required rate of return (RRR) or the discount rate was 16.0498%.
  2. The US 10 year Generic Bond rate was usually used as the Risk-Free Rate. It is to estimate the discount rate in the valuation. The current US 10 year Generic Bond that was used was 2.3648%.
  3. The Market Risk Premium in the USA was 5.75%.
  4. The Beta for ESI was 2.38. Beta measures the stock volatility in which the stock price fluctuates in the overall market.
  5. Long-term Cash Flow Growth or the average long-term GDP used was 3.24 percent.

2.1 The Present Value of the Projected Cash in Flows and Terminal Value

This method of valuation tries to work out the value today of the projected cash inflows in the future. Going forward below is the formula for the present value.

PV

Or

PV = FV (1+r) n

Where:

ESI PV FV

Present Value of Projected Cash inflows in year 5

PV = $122,451,874 / (1 + 16.0498%) ^5

= $122,451,874 (1.160498%) ^5

$58,175,946

Present Value of Terminal Value

PV = $986,895,306 / (1 + 16.0498%) ^5

= $986,895,306 / 1.100498%) ^5

$468,866,390

  • Terminal value is the present value of all future cash flows at a future point in time.
  • While the present value of the future projected cash inflows at year 5 is $58,175,946 million.
  • In addition, the present value of the terminal value was $468,866,390 million.

Conclusion

ESI is put in a very controversial situation after the announcement made by the US Securities and Exchange Commission.  Although 2014 Financials meets investors’ expectations, the stock price of the company. Became unstable and suffered ups and downs.  The company has to answer in court all alleges made by the US Securities and Exchange Commission.

ESI has its financial statements and filings of the consolidated financial statements. It has disclosed the controversies regarding the two private student loan programs. Which are the PEAKS and the CUSO?  The quarterly report ended March 31, 2013, June 30, 2013, and September 30, 2013, were unreliable and needs to be restated.

Regardingcorrected quarterly reports

On October 9, 2014, ESI delivered to the indenture trustee the corrected quarterly reports. And on the same date, the company had made payments under the accurate quarterly reports. Moreover, it is stated in the Financials that they have already accurately corrected the quarterly financial reports. Under risk and uncertainties, the following statement:

“Many of the amounts of assets, liabilities, revenue, and expenses reported in our consolidated financial statements are based on estimates and assumptions that affect the amounts reported. While we are subject to risks and uncertainties that could affect amounts reported in our consolidated financial statements in future periods. Moreover, our future performance, results of operations, financial condition, cash flows, liquidity, capital resources, ability to meet our obligations and ability to comply with covenants, metrics, and regulatory requirements are subject to significant risks and uncertainties that could cause actual results to be materially different from our estimated results.”

Payments made under the PEAKS trust

Further, in order to maintain the asset/liability ratio of 1.40 / 1.0 in the PEAKS trust, ESI made payments of $13.6 million in the three months ended March 31, 2015. In addition, another payment of $156.6 in the year ended December 31, 2014. In addition, these payments were made under the PEAKS trust guarantee applied by the PEAKS trust to reduce the amount of the PEAKS senior debt.

Effects after filing the quarterly report

The stock price of ESI started to rise up after the filing of the quarter ending March 31, 2015, financial statements. However, the stock still remains unstable. The company was able to increase its cash and cash equivalent by $10 million as of March 31, 2015.  However, it states in the 10Q 2015 ESI has a negative working capital on March 31, 2015, December 31, 2014, and March 31, 2014. This is for the reason that the consolidation of financial statements.

The investigation from the SEC and the Department of Education may be over for a period. Further, the Department of Education may not want to shut down ITT Educational Services at around 50,000 students.

Overall

The stock price of ESI may still be swinging until all alleges in the government sector are resolved. Therefore, I recommend a SELL in the stock of ITT Educational Services (ESI).

For latest update please click here.

CITATION

https://www.sec.gov/Archives/edgar/data/922475/000119312515156866/d856991d10q.htm

http://www.sec.gov/Archives/edgar/data/922475/000092247514000048/exhibit10_1.htm

http://www.consumeraffairs.com/education/itt.html

http://www.help.senate.gov/imo/media/for_profit_report/PartII/ITT.pdf

http://www.sec.gov/Archives/edgar/data/922475/000092247510000032/filename1.htm

https://www.youtube.com/watch?v=Pa1DxUWMsEU

https://www.youtube.com/watch?v=8JV0tBFV9Bw

http://www.sec.gov/Archives/edgar/data/922475/000119312515205473/d915248d10k.htm#tx915248_31

http://www.streetinsider.com/Corporate+News/ITT+Educational+Services+%28ESI%29+Plans+Consolidation+of+PEAKS+Trust%3B+May+Not+be+in+Compliance+With+Some+Credit+Agreements/9610383.html

http://www.sec.gov/Archives/edgar/data/922475/000119312515221226/d935543d10q.htm

http://www.streetinsider.com/Corporate+News/ITT+Educational+Services+%28ESI%29+Plans+Consolidation+of+PEAKS+Trust%3B+May+Not+be+in+Compliance+With+Some+Credit+Agreements/9610383.html

http://www.help.senate.gov/imo/media/for_profit_report/PartII/ITT.pdf

http://www.sec.gov/Archives/edgar/data/922475/000092247510000032/filename1.htm

Researched and Written by Criselda

Twitter: criseldarome

 

Interested to learn more about the company? Here’s investment guide for a quick view, company research to know more of its background and history; and value investing guide for the financial status.

Actively Following List of Stocks Revealed for the Third Time

March 25th, 2015 Posted by Stock to Watch No Comment yet

Stocks prices are volatile. You will never know what will happen to stocks the next day. If you are holding stocks from several companies, paying attention and focus to changes is a must. You don’t want to lose thousands of money, do you?

Today, we are going to reveal again our list of actively following stocks. Before that, please be guided to what the column title and the type of stocks mean.

Rank:

  • Orange means to reduce the portfolio holding
  • Green means to buy and
  • No Color means to hold.

Symbol: Company symbol.

Name Complete name of the company.

Type:

  • Evergreen is companies we will hold for more than five years.
  • Woody is similar to Evergreen but that we will not reduce our holdings even when the company stock is fully priced
  • Deciduous is stocks that we will hold for two to five years
  • Monocarpic is stocks that we will hold for less than two years (most likely around one year).

List of Stocks

Rank Symbol Name Type
1 BIDU Baidu Inc (ADR) Woody
2 AMZN Amazon.com, Inc. Woody
3 CHL China Mobile Ltd. (ADR) Evergreen
4 WMT Wal-Mart Stores, Inc. Evergreen
5 MRK Merck & Co., Inc. Evergreen
6 KING King Digital Entertainment Deciduous
7 KORS Michael Kors Holdings  Deciduous
8 PCLN Priceline Group Inc Deciduous
9 SB Safe Bulkers, Inc. Deciduous
10 OSTK Overstock.com, Inc. Deciduous
11 CTSH Cognizant Tech… Deciduous
12 LOPE Grand Canyon Education… Deciduous
13 FCX Freeport-McMoRan Inc Deciduous
14 LULU Lululemon Athletica Inc Deciduous
15 CYOU Changyou.Com Ltd (ADR) Deciduous
16 FHCO Female Health Co Deciduous
17 HFC HollyFrontier Corp Deciduous
18 HLF Herbalife Ltd. Monocarpic
19 INFY Infosys Ltd ADR Monocarpic
20 JOY Joy Global Inc. Monocarpic
21 BHP BHP Billiton Limited Monocarpic
22 COH Coach Inc Monocarpic
23 ESI ITT Educational Services Inc Monocarpic

Moreover, we researched dozens of public companies. And comparing, filtering and adding it down in our list. This is what we do to stocks that we think undervalued and of value. However, monitoring all these companies became overwhelming and we haven’t pay equal focus to each. As a result, we filtered our list then keep those companies we believed are still substantial to us.

Written by: Maydee

apple inc appl

AAPL Increased Brand Value by 21% and Still Claim the No. 1 Spot

March 16th, 2015 Posted by Company Research Report No Comment yet

Company Research

AAPL 1

About the Company (Timeline)

  • On April 1, 1976, Apple Inc. (APPL) is the largest information technology company founded by Steve Jobs, Steve Wosniak and Ronald Wayne on April 1, 1976.
  • On January 3, 1977, they were incorporated as Apple Computer, Inc., renamed as Apple Inc. on January 9. 2007, to reflect their new focus toward consumer electronics. Apple makes personal computers, portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications.
  • In 2013 Apple bought Wi-Fi Slam (Silicon Valley) in March, then Locationary Inc., Hopstop.com Inc. in July, Algo Trim AB (a Malmo-based developer of prepackaged software) in August, Prime Sense Ltd. in November, and Topsy Labs Inc in December.
  • In February 2014, Apple Inc. buys Burstly Inc., then Novauris Technologies Ltd. in April and Beats Electronics LLC (Beats) in August.

AAPL a multinational American corporation in Cupertino, California has changed the world’s information technology. Apple has a staff of computer designers and a diversified production line to successfully compete with IBM and Microsoft in the enterprise of computing market which started in the late 1970s.

Today, Apple’s market capitalization is more than these two companies, about $640.49B; IBM is 162.65B and MSFT is $391.21B. Despite this, Apple continues to buy more small and medium size companies that would help them in line with their products and services.

How do they make money?

Apple Inc. develops, designs, manufactures, sells iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software. They deliver digital content and applications through the iTunes Store, App StoreSM, iBookstoreSM, and Mac App Store. Apple sells globally, through online and retail stores. They also conduct business through direct sales force and with third-party cellular network carriers including, retailers and resellers.

Apple is the company to look forward to, they are into bigger phones and phablets. Samsung is getting the smartphone market. Apple is into high market while low costing Chinese smartphone with Original Equipment manufacturer (OEMs) continue to capture the middle and low-end share.

Touch screens had been created and marketed before, but it was Apple that first adopted the user interface and made it a huge market. Lately, they achieved widespread success with their new iPhone 6 an innovation in mobile phones.

Apple increased its brand value by 21 percent to $118.9B still first place. Next in line is Google, the brand is valued at $107.43B increased by 15 percent. The Information came from Interbrand’s Best Global Brands ranking report as the world’s most valuable brand out of the top 100.

Who is running the business and what is their background?

AAPL 2

Mr. Timothy D. Cook is Chief Executive Officer and Director of Apple Inc. in August 24, 2011. He started in March 1998 as Senior Vice President for Worldwide Operations, Sales, Service and Support until 2002. In October 2005, he became the Chief Operating Officer. Before that, he was Executive Vice President of Worldwide Sales and Operations. He also was the Director of NIKE, Inc. and The National Football Foundation & College Hall of Fame, Inc. Mr. Cooks served as Vice President of Corporate Materials at Compaq Computer Corporation (‘Compaq’) from 1997 to 1998 and as Chief Operating Officer of the Reseller Division of Intelligent Electronics. And his 12 years with IBM’s Personal Computer Company in North and Latin America, working as Director of North American Fulfillment.

Mr. Cook was a Fuqua Scholar when he studied with Duke University for his MBA. And he graduated from Auburn University with a Bachelor of science degree in Industrial Engineering.

AAPL 3

Mr. Luca Maestri was Chief Financial Officer, Senior Vice President, and Principal Accounting Officer of Apple. He was appointed and served these positions basing on his more than 25 years of dedicated work experience in finance globally. He had a bachelor’s degree in Economics from Luiss University in Rome and a master’s degree in Science of Management from Boston University. Mr. Maestri has worked and lived in foreign places with excellent achievements internationally.

In March 2013, he joined Apple where he works with senior management for its financial role. Before this, he started his finance and working experience with General Motors for 20 years with important positions in expanding its business. He was also Chief Financial Officer of Nokia Siemens Networks and Xerox.

Apple Value Investing

Balance Sheet

Liquidity

The Current ratio declined in 2014 so as quick ratio. Cash and cash equivalent and short-term investment declined 38 percent while current liabilities increased 45 percent. Apple has short and long-term debt in 2013 and 2014 less than its net income and depreciation & amortization. Debt to equity ratio increased in 2014.

AAPL liquidity was good in 2010 to 2013 except in 2014. They introduced iPad air in its fifth generation with retina display and the launching of iPhone 6 and  6 Plus, iOS 8, Apple pay and Apple watch. They also had various business acquisitions like Beats Music, LLC., and Beats Electronics, LLC.  Latest quarter current and quick ratio increase 1.47 and 1.18.

In 2014 they issued $12.0B of long-term debt with varying maturities through 2044 and launched a commercial paper program, with $6.3B outstanding as of September 27, 2014. Debt to equity ratio increased and reduced solvency ratio.

Efficiency Ratio

Cash conversion cycle (CCC) shows longer time in paying their obligations to creditors than days sales outstanding and days inventory. In 2014 payable period increased 15 percent or more than 85 days for payables to be paid. Day sales outstanding increased by 19 percent or 31 days before it is sold or paid, and days inventory increased by 44 percent or 6 days before inventory is sold.

They have a low receivable turnover. AAPL has a problem in extending credit or collecting debts. Inventory turnover is high showing fast inventory sold and replaced.

Fixed asset turnover declined from 2011 meaning net sales is lower as a percentage of fixed asset investment. Apple was not as efficient in generating sales from their assets as the company asset grew.

Apple has a negative cash conversion cycle with high payable period. They are having problems in paying their creditors and suppliers.

Apple Income Statement

Profitability

In 2013, Apple declined in gross and net margins at the peak of the successful introduction of the fourth generation of iPad and iPad and iPad mini, a new MacBook Pro with Retina display, a new iPod touch, a new iMac, and expanded of iPhone 5 is dismay in expectation. The 11 percent declined in operating income and increased in other income of 148 percent and interest expense resulted to decrease net margin.

Dupont Analysis (Expanded Five Step Method)

Return on equity using the DuPont Analysis is computed by breaking down the following into five measures. First is the pre-interest pretax margin declines down in 2013 and 2014 because of operating income and expenses. Second, asset turnover increases 0.93 times in 2014 more than in recent years. The low turnover resulted in not investing in their asset. Third, the interest burden of long-term debt incurred in 2013 and 2014. Managing efficiently to maintain their tax efficiency as the fourth step. And the fifth step is equity multiplier increases in 2014 to 3.52 to increase in asset and decrease in equity. Thus, multiplying the results of the five steps will get the return on equity.

The bulk of the five parts of return on equity (ROE) comes from either net profit margin before its interest burden and tax efficiency, asset turnover and leverage. The case of AAPL  a return on equity coming from their sales in operations except in 2014. Increased in ROE comes from high leverage or an equity multiplier of 3.52, resulting to a high ROE of 68.4 percent.

Cash Flow Statement

Cash Flow Analysis

Net cash provided by operation has a growth of 102, 36, 6 and 11 percent. In 2013 operation decreases for net income and depreciation & amortization and abrupt increase in other working capital. Net cash used for investing show declined in 2013 and 2014 because of investment in plant, property & equipment, purchases in investments, sales/maturities in investments, and purchases of intangibles. Net cash in financing was provided by in 2010 and 2011 from common stock issued and other financing activities. And it was used for 2012 to 2014 common stock repurchases, the dividend paid and other financing activities despite common stock issued and debt issued. Thus, resulted in a net change in cash trending up in 2013 but declined down in 2014.

AAPL five-year operation shows that net cash was used heavily in investments in 2011 and 2012. Their effort garnered net cash from operations in 2012, 2013 and 2014 but in 2013 and 2014 they need to increase net cash through debt issued for common stocks was no longer enough to increase in dividend payments and common stock repurchase.

Margins

Cash flow margin declines in 2012 because of an abrupt, increase in operating cash flow and net sales. Free cash flow margin peak in 2010, but abruptly decreased in 2011, an increase in free cash flow over operating cash flow. Free cash flow remains sufficient despite growth in 2013 and 2014 of 8 and 12 percent.

AAPL has good margins in cash flow and free cash flow.

Apple Investment Valuation

Totem Method

The Totem method uses the financial calculator to compute the target price.

Apple has a 28 percent growth based on its present book value per share of $1.28 and future value of $19.02. It has a return on equity of 31.7  percent and their 5 years P/E ratio is 15.2. The return on the book in 5 years is $20.56 and the price in 5 years will be $312.51. The present value of the stock is $135.11 and as computed it resulted to after margin of safety (MOS) of $81.06. They have a dividend yield of 1.73 percent, thus the total value of dividend of $12.57. Adding the two values, price after MOS and the total value of dividend resulted in $93.64 as the target price or total value of the enterprise.

The current market price as of November 7, 2014, is $109.01 per share, more than the computed target price or the total value of $93.64. Indeed, an overvalued company and the current market price increase daily because of the coming Christmas season.

Conclusions

The following research on Apple Inc., shows both financial operations, management, and business strategies surpass immediate problems with their cash account. The products and services offered is the number one in the A & B markets categories are expensive. The reason sales growth was 9 and 7 percent in 2013 and 2014 despite the successful launching of their newest products in the market.

Apple is a good company to invest in. The management shows a strong personality to overcome today concerns. The current market price of $109.10 as of 11/7/2014 is valued more than the target price of $93.64. The company would merit a buy, but for now, will hold on until the target price achieves better profit.

Proper Citations:

Apple Inc. http://en.wikipedia.org/wiki/Apple_Inc.

Company background http://google.brand.edgar-online.com/DisplayFiling.aspx?TabIndex=2&FilingID=10264100&companyid=2035&ppu=%252fdefault.aspx%253fsym%253dAAPL

Business Organization http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10255004-19999-22848&type=sect&TabIndex=2&companyid=2035&ppu=%252fdefault.aspx%253fsym%253dAAPL

Timothy D. Cooks http://www.reuters.com/finance/stocks/officerProfile?symbol=AAPL.O&officerId=2486890

Luca Maestri http://www.reuters.com/finance/stocks/officerProfile?symbol=AAPL.O&officerId=88090

Financials https://www.google.com/finance?q=NASDAQ%3AAAPL&ei=fCxQVIjzOsKwkQXa7YHIDQ

Key ratios http://financials.morningstar.com/ratios/r.html?t=AAPL&region=usa&culture=en-US

Financials http://financials.morningstar.com/income-statement/is.html?t=AAPL&region=usa&culture=en-US

Valuation http://financials.morningstar.com/valuation/price-ratio.html?t=AAPL&region=usa&culture=en-US

Researched and Written by: Nellyt

Alibaba Has Great Margins but Slow Pay Master

October 16th, 2014 Posted by Company Research Report, Uncategorized No Comment yet

 BABA-7.png (299×87)

Company Research

About the Company

Alibaba Group Holding Limited (BABA) is an online and mobile commerce company. They were incorporated on June 28, 1999 through 18 people under the leadership of Jack Ma from Hangzhou, China. Alibaba works in wholesale and retail online marketplaces together with the its related companies. They also offer advertising and marketing services and other services such as electronic payment, cloud-based computing and network services and mobile solutions.

How does the company make money? 

Alibaba’s main source of revenue is the three retail marketplaces; one wholesale and two international. They offer a platform for third parties to provide technology infrastructure and marketing online for cloud computing services and internet infrastructure services. Cloud Computing intends to support its commerce ecosystem through providing distributed computing infrastructure in handling large volume of data and traffic generated by the company’s online marketplaces.

Do you know that Alibaba also provides payment and escrow services? Yes. They have contractual arrangement wherein third party receives and disburses money or documents for any transactions made in Alipay. As an e-commerce company, they have Taobao Markeplace, Tmall and Juhuasuan where people can buy stuffs online. In addition to its three online marketplace, Alibaba also have 1688.com, AliExpress.

Moreover, they also have small and medium enterprise (SME) loan business. The company provides micro loans to vendors on its wholesale and retail marketplaces.

As operators of their “ecosystem” as a platform for third parties, they generate revenues from China and international commerce retail and wholesale, cloud computing and internet infrastructure and others through online marketing services and commissions. Online marketing services includes  P4P marketing fees, Display marketing fees, Taobaoke commissions, Storefront fees, Commissions on transactions, Placement fees and Fees from Memberships and Value-added Services. Alibaba does not stop there and continue expanding their ecosystem to maintain the health and sustainability of its marketplaces. That is why they are the largest online and mobile commerce company in the world in terms of gross merchandise volume in 2013 of 529 in billions of Renminbi (RNB). Also, their three China retail marketplaces, generated a combined GMV of RMB1,833 billion (US$296 billion) from 279 million active buyers and 8.5 million active sellers in the twelve months ended June 30, 2014.

BABA competes with Tencent and Baidu. Tencent and Baidu has market capitalization in USD of 135.50B and 74.34B compared to BABA’s 216.37B.

Who is running the business and what is their background?

BABA 8

First off is Mr. Jack Ma, the Lead Founder and Executive Chairman of Alibaba Group Holding Limited. In 1999, he was the Group Chairman and Chief Executive Officer (CEO) with the overall responsibility for strategy and focus. Later in 2013, he stepped down as CEO to concentrate on the Group’s business strategy and development. He is a board of director of SoftBank Corporation and Huayi Brothers Media Corporation. He is also served as chairman of The Nature Conservancy’s China board of directors. Mr. Ma graduated in Hangzhou Teacher’s Institute with a bachelor’s degree in English.

Next is Mr. Jin Jianhang who serves as the President of Alibaba Group Holding Ltd since August 2014. He is a member of Alibaba’s founding team and served as senior vice president of corporate affairs from September 2009 to July 2014. As a founding member, he had served management roles like heading the marketing and website operations functions for one of their marketplaces. From 2008 to 2009 he was the general manager of China Yahoo! (later Yahoo! Koubei). He was the vice president of human resources and CEO office from 2006 to 2007.  He received a bachelor’s degree in journalism from Fudan University.

BABA 9a

Ms. Maggie Wu is the Chief Financial Officer for Alibaba Group Holding Limited since e May 10, 2013. She is in-charge for the company’s overall financial management like operations finance, reporting, internal control, tax and treasury as well as corporate finance and audit. She first joined Alibaba in July 2007 as chief financial officer of Alibaba.com. In mid 2012, she co-lead the privatization of Alibaba. After that, she served as deputy chief financial officer of Alibaba Group where she is responsible in overseeing key aspects of the company’s finance organization. Prior to Alibaba, she was an audit partner for 15 years at KPMG in Beijing. She is a member of the Association of Chartered Certified Accountants (ACCA) and a member of the Chinese Institute of Certified Public Accountants. Ms. Wu has a bachelor’s degree in accounting from Capital University of Economics and Business.

Value Investing

Balance Sheet

This focus on the asset, liability, and equity ending balances account of the Company BABA.

Alibaba 1

BABA’s current ratio are stable with the exception of 2012 when it peak at 2.37. Their quick ratio also trend up in 2012 at 1.9 but it retracted lower than previous years. Their total current asset growth has increases of 19, 111, 55 and 57 percent. This shows an increased in 2012 current asset, thus this accounts for the increased in its current ratio. Their total current liabilities have growth of 9, 69, 104 and 56 percent. It is noted that current ratio decreases in 2013 because of the sudden increase in their current liabilities. Summing it up, BABA has enough current asset and cash to pay off its current liabilities.

Their solvency ratios have increased in 2012 and have been recovering from a low of .34 in 2013. It drastically increased in 2012 of 431 percent because of the sudden trend up in net income from continuing operations. In 2013 the decrease was due to the increase in their total short and long term debts. In 2014, BABA’s solvency ratio increases 79.4 percent, because net income increased 171 percent despite the increase in total debts of 47 percent.

Debt to equity ratio was relative low for the pass three consecutive years of not more than 17 percent.  Starting in 2013 the company has been increasingly relying on debt of 2075 percent growth and a negative stockholders’ equity of -24 million Renminbi. In 2014 debt to equity ratio increased abruptly to a high of 140 percent for total debt growth of 47 percent.

BABA as seen in their balance sheet current and quick ratios means good liquidity, they can pay off current obligations as it becomes payable. Analysing behind the scene a question comes to mind why the sudden gaps in amounts from 2011 to 2012. The statements depicted a change in business strategy. Is this in preparation for their launching in New York Stock Exchange for their initial public offering or are they massively expanding into buying companies? The fact shows heavy increases in their total debts from 2011 to 2014. This means borrowing as they run out of money to the extent of depleting their stockholders’ equity in 2013 as reflected in their debt to equity ratio. Despite increases in total debts they still are solvent for the mere fact that net income from continuing operations jump up higher that previous years.

Efficiency Ratio

Is BABA efficient in its operations?

Alibaba 2

BABA has declining day sale outstanding. It takes increasing days from 121 to 261days to collect its accounts receivable. Their payable period has a growth rate of -40, 1433, -3.3 and 18 percent from 2010 to 2014. This shows a drastic increase in 2012, telling us that it takes more than three months for BABA to pay its invoices from trade creditors and suppliers compared to its previous years of only 8 days. Their cash conversion cycle has a growth rate of 7, 3, 84, and 9 percent. This is the total number of days it takes for their products and services to turn to cash. As seen in 2013 the increase in days account for the increased in receivable and payable turnover.

Their fixed assets and assets turnover has been increasing year after years except for a slight dip in 2012. It shows that they have been more effective in using their investment in fixed assets to generate revenues so as with their assets. This measures  BABA’s ability to generate net sales from fixed-asset investments, specifically property, plant and equipment (PP&E). This accounts for the increase in their sales revenue, for lower profit margins tends to have high asset turnover due mainly to cutthroat and competitive pricing.

Income Statement

Alibaba 3

Gross margin is 83.2, 80.4, 67.3, 71.8 and 74.5 with TTM of 73.5 from 2010 to 2014. This represents the percent of total sales revenue that the company retains after incurring the direct costs sold by BABA. Growth ratio trend of -3.5, -16, 6.7, and 3.7 percent.  And net margin is 26.44, 26.69, 21.11, 24.35, and 43.95 with TTM of 53.98. It is growing at 0.95, -21, 15, and 80 with TTM of 54 percent.

BABA gross margin increases only 3.7 percent in 2013, compared to 2012 of 6.7 percent. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations. Their net margin shot up from 2011 decrease to 80 percent growth in 2013.

Dupont Analysis

In Totem we are using the expanded five-step model of DuPont analysis. This provides us with insights as to what is driving a company’s return on equity.

The extended five-step DuPont Model breaks return on equity down into five components: pre-interest pretax profit margin, asset turnover, interest burden, tax efficiency and leverage ratio. Their pre-interest pretax margin keeps going up except for 2012.  The decline was the effect of the increased in earnings before interest and taxes (EBIT) of 176 and sales revenue of 212 percent. Succeeding years increase because of lesser growth in sales revenue compared to growth in EBIT. Their asset turnover increases with a dent in 2011 of 0.21. This means they are using their assets to generate sales revenue. The decreased account for the sudden increased in assets and sales revenue growth. Its interest burden started in 2012, showing their borrowings through long term debts with interest expenses to be paid. Their tax efficiency depicted within the level of 83 to 86 with a declined in 2011 of 76 percent. This means taxes went down slightly as compared to 2011. Its equity multiplier has been changing year after year. This depicted an increased in their financial leverage.

BABA’s return on equity breaks down the net profit margin into its pre-interest pretax profit margin. This is to assess the impact of their interest expense associated with increased leverage and its tax burden. In this capacity the increased of EBIT account for their increased in total operating expenses especially its selling, general and administrative (SGA) due to their expansion in buying companies like Shenzhen One-Touch, investments in technology to improve their ecosystem and privatization of Alibaba.com. In 2014 SGA expenses has an equity-settled donation expense of RMB1,269 million or US$205 million relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit organization designated by Jack Ma and Joe Tsai.They have lower net profit margin as compared to asset turnover except in 2011 and this cause the increase of return on equity (ROE) in 2014. Aside from this, increase in equity multiplier also account for high ROE. So, BABA is highly leveraged and it would be risky for default.

Cash Flow Statement

This captures both the current operating results and the accompanying changes in the balance sheet.

Net cash provided by operating activities had been consistently increasing. BABA adjusted net income and this represents net income (loss) before share-based compensation expense, amortization, impairment of goodwill, intangible assets and investments, gain (loss) on deemed disposals/disposals/revaluation of investments, and one-time expense items consisting of the Yahoo TIPLA amendment payment and an equity-settled donation expense.

Their net cash used for investing activities increased in prior years with abruptly increase much more in 2014 but in 2013 it declined down 545 million RMB. BABA had used their cash on investments in PPE, purchases of investment, and purchases of intangibles. The decreased was from cash provided from properties, plant and equipment reduction, net of acquisitions and other investing charges.

And net cash provided by financing uplifted years 2010, 2012 and 2014 from short term borrowing, long term debt issued, and in 2013 issuance of common and preferred stocks. They used cash for financing activities in their long term debt repayment, redemption of preferred stocks in 2014, treasury stocks repurchase, cash dividend payments in 2013 and 2014 and other financing activities. Thus, this resulted a declined in 2011 and 2013.

BABA is globally inclined in sales revenues and this effect of exchange rate from Chinese Yuan Renminbi (CNY) in millions to US Dollars and other currencies. Their Alibaba.com, AliExpress and AliPay are receiving payments in different currencies so, this accounts for the changes. Net change in cash had decrease in 2010 of -112, but it increases back until a sudden declined in 2014 of -80 percent.

BABA adjusted EBITDA, adjusted net income and free cash flow, each a non-GAAP financial measure, in evaluating their operating results and for financial and operational decision-making purposes. Therefore, their operation cash flow from nothing in 2010 has improved 325 percent in 2011. This drastically change their operations, likes the introduction of Logistics Warehouse and Shipping and Logistics Management Services on AliExpress, unveils Mobile Cloud Operating System, agreement with Alibaba Group, Yahoo!, and SoftBank  on Alipay and 38 new leading Chinese B2C Sites in Taobao Mall. And in 2012 the talks of privatization of Alibaba, repurchase and restructure of Yahoo!, and launches Yu Le Bao Platform and Tmall global so as US based investments as among what has been happening to BABA. Their cash had been finance by short term borrowings and long term debts so as issuance of common and preferred stocks for them to expand their operations, purchases of investments, intangibles and properties, plant and equipment. To the extent the decrease in 2013 total stockholders’ equity was primarily due to the repurchase of their ordinary shares from Yahoo in September 2012 and the privatization of Alibaba.com partially offset by the issuance of ordinary shares to finance the repurchase.

alibaba 5

Cash flow margin has reached the peak at 69 and dip in 2013. Net cash flow from operations has increased drastically in 2012 of 325 compares to net sales growth of only 161 percent. And declined in 2013 is just the opposite meaning more increased in net sales and lesser cash flow from operation. This is how efficient BABA converts its sales revenue to cash for expenses and purchases of assets and investments.

Free cash flow margin high at 92, decreased in 2012 and subsequent steady at 83 and 82. The decrease in 2012 account for the increase in net cash provided by operating activities less the capital expenditure of purchases of property and equipment, excluding acquisition of land use rights for, and construction of, their office campuses in China and intangible assets, adjusted for changes in loan receivables.

BABA’s cash flow margin has higher percentage or it is more than 50 percent. This means they have more cash available from the sales, so as its free cash flow ratios. The more free cash flows embedded in the operating cash flows the better it is. It is a very good indicator of financial health of a company.

Totem’s Method

Totem  method adopt the investment style which is applicable to the company. One valuation style is that seeks out undervalued companies whose stock price are temporary down, but whose fundamentals are sound in the long run. The financial calculator is our main instrument in computing the equity selection. This is to know whether BABA is under or overvalued.

BABA has a growth rate of 22 percent as computed base from present book value of 1.14 and future value of -3.78 from 2010 to 2014 and TTM. This resulted to a book value in 5 years of $10.26. Its average return on equity is 37.33 percent, the return on book in 5 years is $3.83 and the price in 5 years will be $172.43. Using the industry P/E ratio of 45 than its current P/E ratio of 53.2 which is more conservative will get the present value of the stock of $74.55 and after margin of safety or total value of appreciation of $44.73. Their current market price as of October 13, 2014 is 85.12.

Since their official initial public offering in New York Stock Exchange, BABA has a stock price or current market price that reached a high of $93.89 in September 19, 2014. But stock price had decreased down in September 23, 25 and October 1 of $87.17, 88.92, and 86.10. And today October 13, 2014 it is $85.12 which is 47.4 percent more than its total value of appreciation. This shows that stock price is overvalued.

Relative Valuation

This is a comparative study on their book value, earnings, price to earnings and returns to help in the valuation of company BABA. These are methods for comparison, in valuing of a company. One is the book value per share with abrupt increase in 2012, downslide to -0.01 in 2013 and reverted back in 2014. This is the effect of their over expansion and buying of companies to the extent of having no equity and increased long term debts to finance its investments. Its price to earnings (P/E) ratio current is 53.2 compared to industry P/E of 45 which Totem used to have a conservative computation for BABA’s TTM P/E ratio is only 39.24. This is an important equity valuation multiple helping as defined the market price per share over its annual earnings per share. Their earnings per share are 0.29, 0.34, 1.69, 3.89 and 9.9 with TTM of 0.34 from 2010 to 2014. It is the monetary value of earnings per each outstanding share of BABA’s common stock. This increased for their net income from continuing operations increased abruptly especially from 2012 to 2014 due to change in their business strategy uplifting their online marketing services and others. So, as their return on equity declined in 2012 and abruptly increased in 2013 and 2014.

BABA’s book value was $3.09 which increased after a week from its initial public offering in NYSE to $3.78 per share. Earnings per share in 2014 show a $9.90 or 10 per share from only 0.29 in 2010. This is a very massive increase per share, due to the successful launching which was unmatched and exceed their expectations. Their return on equity (ROE) increased shows how well BABA uses its investment funds to generate earnings growth.

Conclusion

Totem’s basis of valuation is the company’s five years financial records wherein BABA’s has limited results of their financial performance trailing with progress. The fact that the company is overvalued at $85.12 per share as of October 13, 2014 and total value as compute is only $44.73. This would merit a buy when the share goes undervalued or risk it since to date market price still went down to $84.95.

As all knows, BABA is one of the best-positioned companies within the global internet services space, both inside China and around the globe. Their shares have climbed by 25% since its initial public offering last month. BABA’s growth is higher than that of the rest of the industry and it seems impressive and sustainable.

CITATIONS

https://www.google.com/finance?q=NYSE%3ABABA&ei=WXEdVIihAoatkgXYvoHYBQ

http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=BABA.K

http://www.alibabagroup.com/en/about/history

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10205127-920-1972851&type=sect&TabIndex=2&companyid=934140&ppu=%252fdefault.aspx%253fcompanyid%253d934140

http://financials.morningstar.com/ratios/r.html?t=BABA&region=usa&culture=en-US

Researched and Written by: Nellyt

We Think Facebook is Worth $94

September 15th, 2014 Posted by Company Research Report No Comment yet

Facebook, Inc (FB) is an American online social media and social networking service company. It is based in Menlo Park, California. It was founded by Mark Zuckerberg, along with fellow Harvard College students and roommates Eduardo SaverinAndrew McCollumDustin Moskovitz, and Chris Hughes

Company Research  

Facebook Inc.

Nature of Business  

Mark Zuckerberg founded Facebook Inc., while he was studying psychology at Harvard University. He was a keen computer programmer who had developed a number of social-networking websites such as “Coursematch” and “Facemash.”

In February 2004 Mr. Zuckerberg launched “The Facebook” or Facebook, Inc., it engaged in building products to create a utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.

Developers use the Facebook Platform to build applications and Websites that integrate with Facebook to reach its global network of users and to build personalized and social products.   The site’s features have continued to develop during 2007. Users can now give gifts to friends, post free classified advertisements and even develop their own applications – graffiti and Scrabble are particularly popular. Currently, the company continues to grow and give people the power to share and make the world more open and connected.

How do they make money? 

Facebook Inc., generate substantially all of their revenue from advertising and from fees associated with their payments infrastructure that enables users to purchase virtual and digital goods from its company’s developers with applications on the Facebook website.

Advertising revenue is generated by displaying ad products on Facebook properties, including company’s mobile applications and third-party affiliated websites or mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks made by users, the number of actions taken by users, or the number of impressions delivered.

Facebook, recognize revenue from the delivery of click-based ads in the period in which a user clicks on the content and action-based ads in the period in which a user takes the action the marketer contracted. They recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to users.

FB also generates its income from payment and other fees from its users when they purchase virtual and digital goods from its developers with an application on the company’s websites.  Users can transact and make payments on the Facebook website by using debit and credit cards, PayPal, mobile phone payments, gift cards or other methods. The company will then receive a fee from developers when users make purchases in these applications using its Payments infrastructure.

FB recognizes revenue, net of amounts remitted to their developers. They have mandated the use of their payments infrastructure for game applications on Facebook, and fees related to payments are generated almost exclusively from games. Facebook, Inc other fee revenue, which has not been significant in recent periods, consists primarily of user-paid services and its ad serving and measurement products.

Who is running the business and what is their background?

Facebook Inc.

Mr. Mark Zuckerberg is the Founder of Facebook, Inc., and has been its Chief Executive Officer since July 2004. He is responsible for setting the overall direction and product strategy of Facebook. He leads the design of Facebook’s service and development of its core technology and infrastructure. Mr. Zuckerberg has been the Chairman and Director of Facebook Inc., since January 2012 and July 2004 respectively. He serves as a Member of the Investment Committee at FB Fund, L.P. Mr. Zuckerberg attended Harvard University, where he studied computer science.

Facebook Inc.

Mr. David M. Wernher serves as Chief Financial Officer, Vice President – Corporate Finance and Business Planning of Facebook Inc, effective June 1, 2014. Mr. Wehner has served as Facebook’s Vice President, Corporate Finance, and Business Planning since November 2012. From August 2010 through November 2012, He also serves as Chief Financial Officer of Zynga Inc. From February 2001 to July 2010, Mr. Wehner was employed at Allen & Company, an investment bank focused on media and technology where he served as a Managing Director from November 2006 to July 2010, and a director from December 2005 to November 2006.  He also served as an Analyst at JP Morgan Chase & Co, Research Division.

In his career, he worked as a Consultant with the global strategy consulting firm Monitor Company, where he advised clients in a range of industries both in the United States and Asia. Mr. Wehner joined the New York investment banking firm Allen & Company, LLC in 2001, where his responsibilities include principal investing, corporate finance and mergers & acquisitions advisory.  Mr. Wehner holds a B.S. in Chemistry from Georgetown University, and an M.S. in Applied Physics from Stanford University, where he was a National Science Foundation fellow.  

Do you trust these people and are they competent? 

Facebook Inc., hires and retain people who can contribute to developing its strategy, quickly innovate and build new products. CEO and CFO of the company are highly talented and able to show its competency, as well as demonstrated strong leadership. Therefore, my confidence and trust are absolutely positive as they both shows good management capabilities.

Value Investing

If you want to invest in a company, you need to know not only the nature of business, background and the people behind the success of the firm but most of all to know the financial standing of the company. And this could be found on the balance sheet, income statement and cash flow statement for the given period.

Balance Sheet

Financial Liquidity

Shown in the table below would determine how liquid the company Facebook is through calculations of data from 2010 to 2013.

Facebook inc.

Current ratio average in the past four years from 2010 to 2013 was 8.37, with the latest quarter of 12.81 times. This is the very high current ratio, while the quick ratio average was also 8.06 and the latest quarter was 12.48, which means the company has very high current resources. Looking at its details, cash is the number one contributor of this very high current ratio and quick ratio, which is 60, 62, 64 and 64 percent of total assets.

Their debt to equity ratio is minimal at an average of 0.13 while the solvency ratio is 86 percent average.

By looking at the above data, Facebook is financially healthy and stable. They are very liquid with high current resources. Their debt to equity is only 13 percent and the solvency ratio of 86 percent so above the general rule of thumb which is 20 percent.

Efficiency

The table below is the efficiency ratios of Facebook Inc., wherein it is used to analyze how well a company uses its assets and liabilities internally. Efficiency ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.

Facebook Inc.

Accounts receivable turnover can be used to determine whether the company is having trouble collecting on sales where they provide customers on credit. Facebook Inc., shows an increasing trend from 2010 to 2013 with TTM of 10.19 times which is a good sign. Converting this into Days sales outstanding which are computed as 365 days over accounts receivable turnover. The result is amazing with the declining trend from 69 days to 42 days and TTM of 36 days.

Days payable or payables period shows likewise a declining trend with TTM of 19 days. This means Facebook pays their payables in the short term within 22 to 15 days.

Fixed asset turnover measures the company’s effectiveness in generating sales from its investments in plant, property, and equipment. It has an up and down trend with a TTM of 3.39 times or 108 days.

Asset turnover measures the ability of a company to use its assets to efficiently generate sales. Facebook asset turnover has been slightly up in 2011 and down in 2012 and 2013 with a TTM of 0.55 times or 664 days. This means they don’t usually generate sales from their total asset.

Their cash conversion cycle (CCC) measures how long they will be deprived of cash if it increases its investment in resources in order to expand customer sales. This show that Facebook has a declining cash conversion cycle from 2010 to 2013 with a TTM of 16.8 days.

Efficiency ratios are important because an improvement in the ratios usually translates to improved profitability. Knowing its cash conversion cycle so they can utilize well their cash from sales more efficiently in more investments as well as its asset base – efficiently to generate sales and that is a very good thing.

Income Statement

Revenue is the amount of money that is brought into a company by its business activity. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income.

The table below shows the detailed income of Facebook from 2010 to 2013 and the latest five quarters:

Facebook Inc.

Facebook Inc.

As observed in the above table the trend of revenue and gross income per annual data was yearly increasing which means it is getting higher and higher year after year. While the operation and net income of Facebook have a similar trend which declined in 2012 by 69 and 95 percent respectively.

Meanwhile, quarterly data shows that revenue, gross profit, and operating income were consistently going up in the first three-quarters, but slightly down in quarter 2014-03 however, it recovered in the quarter ending June 2014. Net income shows getting higher and higher every quarter.

Margin

It refers to the percentage results of gross income, operating income and net income over total revenue.

Facebook Inc.

Annual data showed that Facebook Inc., average gross margin was 77 percent, operating margin 37 percent and net margin was 19 percent. However, quarterly data shows the net margin of the company was getting higher and higher every quarter from 2013-06 to 2014-06 with the following percentage:  18, 21, 20, 26 and 27.  This means a good profitability for the company recovering after the 2012 crisis.

Dupont Analysis

It is an expression which breaks return on equity (ROE) into three parts. And this tells us how much profit the company generated for each dollar of total assets. Return on equity using the DuPont Method as computed by a Net profit margin x Asset turnover x Equity multiplier.

Facebook Inc., has the following data in TTM: Net profit margin = 24; Asset turnover = 0.55 and Equity multiplier = 1.13. Therefore, ROE equals 15 percent; which Facebook Inc., could return such profit for every dollar of equity. This is the portion of the return on equity earned on the debt at work in the business.

Cash Flow Statement

FB cash flow data from 2010 to 2013 are shown per the table below:

Facebook Inc.

Operating activities are transactions which include the cash inflows associated with sales interest and dividend revenues and cash outflows associated with operating expenses, interest and taxes. FB’s operating cash flow from 2010 to 2013 was positive and increasing yearly. It shows that the company is doing good and continue progressing. It has an average of $2,578M.

The company’s investing cash flow shows a negative balance from 2010 to 2013, with an average of $-3,418M. It indicates that cash outflows are greater than inflows on this category. The company was expanding through the purchase of investments yearly.

And financing cash flow, the balance were positive except in 2012 which is -667. Through looking back at its details the company retired the debt of $1,891M in 2012, so cash outflow exceeds cash inflow.

Free Cash flow

It is the cash left over after deducting capital expenditures from the operating cash flow.

The table below shows the free cash flow balance of Facebook from 2010 to 2013.

FB 9

FB’s free cash flow shows a positive balance, with an average of 1,559 and trailing twelve months of $3,208 from 2010 to 2013 operation.  It shows that the company is capable of expanding its business wider.

Valuation

In this investment valuation, the company’s historical financial records such as the balance sheet, income statement and cash flow statement are our basis aside from the key ratios. It is Totem’s philosophy to buy wisely when prices are down and to sell when prices rise a great deal. And doing this valuation is the heart of any investment decision.

Totem Investment uses this method. The financial calculator is our main instrument in computing the equity selection. The result data as seen below:

Growth    47%

Yield        0 %

Value of Appreciation                $   94.29

Value of Dividend                                 0

Total Value                                 $  94.29

Price investor is willing to pay    $363.52

Facebook Inc., has a company growth of 47% as a computed base from their book value. They had an average P/E ratio of 50 and a dividend yield of 0%. In computing the value appreciation it is the average ROE with the return of book value, price, and the average P/E all in 5 years. Therefore, the result of the present value after the margin of safety of 40% equals $94.29. And the value dividend is $0 resulted from dividend divided by interest rate of 15%, which is constant.So, the total of the two value appreciation and value dividend equals $94.29 as their total value. Comparing the total value of $94.29 with the current price per share of $77.43 dated September 10, 2014. This means the company stock is trading at an undervalued price of 17.9%. But the price investor is willing to pay amounting $363.52 as computed by multiplying historical P/E with expected earnings for five years.

Aside from these let us compare market values of the stock with the fundamentals, their earnings, book value, growth multiples and other metrics as shown in the table below:

FB 10

The book value per share showed an increasing trend of 129, 396, and 507 percent from 2009 to 2013 with TTM of $7.06 and an average of $3.58 per share. This is used to calculate the per share value of a company based on its equity available to common shareholders and just one of the methods for comparison in valuing of a company.

Its historical price to earnings has trended up and down ratio of 1666.7and 92.6 percent from 2012 to 2013 with TTM of 84 and an average of 879. P/E ratio is an equity valuation multiple. It is defined as market price per share divided by annual earnings per share.

Earnings per share have a growth ratio of – 0.98 and 0.59 with an average of 0.35 and TTM of 0.92 per share. It is the monetary value of earnings per each outstanding share of a company’s common stock.

Their return on equity (ROE) showed an up and down trend of -0.05, -0.98, and 2638 percent with an average of $14.75 and TTM of 15.44. ROE measures the rate of return on the ownership interest (shareholders’ equity) of the common stock owners. It is a gauge of a firm’s efficiency at generating profits from every unit of shareholders’ equity (also known as net assets or assets minus liabilities). This shows how well a company uses investment funds to generate earnings growth. ROE’s between 15% and 20% are generally considered good.

Conclusion

Totem Investment is looking for companies with a strong balance sheet or those with little debt, above average profit margin and ample of cash flow. So, as undervalued whose stock price is temporarily down, but whose fundamentals are sound in the long run.Facebook Inc., passed these criteria. Current market price is down at $77.48 per share dated September 12, 2014. So, compared to its total value of $94.29,  the company is undervalued and still merits a buy.

CITATIONS:

https://www.google.com/finance?q=FB&ei=OMv2U7DyKO_SigL7w4HACw  

http://www.reuters.com/finance/stocks/officerProfile?symbol=FB.O&officerId=2502019  

http://www.sec.gov/Archives/edgar/data/1326801/000132680114000032/fb-6302014x10q.htm   

Researched and Written by Nelly, Rio, and Meriam

Edited by Cris

Our Secret in Value Investing is no More

August 30th, 2014 Posted by Stocks Portfolio No Comment yet

Value investing, the stock prices change every day. You may find a certain stock that is cheap to buy today and then the following day the price goes up. So basically, it’s important to monitor the changes to get yourself aware of the opportunities. So what we have here? Today, we will give you the second released of our actively following list of stocks. If you wish to read the first one, please click here. Here’s our list.

Rank:

Orange means to reduce the portfolio holding, Green means to buy, and No Color means to hold. Sym: Company symbol

Name:

Complete name of the company

Type:

Evergreen is companies we will hold for more than 5 years; Woody is similar to Evergreen but that we will not reduce our holdings even when the company stock is fully priced; In addition, Deciduous is stocks that we will hold for 2 to 5 years; and on the other hand, Monocarpic is stocks that we will hold for less than 2 years (most likely around 1 year).

DeciduousDeciduousDeciduousDeciduousMonocarpicMonocarpicMonocarpic

Rank Sym Name Type
1 BIDU Baidu Inc (ADR) Woody
2 FB Facebook Inc Woody
3 AMZN Amazon.com, Inc. Woody
4 GOOGL Google Inc Woody
5 GOOG Google Inc Woody
6 AAPL Apple Inc. Woody
7 CHL China Mobile Ltd. (ADR) Evergreen
8 PG The Procter & Gamble Company Evergreen
9 KO The Coca-Cola Company Evergreen
10 WMT Wal-Mart Stores, Inc. Evergreen
11 MRK Merck & Co., Inc. Evergreen
12 MBUU Malibu Boats Inc Deciduous
13 KING King Digital Entertainment PLC Deciduous
14 KORS Michael Kors Holdings Ltd Deciduous
15 PCLN Priceline Group Inc Deciduous
16 MNST Monster Beverage Corp Deciduous
17 LULU Lululemon Athletica inc.
18 SB Safe Bulkers, Inc.
19 LOPE Grand Canyon Education…
20 TCEHY TENCENT HOLDINGS ADR Deciduous
21 OSTK Overstock.com, Inc.
22 CTSH Cognizant Tech Solutions Corp Deciduous
23 FCX Freeport-McMoRan Inc Deciduous
24 CYOU Changyou.Com Ltd (ADR) Deciduous
25 FHCO The Female Health Company Deciduous
26 USNA USANA Health Sciences Inc Deciduous
27 JOY Joy Global Inc.
28 IDCC InterDigital, Inc.
29 CLF Cliffs Natural Resources Inc Monocarpic
30 INFY Infosys Ltd ADR Monocarpic
31 BHP BHP Billiton Limited…
32 VALE Vale SA (ADR) Monocarpic
33 NUS Nu Skin Enterprises Inc Monocarpic
34 COH Coach Inc Monocarpic
35 ESI ITT Educational Service Inc Monocarpic

The question you should ask is how did we come up with this list and what does it mean?

Value Investing – How did Totem Evaluate Companies

We researched dozens of public companies.  We compared and dissected the companies we believed to be undervalued. Over time our list of companies became overwhelmingly difficult for us to keep updating. We decided that with our limited resources we had to give up following the companies we like when it is clearly no longer undervalued or that changes in the company now made it unattractive for us to invest. Out of the pool of our favorite list of companies, we think these companies will give us the best bang for our time and resources.

Value Investing – Woody

Woody are perennial trees that take years to grow completely.  Like the companies in our category, we believe it will be a rather long time for them to mature.  Our aim is to increase our stake over time provided that the financial conditions of the company remain sound and that the management team remains stable.  Baidu, Facebook, Amazon, Google, and Apple continue to surprise us in terms of their ability to grow.  They are competitors in many areas.  The fundamentals of the companies are sound.  These companies are big enough to sustain any sudden temporary shock in the financial market.

Value Investing – Principle of Margin of Safety

Let’s say if there is an adverse investing environment in the stock market these companies stock prices will fall and we will see losses in our portfolio similar to many other stocks.  Our position is to invest using the principal of the margin of safety giving us around a 50% buffer before the drop in prices from these begin to create a serious problem for us. This group is designed to provide us with the returns we need in a normal market condition. Hopefully, the returns on these growing giants will be above average.

Value Investing – Evergreen

We are rather cautious about investing.  We always think the next big event will create a devastating blow on the market and our portfolio value.  Our Evergreen category consists of big stable, long live companies which consistently provide for a fair and stable return.  These companies stock prices tend to move in a narrow range and mostly independent of the market.  We think that when there is a crisis we hope to sell off some of these companies which at that time would hold its value far better than most stocks so that we have funds to buy more of the bargains typically found in a market sell-off. That is the plan and these are the companies we are counting on.

Value Investing – Deciduous

Deciduous is the main stable return producer.  These are some of the most admired lists of companies.  They are well run and produces consistent returns for shareholders.  These companies have one more quality lacking for us to categorize them as Woody or Evergreen.  This is the bulk of the companies we focus on. We like these companies so much because they give us minimal stress while we invest.  It is a carefree feeling typically for a few years.  We expect the stock prices of these companies to go up substantially in the 2nd thru the 5th year.  We normally sell when the price is right on these.

Value Investing – Monocarpic

Last is the Monocarpic group of companies. These companies are either going out of favor with the market or just coming back from the dark side.  We view these as substantially undervalued.  Typically they are the good guys stuck with bad companies, not always the case.  When investors don’t like a company they tend to sell the whole industry and some even get out of the sector.  The extreme is getting out of the country altogether.  We don’t have enough firepower in terms of mental resources to consider so many variables so we resort to keeping it simple and looking at one company at a time.

Value Investing – What it Matters

We tend to make a lot of money with these companies.  Sometimes we get into very difficult situations with a few of these.  These are the sleep goblins stealing much of our sleepless nights.  We sometimes hate to work on these because on two occasions we look like stupid idiots.  These are some of the more challenging work in value investing.  These days how quick you are at getting the data and how accurately you implement an action plan determines the degree of success.  This is also a put-off point but we need the money so it is a matter of adding 5 percent to our portfolio.  It is a matter of choice — no choice really.

If we have more funds we might not do these things.  Alright, we might still do it. Most of these are just plain simply outcasts, abandoned and unloved companies. Sometimes they are really sick companies but time heals all wounds and we have been counting on this.  The condition usually takes less than or a little over a year to recover.  Most of our sickly companies have recovered but some died and took a part of us with them (financially).

Thanks for reading,

Peter

King Digital has Successful Games with Doubts of Future

August 13th, 2014 Posted by Company Research Report No Comment yet

King

Company Research on King

King founded by Riccardo Zacconi and Melvyn Morris and incorporated on July 3, 2013. KING is an interactive entertainment company that makes games like Candy Crush Saga, Pet Rescue Saga, Farm Heroes Saga, Papa Pear Saga, and Bubble Witch Saga. The company designs digital games with puzzle element on mobile devices including tablets and mobile phones. Users access its games for free anywhere and anytime on king.com

In addition, King launches new game IPs on royalgames.com, for feedback from its core user base of VIP customers. The Company then identifies the games based on deep performance analytics and historical experience, then enhances them with additional features and capabilities in its Saga format before releasing them on Apple App Store, the Google Play Store, the Amazon App Store, and Facebook.

How does the company make money?

King Digital Entertainment offers its products and services to customers around the world, the operators in developing and monetizing casual online and mobile games. As of December 31, 2013, an average of 128 million DAUs played its games more than 1.2 billion times per day. The massive network 324 million monthly users and track record of long-term retention driven by game longevity and ability to cross-promote new games to its audience.

King2

King designed a technology platform to offer a seamlessly synchronized, cross-platform experience to their audience.

Who is running the business?

CEO

Mr. Riccardo Zacconi is one of the founders and has served on the board of director and as Chief Executive Officer, he has more than 14 years experience in the online and consumer industry. Previously, Mr. Zacconi served as Vice President of European Sales and Marketing at uDate.com Ltd., an online dating service, until it was acquired by InterActive Corporation in 2002. Prior to uDate.com, Mr. Zacconi was an Entrepreneur in Residence at Benchmark Capital Partners, Managing Director at Spray Network GmbH, a Qualified Case Leader at The Boston Consulting Group, Inc., and a consultant at LEK Consulting LLP. Mr. Zacconi holds a B.A. in Economics from LUISS University, Italy. 

CFO

Hope Cochran has served as Chief Financial Officer since October 2013. Ms. Cochran has more than 18 years of senior executive experience at various technology companies. Prior to joining us, Ms. Cochran served in several positions at Clearwire Corporation, most recently as Chief Financial Officer, until it was acquired by Sprint Nextel Corporation in 2013. Prior to Clearwire Corporation, Ms. Cochran served as Chief Financial Officer at Evant Incorporated, as Controller of the Americas – Sales Operations at PeopleSoft, Inc., as a founder and the Chief Financial Officer of SkillsVillage until it was acquired by PeopleSoft, Inc., in 2001, and as an auditor at Deloitte & Touche LLP. Ms. Cochran holds a B.A. in Economics and Music from Stanford University.

Value Investing Guide

Balance Sheet

Financial Liquidity

It is important to be knowledgeable about the financial status of every company we intend to invest in. Shown in the table below, we could determine how liquid the company is through calculations of data from 2012 to 2013 of King Digital.

king liq

Current ratio average for two years is 1.4 which means the current asset is 140 percent of current liabilities while the quick ratio is also 1.4 since the company has no inventory record. Debt to equity ratio and solvency ratio are both 0. Detailed data showed that King Digital is debt free.

Income Statement

This is the statement where we could find the historical earnings, expenses and the margin of the company.  This is also called “ Profit  & Loss Statement”.

Income

Revenue is the amount of money that is brought into a company by its business activity. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income. The table below shows  the  detailed  income of  KING  from  2009 to 2013:

king inc

King started only in 2011, its revenue from 2011 to 2013 was 64, 164 and 1884, increasing year over year. It has a trailing twelve months of 2,285. Gross income has a similar pattern with the revenue, the team of 1569. Operating income was negative 2011 but continue to rise up in the succeeding years, with trailing twelve months of 812. This is the result after deducting total operating expenses from the gross income. Moreover, the company’s net income was also progressing with trailing twelve months of 642 and the average was  304.

Margin

It refers to the percentage result over total revenue.

king marg

The company’s gross margin was 69 percent trailing twelve months and a 66 percent average.  The highest percentage is in 2013 while its lowest is in 2011. The results also showed up and down with a slight difference. The operating margin was 36 percent time and a 35 percent average. And net margin was 28 percent trailing twelve months and average.  It shows here that the company continues to progress year after year since it started in 2011.

Cash Flow Statement

Cash Flow Statement provides information about an entity’s investing and financing activities during the accounting period as well as showing how much cash was generated by the period’s operation. It is categorized into operating, investing and financing:

king cf

Cash Flow From Operating Activities

King’s operating cash flow was continuously increasing from 2011 to 2013. The trailing twelve months was 816 with an average of 378. King’s financing cash flow also consistent negative balance on this category which means they are paying back their debt.

Free Cash Flow

Free cash flow is the amount left after deducting capital expenditures from the company’s operating cash flow.

king fcf

King’s free cash flow was a positive balance. It has an average of 364 and trailing twelve months of 788 from 2011 to 2013 operation.  It shows that the company has excess cash for possible expansion.

Investment Valuation

Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. King enterprise value of 5.450B as of August 13, 2014 (Data derived from multiple sources or calculated by Yahoo! Finance). It measures the value of productive assets; both equity capital (market capitalization) and debt capital.

King’s market capitalization of 5.780B. King’s share outstanding as of today is 317.68M or $17 per share. Since enterprise value is lesser than its market value. It is a company’s theoretical takeover price when the buyer buys all of the stock and pay off existing debt while pocketing any remaining cash. The formula of Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment) wherein Market Capitalization = Market Price x Number of shares outstanding and Total Debt = Market value of Short Term Debt + Market value of Long Term Debt.

CITATIONS

http://www.sec.gov/Archives/edgar/data/1580732/000119312514113704/d564433df1a.htm https://www.google.com/finance?q=NYSE%3AKING&ei=Hr_qU8D5FoaPigKesoDIDQ http://www.reuters.com/finance/stocks/officerProfile?symbol=KING.K&officerId=2487362 http://finance.yahoo.com/q/ks?s=KING+Key+Statistics

Researched and Written By:  Meriam,, Rio and Nellyt

Re-edited by Criselda

Actively Following List of Stocks We Keep an Eye

August 13th, 2014 Posted by Stock to Watch No Comment yet

Today, I would like to present to you the list of stocks that we are actively following. Further, we keep an eye to every company and our team works hand in hand to effectively monitor the changes. As we all know, change is the only constant thing in this world.

Before I introduce to you the list, let us have first the legends.

Rank:

  • Orange means to reduce the portfolio holding,
  • Green means to buy, and
  • No color means to hold.

Symbol: Company symbol

Name: Complete name of the company

Type:

  • Evergreen is companies we will hold for more than 5 years
  • Woody is similar to Evergreen but that we will not reduce our holdings even when the company stock is fully priced 
  • Deciduous is stocks that we will hold for 2 to 5 years
  • Monocarpic is stocks that we will hold for less than 2 years (most likely around 1 year).

The table below presents the list of companies that we keep an eye.

Rank Symbol Name Type
1 BIDU Baidu Inc (ADR) Woody
2 FB Facebook Inc Woody
3 AMZN Amazon.com, Inc. Woody
4 GOOG Google Inc Woody
5 GOOGL Google Inc Woody
6 AAPL Apple Inc. Woody
7 CHL China Mobile Ltd. (ADR) Evergreen
8 PG The Procter & Gamble Company Evergreen
9 KO The Coca-Cola Company Evergreen
10 WMT Wal-Mart Stores, Inc. Evergreen
11 MRK Merck & Co., Inc. Evergreen
12 KING King Digital Entertainment PLC Deciduous
13 KORS Michael Kors Holdings…
14 PCLN Priceline Group Inc Deciduous
15 LULU Lululemon Athletica inc.
16 BA The Boeing Company Deciduous
17 MNST Monster Beverage Corp Deciduous
18 OSTK Overstock.com, Inc.
20 CYOU Changyou.Com Ltd (ADR) Deciduous
22 VALE Vale SA (ADR) Deciduous
23 FHCO The Female Health Company Deciduous
25 MSTR MicroStrategy Incorporated Deciduous
19 LOPE Grand Canyon Education Inc Monocarpic
21 SB Safe Bulkers, Inc. Monocarpic
24 JOY Joy Global Inc. Monocarpic
27 FCX Freeport-McMoRan Inc Monocarpic
29 BHP BHP Billiton Limited Monocarpic
30 COH Coach Inc Monocarpic
31 BNNY Annies Inc Monocarpic
32 ESI ITT Educational Services Inc Monocarpic

Thank you for reading.

The Female Health Company (VERU) Ran by Women for Women

August 11th, 2014 Posted by Company Research Report No Comment yet

The Female Health Company (VERU) company research.

Female Health CompanyFemale Health Company VERU

About Female Health Company (VERU)

The Female Health Company owns rights to the FC2 Female Condom. FC2 is a revolutionary, female-initiated option offering women dual protection against sexually transmitted infections (S.T.I.’s), including HIV/AIDS, and unintended pregnancy. Further, FHCO currently has the only female condom (FC2) which is both approved by FDA and cleared for purchase by WHO. Furthermore, more than 50% of adult HIV/AIDS cases are female, 80% of which are contracted via heterosexual sex. HIV/AIDS is the number one cause of death globally for women 15-44 years old.

Another is, Female Health Company’s main market is currently the public health sector, which distributes FC2 to more than 143 countries worldwide for use in prevention and family planning programs. Likewise, the company’s customer base consists primarily of a small number of customers who purchase large quantities. Due to the receipt and timing of large orders, the Company experiences some quarter to quarter fluctuation in unit sales.

How does the Female Health Company make money?

Female Health Company manufactures markets and sells the FC2 female condom. Its product provides dual protection against unintended pregnancy and sexually transmitted infections, including HIV/AIDS.

Who is running the business and what is their background?

fhco karen

Karen L. King

Ms. Karen L. King serves as President, Chief Executive Officer of the Company, effective January 20, 2014.

Previously, Ms. King served as President of the Biologics and Bio-Solutions businesses of Royal DSM, a global provider of biopharmaceutical manufacturing technology and services, from September 2006 to September 2013.

Ms. King served as Executive Vice President of the Company from May 2006 to September 2006 and as Vice President, Global Development from August 2004 to May 2006, where she was responsible for sales, marketing, and business development.

Prior to August 2004, Ms. King worked at Baxter International since 1981, most recently serving as President of Pulse Nutrition Solutions, Inc., a subsidiary of Baxter that developed a line of nutritional products for consumer use.

 

m greco fhco

Michele Greco
Ms. Michele Greco serves as Chief Financial Officer, Vice President of The Female Health Company. Ms. Greco is a CPA with nearly 30 years of experience in public accounting with Ernst & Young LLP.

From January 2011 to February 2012, Ms. Greco provided consulting services to Systems Research Incorporated as a recruiter of finance professionals.

From March 2009 to January 2011, Ms. Greco was involved in a series of personal business ventures.

From 1994 to March 2009, Ms. Greco served as an audit partner with Ernst & Young LLP. Ms. Greco joined Ernst & Young LLP in 1981.

 

Financial Liquidity

FHC liq
A current asset is 4 times bigger than its current liabilities while quick ratio 2.8.  FHCO has no short-term and long-term debt.

fhccf

Female Health Company Cash Flow From Operating Activities

Operating cash flow of FHCO shows positive results in the past five years from 2009 to 2013 with an average of 7. The company has funds available to retire additional debts and invest new line of business. FHCO’s cash outflow from investing was bigger than cash inflow or they are using the capital to invest in the company. Financing cash flow 2009 to 2013 was also negative; their company is repaying its debts.

Female Health Company Free Cash Flow

fhcfcf

Free cash flow balances were all positive which means that the company is still capable of possible expansion thru investing to other companies. 

The Female Health Company Valuation

In our valuation of equity, we adopt the investment styles which we think applicable to the company. One valuation style is that seeks out undervalued companies whose stock prices are temporarily down, but whose fundamentals are sound in the long run. The philosophy was to buy stocks when prices fall and to sell when the price rises a great deal.

fhcsgr

Using the formula “Sustainable growth rate=ROE x (1- dividend payout ratio)”, it shows that the average SGR of FHCO was 20.71 percent. This is the measure of how fast a company can grow.

FHCO MS

Going forward, the margin of safety shows that the margin of safety was averaging 73 percent. Using a margin of safety, one should buy a stock when it is worth more than its market price. Further, the margin of safety protects the investor from both poor decisions and downturns in the market. The Margin of Safety requires knowing when the buying price is low in absolute terms, rather than merely relative to the market as a whole. This formula is used to identify the difference between company value and price, in other words, it is the difference between the real value of the stock and the market price. The result shows that it passed the 40 percent requirement and therefore, it is a good candidate for a Buy.

Female Health Company Relative Valuation Method

With this valuation method, is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash, flow, and the metrics) of the stock.

fhcrel

FHCO’s current book value per share was $1.09, with an average of $.77 per share, on the other hand, the price to earnings ratio in the trailing twelve months (ttm) was 11.9% per share and 19.02% average per share. Moreover, the earnings per share at ttm was $.33 and averaging $.34 while the return on equity at ttm was $34.43 and has an average of $ 49.47 per share.

The table below shows the summary of calculations of FHCO

fhco yield
The growth was 24 percent, while the dividend yield was 7.41 percent. Likewise, the calculated value of appreciation is $1.22 which is the required 40 percent. Further, the computed value dividend was .28 and the computed total value was $ 3.70. The price that the investor is willing to pay was $3.70. Furthermore, the market price of FHCO to date was $ 3.95 per share. Overall, if we compare this to the total value of $ 3.70 per share, it indicates that the stock is trading at undervalued prices.

Conclusion

Overall, it shows that FHCO is financially healthy based on its current resources. Further, the company has sufficient cash flow used for operating activities and high free cash flow. Furthermore, the margin of safety of 73 percent has passed the 40 percent requirement.

CITATION:

http://www.reuters.com/finance/stocks/companyOfficers?symbol=FHCO.O&WTmodLOC=C4-Officers-5
www.google.com/finance?q=NASDAQ%3AFHCO&ei=bC7oU4jWGseskgXM1YDQBA
http://femalehealth.investorroom.com/index.php?s=117

Researched and Written by Rio

Edited by Cris

ITT Educational Services Inc (ESI) Involves in Higher Education Program

August 7th, 2014 Posted by Company Research Report No Comment yet

ITT Educational Services Inc (ITT) Company Research

ITT Educational Services Inc

ITT Educational Services Inc is a provider of post-secondary degree programs in the United States.  Offered master, bachelor and associate degree programs to approximately 73,000 students, which has144 locations (including 141 campuses and three learning sites) in 39 states.

The company offered one or more of its online programs to students who were located in 48 states, helping them to prepare for careers in various fields involving their areas of study.

 

How does ITT Educational Services make money?

ITT Educational Services Corporation, Incorporated is one of the largest for-profit education companies and offers primarily 2-year and some 4-year degrees in a number of subjects. Their revenue is generated from the number of enrolling as they experienced significant growth in students. Part of company’s income derives from Federal financial aid programs.

Who is running the business and what is their background?

Kevin Modany

Kevin Modany

 

Mr. Kevin M. Modany is Chairman of the Board, Chief Executive Officer of ITT Educational Services Inc. He has served as Chairman since February 2008 and as Chief Executive Officer since April 2007. He also served as President from April 2005 to March 2009. From April 2005 through March 2007 he also served as Chief Operating Officer.

Mr. Modany has been a Director of ours since July 2006. Mr. Modany had previous experience in advising other companies on financial and operational matters, and he had involvement in the financial and operational aspects of the company before becoming Chief Executive Officer.

 

Daniel Fitzpatrick

Daniel Fitzpatrick

Mr. Daniel M. Fitzpatrick is Chief Financial Officer, Executive Vice President of ITT Educational Services Inc. He served as Senior Vice President, Chief Financial Officer from June 2005 through March 2009.

ITT Financial Liquidity

esi liq

The average current ratio was 1.35 which means that its current asset was higher by 35% compared to its current liability while quick ratio was also 1.22 averaged.

Debt to equity ratio was averaging  0.98 which means that ESI has minimal leverage.

And solvency ratio was 1.96 averaged in 5 years period which shows that the company was capable of paying its total obligations.

The liquidity of ESI lies in the normal level. The company’s current resources were just sufficient to continue its operation with excess funds for unexpected opportunities.

ITT Asset Management/Efficiency

esi eff

Inventory turnover ratio was 0. as this industry has no record of inventory. Receivable turnover ratio average was 26.99 times per period. This is equivalent to 15 days for its receivable to turn into cash. For some companies, this is the credit term given to their respective customers. The payable turnover ratio has an average of 20.60 times for the company to pay its obligations or 47 days for its suppliers to pay.

Looking at the above data, the company’s current resources, as well as its total asset, is efficient enough in generating sales.

ESI is not highly indebted as calculated in the debt ratio. However, if compared to the owners’ equity it reflected an average of .98, this is because the company has not many capital investments.

ITT Property, Plant & Equipment

esi ppe

Gross investment in PPE average in five years was 340.20. It showed that the company was yearly expanding thru investment in fixed assets. Accumulated depreciation average was 150. It is a cumulative cost allocated to a tangible asset over its useful life. So, the net value of the PPE after deducting its accumulated depreciation was 190.20.

To calculate it using an estimated life of 5 years, the average used life of the said fixed asset was 2.2 years already. And it was still a remaining 2.8 years to use before it is fully depreciated.

ITT Income

esi rev

Revenue was 1015, 1319, 1597, 1500 and 1287 with trailing twelve months of 1108. Shown here, the gross revenue was yearly increasing from 2008 to 2010 but pulled down from 2011 to 2012. Its yearly growth rate was 30, 21,-.06 and -.14 percent.

Its operating income was 328, 489, 614, 507 and 233 with ttm of 104. This is the amount after deducting the operating expenses.

Income before and after tax have the same trend, continuously increasing until 2010 but dropped a little in 2011 while 50 percent in 2012. Its yearly growth rate was .48, .25, -.18 and -.55 percent respectively.

The net income was consistent going up in 2008 to 2010 but showed a slight decrease in 2011 and dropped by more than 50 percent in 2012. The company needs to be closely monitored.

ITT Expense

esi exp

The cost of revenue was 384, 450, 538, 553 and 539 with ttm of 500 which is equivalent to 37 percent average of gross revenue. It has the same trend with revenue.

Operating expense was 304, 381, 445, 440 and 515, with of ttm of 503, which is equivalent to 31, 30, 29, 28 and 29 percent respectively of revenue. While another expense the trailing twelve months was 43 or 4 percent of revenue. And total expense was  436, 573, 687, 642 and 609, with trailing twelve months of 546. This represents 49 percent of gross revenue.

Total expenses of the company are quite high especially in the year 2012 which unmatched its revenue. So, the company needs to control its expenses.

ITT Margin

esi marg

Gross margin was .62, .66, .66, .63 and 58, trailing twelve months was .55, this is the percentage result of gross profit over revenue.
Operating margin was 32.3, 37.1, 38.4, 33.8 and 18.1 percent, trailing twelve months was 9.4 which shows a continuous increase from 2008 to 2010 but slightly dropped by 5 percent in 2011 and 17 percent in 2012.

Net profit margin was 20, 23, 23, 21 and 11 percent, with ttm of 17. This is the bottom line of ESI’s business transactions expressed in percentage.

ITT CASH FLOW

esi cf

Operating cash flow from 2008 to 2012 was 173, 301, 559, 388 and 105 ttm was 115. It shows positive results throughout the five years period, although up and downtrend.

Net cash used in investing activities from 2008 to 2012 was 129, -64, -99, -46 and 123. Its trailing twelve months was 133. It shows negative results except in 2008 and 2012 because cash inflows were greater than cash outflows which are mostly investments.

Cash Flow from Financing Activities

Financing cash flows refer to cash received from the issue of debt and equity or paid out as dividends, share repurchases or debt repayments.

Net cash used for financing activities of ESI from 2008 to 2012 was -83, -334, -424, -277 and -211, with trailing twelve months of -245. Its cash inflows include common stock issued, the excess tax benefit from stock and other financing activities while cash outflows include repurchased of common stocks.

Financing cash flow showed a negative balance since its cash outflow transaction was more than its cash received.

Free Cash Flow

esi fcf

Free cash flow from 2008 to 2012 was 137, 273, 526, 357 and 87 which show positive balance throughout the five years period. It indicates that the company has enough funds to continue its operation and expansion.

Based on the overall performance of ESI, the company was able to meet its financial and operational commitments.

Relative Valuation Method for ITT

esi reval

The current book value per share was $5.44, with an average of $5.62 per share, while the price to earnings ratio in the trailing twelve months (ttm) was 5.5% per share and 8.28% average per share. Moreover, the earning per share at ttm was $2.61 and averaging $7.31 while the return on equity at ttm was $36.94 and has an average of $155.6 per share.

Overview, it indicates that ESI has a good measure of profitability it also shows that the company was able to generate a favorable and stable return on the invested capital.

The table below shows the summary of calculations of ESI using this method.

The growth was 5 percent while the dividend yield was 0. The calculated value of appreciation is $15.64. Further, the computed value dividend was 0 and the computed total value was $ 23.46. The price that the investor is willing to pay was $23.46. Furthermore, the market price of ITT/ESI to date was $ 7.82 per share. If we compare this to the total value of $ 23.46 per share, it indicates that the stock is trading at undervalued prices, therefore, it is a “Buy”.

Conclusion:

To sum it all, the results show that ITT/ESI is financially healthy as far as its current resources are concerned in spite of the fact that the stock price is unstable due to issues like low net income and weak cash flow.

Income wise, though it is decreasing lately, the company is still continuously generating income, with fairly controlled expenses which resulted in a fair profit margin. When it comes to generating cash flow, the company has sufficient cash flow used for operating activities and moderate free cash flow.

Furthermore, our investment valuation method shows that ESI is still undervalued.

CITATION:

http://www.ittesi.com/index.php?s=45 
http://www.reuters.com/finance/stocks/officerProfile?symbol=ESI&officerId=618323

Researched and Written by Rio

Edited by Cris

Note:

Research Reports can be found under the company tab.