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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 -7.64 percent and -3.34 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.

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

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

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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 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.

Tesla Motors Inc

Tesla Motors Inc (TSLA) Investment Valuation

April 13th, 2014 Posted by Deep Analysis No Comment yet

TESLA MOTORS INC (TSLA) was founded in 2003 by a group of Silicon Valley engineers who prove that electric vehicles are awesome.

Tesla logored

About

Tesla Motors Inc (TSLA) design, develop, manufacture and sell high-performance fully electric vehicles and electric vehicle powertrain components. They have operationally structured their business in a manner that they believe will enable them to rapidly develop and launch advanced electric vehicles and technologies. In addition, TSLA believes their electric vehicles are engineered by expertise, and their operational structure differentiates them from incumbent automobile manufacturers.

Moreover, Tesla Motors uses proprietary technology, world-class design, and state-of-the-art manufacturing processes to create a new electric vehicle capable of highways. They used an innovative distribution model that is Company-owned sales and service centers. This approach allows them to maintain the highest levels of customer experience and they make sure that their customer needs are fulfilled. They believe their operational infrastructure provides them with a competitive advantage compared to ordinary automobile manufacturers.

Incorporation

Tesla Motors Inc (TSLA.O), Tesla Motors, Inc. (Tesla), incorporated on July 1, 2003.  The Company is also producing commercially an electric vehicle, the Tesla Roadster, aside from developing it’s Model S and vehicle manufacturing capabilities at the Tesla Factory. Tesla is designing, developing and manufacturing lithium-ion battery packs, electric motors, gearboxes, and components both for its vehicles and for its original equipment manufacturer customers.

Manufacturing Activities

The manufacturing activities are manufactured at the companies electric powertrain manufacturing facility in Palo Alto, California and at the Tesla Factory. Moreover, the Company also provides services for the development of electric powertrain components and sells electric powertrain components to other automotive manufacturers.

Tesla has provided development services and powertrain components to Daimler AG (Daimler) for its Smart for two and A-Class electric vehicles. The Company has received an initial purchase order for the development of a powertrain system for an additional Mercedes Benz vehicle from Daimler.

How does the company make money?

Tesla Motors Inc makes the best electric cars and electric powertrains in the world. Tesla technology has the most efficient path to future supportable energy. Hybrids no. Hydrogen no. Hype no. The Tesla electric drivetrain offers a radically different experience. The driver, the car, and the environment connect in ways they’ve never connected before.

On the other hand, the goal of Tesla is to increase the world’s transition to electric mobility with a full range of increasingly affordable electric cars. further, the Company is bringing on the change in the industry. According to Tesla vehicles and EVs powered by Tesla are fun to drive and environmentally responsible.

TESLA PRODUCTS 

ModelS 2015-tesla-model-x

MODEL S AND MODEL X

The Model S and Model X are the next steps in Tesla’s “Secret Plan” to increase the world’s transition to electric mobility. Model S is now in production!

Tesla Motors Inc recognized its revenue from the sales of Model S and the Tesla Roadster, including vehicle options, sales in accessories and services.

THE TESLA ROADSTER

The Tesla Roadster was seen used in early 2008 as a car with no equal.

TSLA Roadster

The company has sold approximately 2,500 Tesla Roadsters to customers in over 30 countries, generally in North America and Europe. The production of Tesla Roadster flows at Lotus Cars Limited in January 2012.

Gen III

Tesla has announced their intent to develop a third generation electric vehicle, to which they refer as “Gen III”, to be produced at the Tesla Factory. In addition, they also intend to offer this vehicle at a lower price point and expect to produce it at higher volumes than their Model S. They expect that this vehicle will be produced in approximately three years.

Powertrain Development and Sales

Moreover to their own vehicles, they also design, develop, manufacture and sell electric vehicle powertrain components to other automotive manufacturers. Tesla has provided development services and complete powertrain systems and components to Daimler for its Smart for two, A-Class, and B-Class electric vehicles.

Stationary Energy Storage Applications

In 2013, Tesla developed stationary energy storage products for use in homes, commercial sites and utilities. They plan to ramp sales of these products in 2014.

Tesla’s Batteries and Powertrains will help lessen global dependence on petroleum-based transportation and drive down the cost of electric vehicles. By cooperating with other car manufacturers, they hope to increase more electric cars on the road.

TSLA product8  TSLA product12   TSLA product7

PLUG IN Anywhere. Seriously. Where there’s an outlet, you can charge. The type of outlet or charging station will determine how fast you can charge. Every TESLA AND EV using their technology is a step towards making increasingly affordable electric cars available to the consumer. It’s more than electric, it’s Tesla.

ACCESSORIES

Tesla has a variety of accessories, here are some of their product accessories.

TSLA product4TSLA product9tesla-energy

RISK FACTORS TO CONSIDER

There are certain risks that must be carefully considered, they may be unable to sustain their current level of production and deliveries of Model S or increase production and deliveries in line with their plans, both of which could harm their business and prospects. This statement was written in the financial report of Tesla on its annual 2013 SEC filings.

Who is running the Business?

The two most important people behind Tesla Motors Inc was the Chief Executive Officer and the Chief Financial Officer.  Let us find out what makes them great.

Elon MuskCo-Founder, CEO, and Product Architect

ElonMusk1

Elon Musk is the CEO and Product Architect of Tesla Motors and the CEO/CTO of Space Exploration Technologies (SpaceX).

Elon has overseen product development and design from the beginning, including the all-electric Tesla Roadster, Model S and Model X. Transitioning to a maintainable energy economy, in which electric vehicles play a crucial role, has been one of his central interests for almost two decades, beginning from his time as a physics student working on ultracapacitors in Silicon Valley.

  • Elon is the chief designer, overseeing the development of rockets and spacecraft for missions to Earth orbit and ultimately to other planets at SpaceX.
  • Moreover, in 2008, SpaceX’s Falcon 9 rocket and Dragon spacecraft won the NASA contract to provide a commercial replacement for the cargo transport function of the Space Shuttle, which retired in 2011.

More about SpaceX

  • The SpaceX Falcon 1 was the first privately developed liquid fuel rocket to reach orbit.
  • In 2010, SpaceX became the first commercial company to successfully recover a spacecraft from Earth orbit with its Dragon spacecraft.
  • SpaceX became the first commercial company to dock with the International Space Station and return cargo to Earth with the Dragon in 2012.
  • In addition, Elon is the non-executive chairman and principal shareholder of SolarCity, which he helped create. SolarCity is now the leading provider of solar power systems in the United States.
  • Prior to SpaceX, Elon co-founded PayPal, the world’s leading Internet payment system, and served as the company’s Chairman and CEO.
  • Before PayPal, Mr. Musk co-founded Zip2, a provider of Internet software to the media industry.
  • Moreover, Elon has a physics degree from the University of Pennsylvania and a business degree from Wharton.

Deepak AhujaChief Financial Officer 

Deepak CFO

Deepak brings more than 15 years of global automotive finance experience to the Tesla team. As Chief Financial Officer, Deepak brings invaluable insight into a well-versed industry

  • Prior to joining Tesla Motors, Deepak was the Controller of Small Cars Product Development at Ford with the goal of bringing several exciting fuel-efficient automobiles to the North American market.
  • Previously, Deepak was CFO for Ford of Southern Africa, a $3 Billion subsidiary where he oversaw the finance, legal and IT functions.
  • Prior to that, Deepak served as CFO for Auto Alliance International, a joint venture between Ford and Mazda with over $4 billion in revenue.

Moreover,

  • His career at Ford included assignments in all aspects of the business, including Manufacturing, Marketing, and Sales, Treasury, Acquisition, and Divestitures.
  • Before joining Ford, Deepak worked as an engineer for Kennametal, Inc. near Pittsburgh, PA for almost 6 years and developed two new ceramic composites cutting tools for machining of aluminum alloys in aerospace and automotive industries.
  • Deepak holds a bachelor’s and master’s degrees in materials engineering from Banaras Hindu University and Northwestern University, respectively and an MBA from Carnegie Mellon University.
  • In 2010, following Tesla’s successful IPO, Deepak was named Silicon Valley Business Journal’s CFO of the Year.

Value Investing Guide on Tesla Motors Inc 

Liquidity and Solvency

A solvent company is one that owns more than it owes; in other words, it delivers a positive net worth and a manageable debt burden.

Liquidity

Let us review the liquidity of Tesla Motors Inc. The key ratios are the current and quick ratios. It shows that the average current ratio of Tesla was 1.61, although the rule of thumb is 2.0, it tells us that the company appears to have sufficient current assets to meet its short-term debt obligations when it falls due.

Quick Ratio

In addition, the quick ratio was averaging 0.99, the rule of thumb is 1.0, meaning, Tesla has the capability of paying its short-term financial obligations using their liquid assets.  Current assets by definition are convertible into cash in less than one year. You will notice that in 2012, the current ratio decreased by 50.26 percent from 2011, this is due to higher expenses associated the expansion of their network and service infrastructure as well as the growth of their business in general. It tells us further that the company is not struggling financially.

Solvency

Now, let us walk a little further and find out the solvency ratio of Tesla.  Solvency ratio was averaging negative 0.90 because the company suffered losses for the past three years of its operations. From 2010 to 2012, Tesla is having a hard time meeting its long-term debt. Although the ratio was negative, the yearly trend shows a favorable improvement. In 2013, the ratio was positive at 0.05, meaning its net income plus depreciation and amortization were greater by 5 percent against its total debt or in other words, the ratio in 2013 has increased by 1,492 percent from 2012. Therefore, it means that Tesla has now the ability to meet its long-term debt.

Leverage

In addition, the leverage ratio was averaging 1.44 or 144 percent for the past 4 years. It means that Tesla has 144 percent total debt against its shareholders’ equity. In other words, the company is using more debt or 44 percent above its shareholders’ equity as part of its capitalization structure. Since borrowing money is very common in a capital-intensive company such as automobile manufacturers, Tesla is using debt almost half above its equity for its capital investments. Moreover, the financial leverage ratio was averaging 3.41, it tells us that total assets were 341 percent against shareholders’ equity.

Tesla Motors Inc Income Statement

Revenue

Explanation

The table above shows that the revenue trend from 2009 to 2013 was 1,697 percent increased. On the other hand, although, net income was negative for the past 5 years, 2013 shows a favorable result with an increase of 435 percent from 2012. During 2012, Tesla Motors Inc has suffered a large loss of $396 million, a little more than half of that in 2011, because of the expansion in retail network and the launching of Supercharger network in California which brought additional expenses.

Interpretation

However, despite the negative earnings, the growth in 2013 was satisfactory. Tesla shows the possibility of profitability in the future as they intend to commence deliveries to China in the spring of 2014. In addition, they plan to significantly expand production capacity for Model S and Model X, and various plans they intend to do in the succeeding years. This indicates that Tesla Motors Inc has the capacity to generate more revenue in the future.

Profitability Ratios

Let me guide you another step in the profitability ratios of Tesla Motors Inc. The gross margin of Tesla Motors Inc was averaging 19 percent. To explain further, the cost of goods sold was averaging 81 percent, these are the expenses required to manufacture the products. The operating margins were negative, however, the ratio was improving year over year. The operating margins, not only include the cost of goods sold but also the selling and administrative expenses as well as depreciation. It is the income associated with the ongoing operations of the company’s core business.

Net Margins

Tesla’s net margins were also negative for the past 5 years, however, the ratio was favorably improving. Since Tesla Motors Inc is young and in the process of developing its products, their cost of revenue was high. It is anticipated that in 2014 its net income would be positive and will show a favorable result due to its annual trending.

Tesla Motors Inc Cash Flow Statement

The cash flow margin of Tesla was negative from 2009 until 2012 due to its negative net earnings. However, in 2013, it shows a positive sign of 12.82 percent. The free cash flow and operating cash flow was also negative from the past 5 years, except in 2013, where the operating cash flow shows a positive sign of $258 million. Moreover, during 2012, the company has the highest loss from its 5 years of operation due to the expansions and launching of Supercharges network expenses, aside from these expenses they also incurred significant amount in advertising expenses.

Explanation

Although Tesla Motors Inc suffered losses from 2009 to 2012, 2013 shows a favorable sign of improvement. For a young growth company, it is anticipated that the first few years of its operation will be a loss or breakeven.  It indicates that the company is capable of generating revenue from its production and it will be sufficient in the next succeeding years.

The Investment Valuation of Tesla 

This investment valuation was prepared in a very simple and easy way to evaluate a company for business valuation.  My basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement.

The Discounted Cash Flow (DCF) Approach

Discounted Cash Flow (DCF) is a method of valuing the intrinsic value of Tesla Motors Inc. DCF calculates the value today based on cash projections that Tesla could make available to investors in the future. It is called “discounted” because of the concept that the value of the dollar to be received in the future is less than the value of a dollar on hand 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 from 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 equation above is the basic discounted cash flow (DCF) model.

Summary

TSLA DCF

The discounted cash flow indicates a present value of $247.9 million, at a rate of 15 percent. The calculated future value was $498.62 at the end of 5 time periods or 5 years. In other words, the future value of $498.62 is equal to the present value of $247.90.

The future value of money is how much it will be worth at some time in the future. In other words, it shows how much an investment will be worth after compounding for so many years.

The Relative Valuation Method of Tesla

There are two basic methods of valuing stocks. The most frequently used method is a relative valuation, which compares a stock’s valuation with those of other stocks or with the company’s own historical valuations.

The book value growth rate of Tesla Motors Inc. was 20 percent from 2010 to 2013. The calculated book value in 5 years’ time was $13.48 per share at $1.6 billion. Moreover, the earnings per share and the return on equity were negative for the past 5 years due to negative net earnings, however, it is trending positively in a high percentage significantly in 2013.

Conclusion

Overview, it indicates that Tesla Motors Inc is capable of producing more revenue, and has sufficient current assets to meet financial obligations. The company shows significant improvements year over year when it comes to its earnings and productions. Since, Tesla is a young, high-growth company, therefore, I recommend a Buy on the stock of Tesla Motors Inc.

Part II

After the above information was published, I perceived that the company needed to be revisited and some further insights needed to be explained.  It was decided that it is better to continue with the analysis for a deeper aspect.

This company updates are an additional analysis of Tesla Motors Inc with regards to its historical data. This analysis is significant to include with your investment decision on Tesla.

Tesla’s Run Rate

Tesla Motors Inc has made significant progress in increasing its production level aided by its manufacturing, design and quality improvements and the strong efforts from their suppliers. The company expects production to increase from 600 vehicles per week presently to about 1,000 vehicles per week by the end of 2014 or from 31,200 vehicles to 52,000 vehicles annually, as they expand their factory capacity and address supplier bottlenecks. This was taken in the 2013 Tesla SEC filings. In consideration of Tesla’s working capital of 2013, it has a tremendous increased from 2012 to 4321 percent.

Problems regarding supplier

According to Elon Musk in one of his interview, that, they planned to increase their cash and cash equivalent for the purposes of unanticipated issues or problems regarding the suppliers’ delay in the delivery of the materials needed in their production. The management will make it possible to maintain its full production capacity without delays and sacrificing the quality of their products.

Risk Factors

There are risk factors that could materially affect Tesla’s financial condition and future results. Here are some of the risk factors that Tesla Motors Inc is facing.

Model S

Model S contains numerous purchased parts which they source globally from over 300 direct suppliers, the majority of whom are currently single source suppliers for these components. If these single suppliers fail to deliver Tesla’s requirements on a timely basis at a competitive price, could suffer delays, possibility of losses, might incur higher cost of revenue, in which case, Tesla may not be able to sustain their current level of production and deliveries of Model S or increase their production as planned, which may affect the operating results of the company as they continue to focus on supplier capabilities and constraints. Tesla has not qualified alternative sources for most of the single sourced components used in their vehicles and they do not maintain long-term agreements with a number of its suppliers.

Maintaining desired quality levels

Tesla’s ability to use their manufacturing processes as planned for volume production while maintaining their desired quality levels and efficiently making design changes to ensure consistently high quality since the production process is still maturing, due to the new product, new equipment, and new employees.

Moreover, they have limited experience in the high volume delivery of their Model S vehicles. They have just started their deliveries in Europe and may face difficulties meeting their delivery and growth plans in Asia and other right-hand drive markets later this year, which may impact their ability to achieve their worldwide delivery goals.

Tesla has introduced a number of new manufacturing technologies and techniques. Model S has a number of new and unique design features, such as a 17-inch display screen, newly designed retractable exterior door handles and a panoramic roof, each of which poses unique manufacturing challenges.

Production and deliveries

Model S production and deliveries will continue to require significant resources and they may experience unexpected delays or difficulties. It may harm their ability to maintain full manufacturing capacity for Model S, or cause them to miss planned production targets, any of which could have a material adverse effect on their financial condition and operating results.

Moreover, in October 2013, they entered into an amendment to their existing supply agreement with Panasonic Corporation in order to address their anticipated short- to medium-term lithium-ion battery cell needs. While Tesla expects that this supply agreement, as amended, will provide them with sufficient cells for the next few years. They may not be able to meet their long-term needs, including for their third generation electric vehicle, which they refer to as “Gen III.” And other programs they may introduce, without securing additional suppliers or other sources for cells. If Tesla Motors Inc cannot secure such additional suppliers or sources, they might experience production delays, which could have a material adverse effect on their financial condition and operating results.

Production Costs for Model S

Tesla’s production costs for Model S were high initially due to start-up costs at the Factory, manufacturing inefficiencies including low absorption of fixed manufacturing costs, higher logistics costs due to the immaturity of their supply chain, and higher initial prices for component parts during the initial period after the launch and ramp of Model S. As they have gradually ramped production of Model S, manufacturing costs per vehicle have fallen.

The Executive Compensation

I would like to cite the compensation of Tesla’s executives’ as I find it significant to include in this article. The information below shows the total compensation of Tesla’s executives in 2012, the 2013 report on compensation will be included in their 2014 financial statement.

TSLA executive compensation

Facts:

The total cash compensation is comprised of yearly Base Pay and Bonuses. Further, the total aggregates grant date fair value of stock and option awards and long term incentives granted during the fiscal year. On the other hand, the Other Compensation-like awards that are not applicable to the other categories.

The board of directors of Tesla has a fortune worth $6.8 billion, deserves a generous incentive package because the company wants to “appropriately reward the CEO’s previous and current contributions and to create incentives for the CEO to continue to contribute significantly”, gathered from Tesla’s SEC filings.

News about Tesla

Furthermore, the latest news from AutoGuide.com, in an article entitled Tesla CEO Took 99.9 Percent Pay Cut in 2013, I quote, “In 2013, Tesla CEO Elon Musk received total compensation of $69,989 with the value of stock and options totaling just $36,709. That’s a sharp contrast compared to his total compensation from 2012 when the CEO received $78.2 million in total compensation. His value of stock and options from 2012 was $78.1 million.”

Liquidity Ratio in 2014 Q1

The current ratio and the quick ratio of Tesla Motors Inc in the trailing twelve months 2014 were 1.04 and 0.72, respectively.

Discounted Cash Flow (DCF) Method 

Estimating the absolute value of a company’s stock is not an easy way to do because you have to consider a lot of factors. However, the discounted cash flow is one of the methods that some analysts commonly used to determine stock prices in a different and sound way. Further, I review the trend in the company’s historical five-year financial data and its ability to produce or manufacture its products. And, I came up with the following figures presented in the table below. Slowly, I will walk you through step by step process on the explanation and interpretation of the data.

Projected Quarterly 2014

TSLA Projected Q

The above table shows the calculated projected quarterly 2014 revenue of Tesla Motors Inc. According to Elon Musk, the CEO of Tesla Motors Inc, in its 2013 financial report presentation, that they are capable of producing 40,000 units or more of Model S by the end of 2014. Above shows, the projected total number of units was 42,250. The total projected revenue is $3.8 billion ends of 2014. Now, let us walk further, and compute the present value of $3.8 billion.

The formula for the present value is:

Present Value

                                       Or = PV = FV / (1 + r) n

Where:

PV – Present Value

FV – Future Value

r – Rate of Return

n – Number of Periods

Therefore, based on the table above, where the future value at the end of 2014 was $3,832,920,000. Now, we are going to calculate the Present Value discounted at 15 percent.

PV = FV/ (1+0.15) ^1

= $3,832,920,000 / (1+0.15) ^1

$3,832,920,000 / 1.15^1

        $3,332,973,913.04

The calculated present value of the projected 2014 cash flow is $3,332,973,913.04 discounted at 15 percent. In other words, the future value of $3,832,920,000 is worth $3,332,973,913 today.

Projected Cash Inflows

Moving forward, I have prepared a yearly projected cash inflow for five years.

TSLA Projected A

Explanation

The projected total revenue including service income by the end of 2014 was $3.8 billion. On the other hand, the projected number of units at the end of five years (2019), was 259,521 and the total revenue inclusive of service income was $23.54 billion. Since this method of valuation tries to work out the value today of the projected cash flows in the future, let us calculate the present value of $23.54 billion by the following formula:

PV = FV / (1 + r) n

PV = $23,543,711,100 / (1 + 0.15) ^5

= $23,543,711,100 / 1.15 ^5

$23,543,711,100 / 2.011357188

          $11,705,385,421.50

Explanation

Therefore, the calculated present value of the projected cash inflows in the year 2019 of $23,543,711,100 discounted at 15 percent is worth $11,705,385,421.50 today. This is also called the discounted value or the current worth of future value. Total projected growth from 2014 to 2019 was 514 percent. Moreover, the present market price to date, May 5, 2014, was $210.91 per share. If we divide the discounted cash flow value with its present number of outstanding shares, the fundamental or intrinsic value is $98.36 per share. The stocks of Tesla are overvalued by 114 percent. In valuing a young high growth company, in most cases, the results will give us an overvalued price.

Free Cash Flow to the Equity (FCFE)

FCFE is often used to determine the value of a company.  It is a measure of how much cash is available to the equity shareholders’ after all expenses, reinvestment, and debt is paid, and a measure of equity capital usage, according to Investopedia.

Calculation:

FCEE = Net Income – (Capital Expenditures – Depreciation) – Changes in Non-cash Working Capital – (Principal  Repayments – New Debt Issues)

or alternatively,

FCEE = Cash from Operations – (Capital Expenditures – Depreciation) + Net Borrowing.

The table below is the results of my calculations, in which I have used the alternative. Let us find out the results.

TSLA FCEE

Explanation

The free cash flow to the equity of Tesla Motors Inc was improving year over year. It shows that the company is managing its resources effectively. In addition, it tells us how well Tesla is managing its debt load. Tesla’s first two years, 2009 and 2010 shows negative results, which imply that Tesla is in the early stage of a growth outbreak. Hence, the succeeding years, 2012 and 2013 increased dramatically by 160 and 46 percent, respectively.

Sources of Cash

The company’s sources of cash include cash from the deliveries of Model S, customer deposits, the sale of regulatory credits. And cash from the provision of development services and sales of powertrain components and systems. Due to problems incurred recently regarding some suppliers’ inability to supply on time. The reason why Tesla planned to have adequate sources of liquidity to continue on with their current plans. Moreover, to fund their ongoing operations, continue research and development projects, and for expansions.

Tesla’s Industry Peers in China – BYD

BYD was established in January 2003 and headquartered in Shenzhen, China. The Company specializes in IT, automobile, and new energy. Further, BYD is the largest supplier of rechargeable batteries in the globe. Moreover, it has the largest market share for Nickel-cadmium batteries, handset Li-ion batteries, cell-phone chargers, and keypads worldwide. Furthermore, HK. BYD IPO price is HK$10.95 per share. It was the highest IPO price among all of the H-share companies at that moment.

Here is some basic information on BYD Company Ltd.

TSLA BYD

Explanation

The current price of BYD was $5.38, it is lower by 88 percent against its total value of $43.52. The stock price of BYD was undervalued. However, its liquidity ratios were very low. Consequently, it indicates that BYD is having a hard time paying its short term and long term financial obligations. In addition, its debt to equity ratio was 0.20 or 20 percent. Moreover, the calculated book value in year 5 was $6.90.

The bottom line 

Tesla Motors Inc is growing very fast. The market is anticipating a $3.65 billion revenue at the end of 2014 with low profits. For long-term shareholders’ it will not be easy to forecast whether they will be able to make a decent return. For the reason that the market somehow can bake the stock regardless, they will make a good profit or not. However, for short-term investors, Tesla may be an appropriate investment.

CITATION

  1. http://www.reuters.com/finance/stocks/companyProfile?symbol=TSLA.O
  2. http://ir.teslamotors.com/
  3. http://www.teslamotors.com/about
  4. http://www.teslamotors.com/executives
  5. Elon Musk interviews, articles, and blog posts
  6. http://quote.morningstar.com/stock-filing/Annual-Report/2013/12/31/t.aspx?t=XNAS:TSLA&ft=10-K&d=00cab30124b955d581c89f0ff007ad13
  7. https://www.youtube.com/watch?v=SE6GF1Y5WHE
  8. http://www1.salary.com/TESLA-MOTORS-INC-Executive-Salaries.html

Researched and Written by Criselda

Twitter: criseldarome

cf-industries-holdings-inc-cf

CF Industries (CF) The World Leader In Fertilizer

February 26th, 2014 Posted by Deep Analysis No Comment yet

CF logo

CF Industries Holdings Inc (CF) is a manufacturing and distributor of fertilizer around the globe and the second largest producer of nitrogen fertilizer globally and the number three largest producer of phosphate fertilizer of all public companies. Further, the company is operating and owns a world-scale nitrogen and phosphate plants.

How does the company make money?

CF Industries produces nitrogen fertilizer which is vital for healthy plant growth and for yielding high crop, especially for corn, cotton, and wheat. Phosphate fertilizer helps plants generate necessary sugars, germinate seeds, and build strong root structures. Nitrogen is also produced for industrial and environmental applications.

Primary nitrogen products produced by CF Industries are:

Urea Ammonium Nitrate (UAN) Solution

  • Anhydrous Ammonia
  • Granular Urea
  • Ammonium Nitrate
  • Other Urea Diesel Exhaust Fluid (DEF)

Primary phosphate fertilizers produced by CF Industries are:

  • Diammonium Phosphate (DAP)
  • Monoammonium Phosphate (MAP)
  • MAPplus Sulfur Enhanced Monoammonium Phosphate

Custom fertilizer products include Aqua Ammonia, UAN with   Sulfur, DAP – Turf grade, and others.

CF product2

Man-made fertilizers have had a great influence on farm productivity and food availability.

Who is running the Business?

The CF Industries organization is headed by a team of executives who have a great experience building and growing successful companies. These executives are supported by more than 2,400 CF Industries employees at the company’s headquarters, manufacturing, distribution, and other locations.

W. Anthony Will, President, and Chief Executive Officer, CF Industries Holdings, Inc.

CF Tony Will

Anthony Will has served as the president and chief executive officer and as a member of the board of directors of CF Industries Holdings, Inc. since January 2014.

 

 

 

Special events:

  • Mr. Will joined CF Industries in 2007 as the company’s first vice president, corporate development.
  • He was promoted to vice president, manufacturing and distribution in 2009 and senior vice president, manufacturing, and distribution in 2012.
  • He has also served as the chairman, president, and chief executive officer of Terra Nitrogen GP, Inc. (TNGP), a wholly-owned subsidiary of CF Industries Holdings, Inc. and the sole general partner of Terra Nitrogen Company, L.P., a publicly-traded producer of nitrogen fertilizer products, since January 2014.
  • He has been a member of the TNGP board since 2010.
  • Prior to joining CF Industries, Mr. Will was a partner at Accenture Ltd., a global management consulting, technology services, and outsourcing company.
  • Earlier in his career, he held positions as vice president, business development at Sears, Roebuck and Company and vice president, strategy and corporate development at the Fort James Corporation.
  • Prior to that, Mr. Will was a manager with the Boston Consulting Group, a worldwide management consulting firm.
  • Moreover, Mr. Will holds a B.S. degree in electrical engineering from Iowa State University
  • And also an M.M. degree (M.B.A.) from the Kellogg Graduate School of Management at Northwestern University.
  • He serves on the board of directors and the executive committee of The Fertilizer Institute and is a member of the Business Roundtable.

Dennis Kelleher, Senior Vice President, and Chief Financial Officer

CF Dennis Kelleher

 

 

 

Special events:

  • Kelleher joined CF Industries in August 2011.
  • Prior to that, he had been vice president, portfolio, and strategy for BP’s upstream business.
  • Earlier, he served as a chief financial officer for Pan American Energy, LLC, and in other financial positions in the operations of BP PLC and Amoco Corporation.
  • In addition, he is a certified public accountant
  • And has a Bachelor’s degree in accounting from the University of Illinois and an MBA from Northwestern University.

CF Industries Value Investing Guide

The analysis below was created as your value investing guide.

Liquidity and Solvency

CF liquidity

The table above shows that the current ratio was averaging 2.31 and the quick ratio was averaging 1.84. The rule of thumb is 2.0 and 1.0, respectively. It indicates that the company has the capability of meeting its short-term financial obligations when the due date comes. On the other hand, it tells us that CF Industries Holdings Inc has strong liquidity. The current ratio and quick ratio in 2010, went down by 47 percent, due to the acquisition of properties.

Moreover, the solvency ratio was averaging 48.93. It shows that CF Industries Holdings Inc is able to sustain $0.49 for every $1 total debt. The highest ratio was in 2008, and the lowest was in 2010. The leverage ratio was averaging 14 percent, total debt was 14 percent of the shareholders’ equity. CF Industries has the ability to pay its long-term financial debt. On the other hand, financial leverage was averaging 1.87 or 187 percent. This is the percentage of assets against the shareholders’ equity. Overall position, CF Industries Holdings Inc has a solid financial position.

Profitability Ratios

CF profitability

CF Industries has an acceptable gross margin, operating margin, and net margins were averaging 39.58, 36.0 and 20.74 percent, respectively. Although the ratios are somewhat erratic in movement, overall, the ratios increased by 47, 49 and 64 percent, respectively. The company has not suffered any losses from the last 5 years of its operation. Overall view, CF Industries is financially stable and sound.

The Cash Flow Statement

CF CF

  • The cash flow margin was stable, averaging 0.88 percent.
  • The ratios were erratic in movement.
  • Free cash flow has an average of $12 million.
  • On the other hand, the operating cash flow was lower in 2010, due to the purchased of properties, as mentioned earlier.
  • CF Industries Holdings, Inc has not suffered any negative ratios and negative cash flows. It tells us that the company was profitable.

CF Industries Investment Valuation

The Investment in Enterprise Value

Enterprise Value (EV) is the first step in this valuation. The concept of enterprise value is to calculate what it would cost to purchase an entire business. In other words, the Enterprise Value (EV) is the present value of the entire company.  EV takes into account the balance sheet, so, it is a much more accurate measure of a company’s true market value than market capitalization.  Significantly, it assesses the value of the productive assets that brought about its product or services, both equity capital (market capitalization) and debt capital.

CF EV

The enterprise value of CF was averaging $807 per share and the market capitalization was averaging $817 per share. The total debt was 16.22 percent and the cash and cash equivalent was 14.59 percent of the enterprise value, therefore, buying the entire business of CF, the investor would be paying 98.37 percent of equity and 1.63 percent of its total debt. In addition, the takeover price to date, February 25, 2014, was $14.73 billion at $241.43 per share. The market price to date was $242.79 per share.

Margin of Safety

In the calculation, the enterprise value was used because it takes into account the balance sheet, so it is considered a much more appropriate measure of the company’s true market value rather than the market capitalization.  Let us walk through the margin of the safety table.

CF MOS

The margin of safety was averaging 74 percent and the intrinsic value was averaging $1,376 per share from 2009 to 2013, respectively. It indicates that it has a greater margin of safety against future uncertainty and a greater stock’s resilience to market downturns.

Intrinsic Value

Here is the calculation for the intrinsic value.

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)

EPS, the company’s last 12-month earnings per share; G: the company’s long- term (five years) sustainable growth estimate; 9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham proposed an 8.5, but I changed it to 9); 2: the average yield on high-grade corporate bonds.

CF IV

Intrinsic value was averaging $1376.26 per share and the earnings per share were averaging $18.14 from 2009 to 2013. The annual growth rate was 67.10 percent. The term earnings per share (EPS) represent the portion of a company’s earnings, fewer taxes, and preferred stock dividends that are allocated to each share of common stock. The computation of EPS is:

CF EPS

On the other hand, the sustainable growth rate (SGR) is a measure of how much a firm can grow without borrowing more money. Here is the table for the sustainable growth rate.

CF SGR

The sustainable growth rate was averaging 29.05 percent and the return on equity was averaging 27.52 percent from 2009 to 2013. Further, the payout ratio was averaging $5.84 from 2009 to 2013. Furthermore, the ROE was lower in 2010 where the company suffered its lowest positive net earnings in the last five years and this is the year they had invested in property and equipment. And also,, the CF payout ratio was high in 2010.

Return on Equity formula:

CF ROE

The Return on equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. The historical summary of the Benjamin Graham method above can be viewed in the table below.

CF Graham

The margin of safety was lower in 2010, so as to the intrinsic value, however, during the succeeding periods, 2011 and 2012 it went up by 886 and 30 percent, respectively and in 2013 it decreased by 19 percent. Moreover, the sustainable growth rate was also low in 2010 but managed to increase the succeeding periods. It shows that CF was profitable.

CF Industries Relative Valuation

The relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)    

This valuation will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.   Below is the calculation for the P/E*EPS valuation.

CF PE EPS

Overall, the P/E*EPS indicates that the stock of CF was trading at an undervalued price because the P/E*EPS ratio was higher by 1 percent of the enterprise value. This valuation shows the relationship between the stock price and the company’s earnings. The price to earnings is the price that the market is willing to pay for the company’s earnings. The price to earnings of the company can change daily as the market price changes.

Enterprise Value (EV) / Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)  

This EV/EBITDA metric is used in the valuation of the business. This metric used to compare the value of the company with its debt and other liabilities to its actual cash earnings, not including non-cash disbursements. In addition, it is applicable in analyzing and comparing profitability between companies and industries.  As a result, this gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

CF EV EBITDA

The EV/EBITDA valuation indicates that it will take 5 times the cash earnings of CF to recover the costs of buying the entire business. In other words, it will take 5 years to recover the purchase price of buying the entire business.

Summary of Historical Ratios

The table below is the summary of the five years of historical data on CF Industries Holdings Inc.

CF Relative

The above financial ratios will give us a view of the 5-year historical trend in the company’s operation. As seen above, the book value increases from  2008 to 2012; however, in 2013, there was a 5 percent decreased in value. Further, the price to earnings was erratic in movement. Furthermore, the earnings per share and the return on equity shows a decreased in 2009 and 2010, and an increased of 196 percent in 2011.

The Book Value Growth and the Return on Equity Approach

This approach is the historical book value growth analysis plus the return on equity analysis. The 5 years historical Price to Earnings, the current dividend yield, and the current market price was factored. In addition, the percentage of risk was 15 percent. It determines whether the stock is over or undervalued.

Summary

CF Growth

Facts:

  • The book value growth of CF Industries was 26 percent with its historical data of 5 years.
  • The calculated future book value at year 5 was $284.50 per share.
  • The ROE was averaging 32.85 percent,
  • And also, the return on book value at year 5 was $93.46.
  • In addition, the future price in year 5 was $1,121.51 per share.
  • The calculated present value of the stock was $484.86 per share.
  • Further, the value of the margin of safety was $290.92
  • Furthermore, the calculated total value was $309.53, compared to the current market price of $242.79,
  • Finally, the stock of CF Industries Holdings, Inc was undervalued at 27.49 percent as of February 25, 2014.

Conclusion

The company has a solid financial position, a reasonable level of debt and a notable return on equity. The company’s market price increased by 1,437 percent from the time it started its IPO in 2005 up to the trailing twelve months of 2014, at $16.20 to $249.05 per share.  Finally, the stock price was trading at an undervalued price.  Therefore, a BUY is best recommended for the stock of CF Industries Holdings Inc (CF).

CITATION

http://phx.corporate-ir.net/phoenix.zhtml?c=190537&p=irol-homeProfile&t=&id=

http://www.cfindustries.com/profile_history.html

http://www.cfindustries.com/profile_leadership.html

http://www.cfindustries.com/products_overview.html

Researched and written by Cris

Twitter: criseldarome

Ensco PLC Class A Continues to Grow

November 28th, 2013 Posted by Investment Valuation No Comment yet

Ensco PLC Class A (ESV) Investment Valuation.

Ensco PLC Class A

About Ensco

Ensco PLC Class A (ESV) is the leader in customer satisfaction and the second largest offshore drilling company. The company started trading as Energy Services Company, Inc. (formerly Blocker Energy Corporation) and the company’s growth increased through the acquisition of Penrod Drilling (1993) and Dual Drilling (1996). The company raised capital through public offerings to purchase and refurbish equipment. The company expanded from the contract drilling business into various associated businesses including a tool and supply company, engineering services and the marine transportation business. Ensco focuses solely on offshore drilling with a premium fleet, they divested marine vessels, platform rigs and the majority of barge rigs. Through new construction and acquisitions, the company grew their jack-up rig fleet and entered the developing ultra-deepwater market.

Ensco Company History

The Gulf of Mexico.2009Ensco’s deepwater strategy became a reality with the first two ENSCO 8500 Series® ultra-deepwater rigs successfully commencing operations in the U.S.

Ensco high graded its fleet by acquiring ENSCO 109, a Mod V Super B high-spec jack-up built in 2008 and divesting four backups.2010Two more ENSCO 8500 Series® rigs were delivered.

1995 The company changed their name to ENSCO International Incorporated and listed their shares on the New York Stock Exchange under symbol ESV.
2000 The ENSCO 7500 was the company’s first ultra-deepwater semisubmersible was delivered and was followed by a multi-billion dollar capital commitment to eventually construct seven ENSCO 8500 Series® ultra-deepwater rigs.
Late 2009 The company redomiciled to the United Kingdom and opened a new global headquarters in London in early 2010.
May 2011 Ensco acquired Pride International to create the second largest offshore driller in the world with operations spanning six continents.

How does Ensco Plc make money? 

Ensco plc (NYSE: ESV) is a global provider of offshore drilling services to the petroleum industry. ESV is operating the world’s newest ultra-deepwater fleet and largest fleet of active premium jack-ups.

ESV pics

The company is operating on six continents, their high-quality fleet includes:
  • 10 drillships,
  • 13 dynamically-positioned semisubmersibles,
  • 6 moored semisubmersibles and
  • 46 premium jack-ups.

ESV provide drilling management for three customer-owned deepwater rigs. Their rigs have drilled some of the most complex wells in virtually every major offshore basin around the globe. Ensco’s customers are multinational integrated energy companies, national oil companies, and independent operators.

Who is Running the Business? 

Daniel W. Rabun Chairman, President, and Chief Executive Officer   

ESV CEO Daniel Rabun

Daniel W. Rabun joined Ensco in March 2006 as President and as a member of the Board of Directors. Mr. Rabun was appointed to serve as our Chief Executive Officer effective January 1, 2007, and elected Chairman of the Board of Directors in May 2007. Prior to joining Ensco, Mr. Rabun was a partner at the international law firm of Baker & McKenzie LLP where he had practiced law since 1986, except for one year when he served as Vice President, General Counsel and Secretary of a company in Dallas, Texas.

Further, Mr. Rabun provided legal advice and counsel to us for over fifteen years before joining Ensco and served as one of our directors during 2001. He has been a Certified Public Accountant since 1976 and a member of the Texas Bar since 1983. Furthermore, Mr. Rabun holds a Bachelor of Business Administration Degree in Accounting from the University of Houston and a Juris Doctorate Degree from Southern Methodist University. He served as Chairman of the International Association of Drilling Contractors in 2012.

Jay W. Swent Executive Vice President and Chief Financial Officer   

   ESV CFO Jay W. Swent

James W. Swent III joined Ensco in July 2003 and was elected Executive Vice President and Chief Financial Officer in July 2012. Prior to his current position, Mr. Swent served as Senior Vice President—Chief Financial Officer. Prior to joining Ensco, Mr. Swent served as Co-Founder and Managing Director of Amrita Holdings, LLC since 2001. Mr. Swent previously held various financial executive positions in the information technology, telecommunications, and manufacturing industries, including positions with Memorex Corporation and Nortel Networks.

Further,

Mr. Swent served as Chief Financial Officer and Chief Executive Officer of Cyrix Corporation from 1996 to 1997 and Chief Financial Officer and Chief Executive Officer of American Pad and Paper Company from 1998 to 2000. Mr. Swent holds a Bachelor of Science Degree in Finance and a Master Degree in Business Administration from the University of California at Berkeley.

Ensco Liquidity and Solvency 

ESV liquidity

The table above shows the liquidity ratios which is the current ratio and the quick ratio is averaging 2.57 and 2.25, respectively. The rule of thumb is 2.0 and 1.0 for current and quick ratio, respectively. The results of the ratio mean, that Ensco PLC Class A has the ability to pay its short-term debt using its current assets. .On the other hand, the solvency ratio was averaging 2.05 or 205 percent. Solvency ratio is calculated on total net income plus depreciation over total debt (short term and long term debt).

Explanation

It indicates that the company has 205 percent net revenue against its total debt. The ratio was decreasing from 2008 to 2011 because the company experiences a  145 percent drop in its net revenue. However, managed an increase in the succeeding years at a rate of 44 and 8 percent, respectively. Moreover, the leverage ratio was averaging 0.18 or 18 percent, this is the percent of the total debt against the total shareholders’ equity. In 2011, the ratio increased by 86 percent but nevertheless, the ratio is only a quarter of the shareholders’ equity. To sum all the results of the company’s solvency, it indicates that Ensco PLC Class A is capable of paying its long-term financial debt and it tells us that the company is financially healthy.

Ensco Profitability 

ESV Profitability

The gross margin ratio was averaging 56.18 percent while the net margins were averaging 32.85 percent. It indicates that Ensco PLC Class A was efficient in generating revenue for its business operations. The company is profitable and financially healthy.

Ensco Cash Flow Statement 

ESV CF

Ensco PLC Class A has an average 0.46 or 46 percent cash flow margins.  Cash flow margins are cash from operating activities as a percent of gross revenue. It indicates that the company has sound cash that was left for future investments and for paying dividends. The company has also a free cash flow of $267.33 million cash for this purpose.

The Relative Valuation Method 

ESV Relative

Going forward, the book value per share was averaging $44.21. If you will notice the book value was increasing yearly from 2008 to trailing twelve months at an average 10.4 percent and this is a good sign of the company’s profitability.  On the other hand, the price to earnings and the earnings per share was averaging $10.35 and $5.22, respectively. Moreover, the Price to earnings is the price that the investors are willing to pay for the company’s earnings while the EPS represents the company’s net earnings allocated to each share of common stock. Another, the return on equity was averaging 13.52 percent, it represents the percentage of profit that the company generates for the investment that the investors have put into the company.

The Discounted Cash Flow (DCF) Method 

ESV DCF

By using the discounted cash flow spreadsheet based on the 5 years financial data, the get the present value of $88.26 per share or a total value of $20.3 billion. Moreover, the future value was $177.53 per share and with a total value of $40.8 billion. In other words, if you were to invest $88.26 today at a rate of 11.49 percent, you will have $177.53 at the end of five times period.

In addition, the future value of $177.53 is equal to the present value of $88.26. Accepting an amount higher than $88.26 today and taking $177.53 at the end of 5 years, you would have taken the money today. By doing this, you will be able to invest at a higher amount at 11.49 percent equal to five years period. This will end up giving you higher than $177.53.  Furthermore, the calculated net income at year five was $19.64 with a total value of $4.5 billion.

Summary of the calculation

Growth 10.33%
Yield 3.07%
Value of appreciation $35.31
Value dividend $36.65
Total value $71.95
Market price $59.69
Price investors are willing to pay $197.93

The growth of book value was 10.33 percent and the yield was 3.07 percent. The calculated value of appreciation was $35.31, this is equivalent to the margin of safety, the Buffett style. In addition, the calculated value dividend was $36.65.  On the other hand, adding value dividend and the value of appreciation will give us a total value of $71.95.  Ensco PLC Class A stock has a total value higher than the current market price. Therefore, the stock is trading at an undervalued price. The price that the investors are willing to pay was $197.93 per share.

Conclusion

Finally, Ensco PLC Class A has a good business history from the beginning and continue to show its profitable progression. Further, the company’s CEO and CFO have done a satisfactory performance in the company from the time they joined ESV. Further, with regards to the fundamentals, it shows that the company was financially healthy and with little debt. The company is capable of generating cash that can be utilized for future expansion and for paying dividends. The Benjamin Graham method tells us that the stock is trading at a discount and undervalued. In addition, the Warren Buffett method of valuing stock shows that the stock of ESV was undervalued. Therefore, I recommend a BUY on the stock of Ensco PLC Class A.

CITATION 

Researched and written by Criselda

Twitter: criseldarome

 

Apple Inc (AAPL) Investment Valuation

November 17th, 2013 Posted by Investment Valuation No Comment yet

The Apple Inc (APPL) company research is a written document and published for our readers to guide them with their investing and make better decisions as to what stocks to Buy.

Company Profile

Apple Inc (AAPL) is an American technology company, headquartered in Apple IncCupertino, California. AAPL manufactures, designs, and markets communication devices to consumers, businesses and also in government entities. It is the top information technology serving the globe. Steve Jobs, Steven Wozniak, and Ronald Wayne incorporated Apple Inc (AAPL) on January 3, 1977. After three months of incorporation, Wayne sold his shares for $800. Wozniak and Jobs were high school friends, both were interested in electronics.

How does the Company Make Money?  

Apple Inc. designs manufacture and market mobile communication and media devices, personal computers and portable digital music players and related accessories. The Company’s products and services include iPhone, iPad®, Mac, iPod, Apple Watch, Apple TV, iOS, OS X and watchOS operating systems, iCloud, Apple Pay.
   apple-inc-appl
The Company sells its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and also value-added resellers.

Who is Running the Business? 

Timothy Cook, Chief Executive Officer 

AAPL Timothy Cook

 

Historical Events
  • In August 2011, Tim was Apple’s Chief Operating Officer and was responsible for all of the company’s worldwide sales and operations, including end-to-end management of Apple’s supply chain, sales activities, and service and support in all markets and countries.
  • He also headed Apple’s Macintosh division and played a key role in the continued development of strategic reseller and supplier relationships, ensuring flexibility in response to an increasingly demanding marketplace.

Further,

  • Prior to joining Apple, Tim was vice president of Corporate Materials for Compaq and was responsible for procuring and managing all of Compaq’s product inventory.
  • Previous to his work at Compaq, Tim was the chief operating officer of the Reseller Division at Intelligent Electronics.
  • Tim also spent 12 years with IBM, most recently as director of North American Fulfillment where he led manufacturing and distribution functions for IBM’s Personal Computer Company in North and Latin America.
  • Tim earned an M.B.A. from Duke University, where he was a Fuqua Scholar and a Bachelor of Science degree in Industrial Engineering from Auburn University.

Peter Oppenheimer, Senior Vice President, and Chief Financial Officer 
AAPL Peter Oppenheimer

Peter Oppenheimer is Apple’s Senior Vice President and Chief Financial Officer. As CFO, Oppenheimer oversees the controller, treasury, investor relations, tax, information systems, internal audit and facilities functions. He reports to the CEO and serves on the company’s executive committee.

 

Historical Events

  • Oppenheimer started with Apple in 1996 as a controller for the Americas, and
  • in 1997 was promoted to vice president and Worldwide Sales controller and then to corporate controller.
  • Oppenheimer joined Apple from Automatic Data Processing (ADP), where he was CFO of one of the four strategic business units. In that capacity, he had responsibility for finance, MIS, administration, and the equipment leasing portfolio.

Further,

  • Prior to joining ADP, Oppenheimer spent six years in the Information Technology Consulting Practice with Coopers and Lybrand where he managed financial and systems engagements for clients in the insurance, telecommunications, transportation and banking industries.
  • Oppenheimer received a bachelors degree from California Polytechnic University, San Luis Obispo and an M.B.A. from the University of Santa Clara, both with honors.

Do you trust the people and are they competent?     

With Apple’s governance structure, the two senior officers, Timothy D. Cook, and Peter Oppenheimer have the ability to meet the standards of making business success through a high measure of responsibility.   For these reasons, I do trust them and they have the necessary skills and the ability for the success of Apple Inc.

Apple Inc Value Investing Guide

Apple Inc Balance Sheet

Liquidity and Solvency

In the financial analysis of a business, solvency can refer to how much liquidity a company has.  When referencing to the company’s ability to service debt, liquidity refers to the ability of the company to pay its short-term financial obligations, it also refers to the company’s capability to sell its assets quickly to raise funds. On the other hand, solvency is the company’s ability to meet its long-term financial obligations. A solvent company is one that owns more than it owes; in other words, its assets is higher than its liabilities.

AAPL Liquidity

Analysis

  • The table above shows that the current ratio of Apple Inc was averaging 1.89 or 1.89:1, this indicates that Apple Inc has $1.89 of current assets for every $1 of current liabilities.
  • On the other hand, the quick ratio was averaging 1.62 the rule of thumb is 1. This indicates that Apple has enough liquid resources to pay the short-term debt. In other words, it shows the capability of Apple to meet short-term financial obligations.
  • Going forward, the solvency ratio is the capability of the company to meet its long-term financial obligations.  Apple has a 2.58 solvency ratio in 2012 and 2013.  It indicates that debt exceeds equity by more than twice.

Apple Inc Income Statement

Profitability    

Gross profit margin is a measure of profitability indicating how much of every dollar of profit is left over after deducting the cost of goods sold. While net profit margin is the percentage of income remaining, after the operating expenses, interest, taxes and preferred stock dividends have been deducted from gross profit.

AAPL ProfitabilityAnalysis

  • Apple’s gross margin and net margin was averaging 39.85 and 22.59 percent, respectively, this shows good profit margins. It also indicates the financial success and viability of Apple’s products and services.
  • Net margins measure the percentage of revenue that was left after deducting all of the expenses of the company. Same as how much cash was earned during a certain period.
  • To sum it up, it indicates that Apple Inc is financially sound and efficient in generating sufficient revenue for its business operation.

Apple Inc Cash Flow Statement    

AAPL CF

The Cash Flow Margin measures the efficiency of a company to convert its sales into cash.

  • The cash flow margin was averaging 0.30 or 30 percent. Cash flow margin is cash from operating activities as a percentage of sales.   The formula was cash from operating activities over total sales.
  • Moreover, Apple’s free cash flow was averaging $31.0 million. It tells us that the company was able to generate cash for future investments.

Apple Inc Investment Valuation 

The following model of equity valuation adopts the investment style of Benjamin Graham, the father of value investing. In essence, Graham said, any investment should be worth more than the investor has to pay for it.  Graham’s valuation looks for undervalued companies whose stock price is lesser than the cost.

AAPL Graham

Explanation

  • The sustainable growth rate (SGR) was averaging 38.75 percent, this is the maximum rate that Apple could grow limited to using its own generated revenue and without using additional funds from creditors or investors. In other words, it is the maximum rate that Apple can sustain its operation internally. SGR also measures the profitability of the company by comparing net income and shareholders equity. According to Investopedia, SGR is a good measure to plan long-term growth, actual acquisitions, cash flow projections, and borrowing strategies.
  • Moreover, the calculated margin of safety using the Benjamin Graham method was 86 percent in 2013 trailing twelve months. In other words, it passed Graham’s requirement of at least 40-50 percent below the intrinsic value or the true value of the stock. The margin of safety provides an allowance against errors in the analysis or calculation, hence there is a different style in calculating an intrinsic value that can impact the result of the margin of safety.
  • In addition, the market price to date, November 13, 2013, was $520.01 per share with $467.9 billion market capitalization.

The Relative Valuation Methods   

The relative valuation methods for valuing a stock is to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.
AAPL Relative

Explanation

Let us understand what the relative valuation tells us.

  • The book value per share was averaging $95.06, in 2013, rise to $137.32, and the growth of 291 percent in five years.
  • While the Price to Earnings ratio was averaging $15.17, this is the price that the investors are willing to pay for Apple’s earnings.
  • In addition, earnings per share were averaging $29.26, this represents the company’s net earnings allocated to each share of common stock.
  • The return on equity was averaging 35.39 percent, this indicates how much profit Apple generates with the investment that the shareholders’ have invested.
  • Overall, it shows that Apple Inc was profitable.

Discounted Cash Flow Method   

The discounted cash flow analysis uses the free cash flow projections and discounts them to arrive at the present value.
AAPL DCF

Explanation

  • The discounted cash flow method shows that the present value of Apple’s equity was $1,012 per share and the total value was $943 billion.
  • The calculated future value was $2,341 per share with a total value of $2.1 trillion. This means, if you were to invest $1,012 today at a rate of 28 percent, you would have $2,341 at the end of six time periods or at the end of year 6. In other words, a future value of $2,341 is equal to a present value of $1,012. If you had a choice between taking an amount higher than the $1,012 today and taking the $2,341 at the end of six years, you should take the money today. Doing this, you would be able to invest at a higher amount at 28 percent for equal 6 years period, which would end up giving you more than $2,341.
  • The calculated net income for year 5 was $198 per share or $185 billion in total value.

Warren Buffett Approach

Totem also adopts the Warren Buffett method using the financial calculator in our equity selection.  The table below indicates a summary of the calculations.
AAPL Buffett

Explanation

Warren Buffett approach indicates that Apple Inc stock price was undervalued. In addition, the margin of safety or the value of appreciation was $404.83 per share. Furthermore, the value dividend was $236.33 per share, therefore, giving us a total value of $641.17 per share. Comparing $641.17 with the market price of $520.56, November 13, 2013, shows that Apple Inc stock is undervalued. The price is undervalued because the market price is less than the total value.  Furthermore, the price that the investors are willing to pay was $2309.20 per dollar of earnings.

In Conclusion

The liquidity and solvency tests indicate that Apple Inc was financially stable and sound. While the profitability ratios and also the cash flow margins tell us that AAPL was capable of generating sufficient revenue. The company has money left for paying dividends and for future investments. Furthermore, the margin of safety and the sustainable growth rate using the Graham method has acceptable results. In addition, the discounted cash flow approach indicates a future value of $2,341 per share. When it comes to Warren Buffett method, it shows that Apple Inc stock is trading at an undervalued price.  Therefore, I recommend a BUY on Apple Inc stock.

CITATION

Researched and Written by Criselda

Twitter: criseldarome

Is Cisco Systems Inc (CSCO) A Good Buy?

October 23rd, 2013 Posted by Investment Valuation No Comment yet

Cisco Systems Inc (CSCO) was incorporated on December 10, 1984, is the worldwide leader in networking that transfigures how people connect, communicate and collaborate. CSCO is an American multinational corporation with the main office in San Jose, California.

CISCO logo

How does the company make money? 

CSCO Products

Products

Cisco Systems, Inc. (CSCO) main activities were, they design to manufacture, and sells Internet protocol (IP)-based networking. And also other products that have something to the communications and information technology (IT) industry. In addition, CSCO provides services in line with these products. Further, the Company provides a number of products for transporting data, voice, and video within buildings, across campuses, and around the world. Likewise, the company’s products are designed to alter how people connect, communicate, and collaborate. Furthermore, the products are installed at enterprise businesses, public institutions, telecommunications companies, commercial businesses, and personal residences.

The Company is operating in five segments

  • The United States and Canada,
  • European Markets,
  • Emerging Markets, Asia Pacific, and Japan.
    • The emerging markets theater consists of Eastern Europe, Latin America, the Middle East and Africa, and Russia and the Commonwealth of Independent States.

 The Company’s product offerings fall into three categories:

  • Its core technologies, routing, and switching;
  • advanced technology and other products.
  • The Company provides a range of service offerings,
  • Technical support services
  • Advanced services program which supports networking devices, applications, solutions, and complete infrastructures.

Historical events

  • On July 30, 2012, the company acquired NDS Group Ltd.
  • In October 2012, it acquired virtual networking company, vCider.
  • August 2011, the Company acquired Versly.
  • November 2011, it acquired BNI Video.
  • March 2012, the Company acquired Lightwire, Inc.
  • May 2012, the Company acquired ClearAccess. In December 2012, the Company acquired Cloupia.
  • December 2012, the Company acquired Cariden Technologies Inc.
  • December 2012, the Company acquired Meraki, Inc.

Furthermore,

  • Effective January 31, 2013, the Company acquired Cariden Technologies Inc.
  • Effective February 13, 2013, the Company acquired BroadHop Inc.
  • February 2013, it acquired Intucell.
  • May 2013, the Company acquired Ubiquisys.
  • July 2013, Cisco Systems Inc announced it has completed the acquisition of privately held JouleX, an enterprise IT energy management for network-attached and data center assets.
  • July 2013, the Company announced that it has completed the acquisition of Composite Software, Inc.
  • October 2013, Cisco Systems Inc completed the acquisition of Sourcefire, Inc.

The Company’s product offerings fall into three categories

  • Core technologies, routing, and switching;
  • advanced technologies,
  • and other products.
  • In addition to its product offerings, the Company provides a range of service offerings, technical support services, and advanced services. The advanced services program supports networking devices, applications, solutions, and complete infrastructures.

Who is running the business?

The Chairman of the company has the overall responsibility for the operation of the corporation while the Chief Financial Officer was responsible for the financial control and planning of a firm or project. These two great men of Cisco Systems Inc have contributed a very significant effort for the success of the corporation.

John T. Chambers, Chairman, and Chief Executive Officer

Cisco System Inc

John Chambers is the Chairman and CEO of Cisco. He has helped in the growth of the company from $70 million when he joined Cisco in January 1991, to $1.2 billion when he assumed the role of CEO, to record revenues of $48.6 billion in FY13. In 2006, Chambers was also the Chairman of the Board, in addition to his CEO role.

 

Awards

The various awards received by Mr. Chambers for his leadership over his past 18 years at the headship of Cisco:

  • The 2012 Bower Award for Business Leadership from the Franklin Institute,
  • Time Magazine’s “100 Most Influential People,”
  • One of Barron’s’ “World’s Best CEOs,
  • The “Best Boss in America” by 20/20,
  • One of BusinessWeek’s “Top 25 Executives Worldwide,”
  • “CEO of the Year” by Chief Executive Magazine,
  • The Business Council’s “Award for Corporate Leadership,” and
  • “Best Investor Relations by a CEO” from Investor Relations Magazine three times.

Further,

  • During his tenure as CEO, Cisco has been named to Fortune’s “America’s Most Admired Company” list since 1999 ranking number one in the Network Communications category eight times,
  • BusinessWeek’s “Top 50 Performers” list six times,
  • Forbes’ “Leading Companies in the World,”
  • And is one of the top 10 places to work in the United States, China, Germany, France, India, UK, Australia, Singapore, and several other countries.
  • Chambers has been widely recognized for his and Cisco’s philanthropic leadership,
  • including receiving the U.S. State Department’s top corporate social responsibility award (ACE) twice, from both Secretary of State Hillary Clinton in 2010 and former Secretary of State Condoleezza Rice in 2005.
  • He also received the first-ever Clinton Global Citizen Award from former U.S. President Bill Clinton and has been awarded the Woodrow Wilson Award for Corporate Citizenship,
  • and the prestigious Excellence in Corporate Philanthropy Award, an award given by CEOs to their CEO peers.

Chambers corporate social responsibility worldwide

  • Recent partnerships include working with the Palestinian ICT sector growing ICT from .8% to over 5% of GDP in 2 years;
  • Connecting Sichuan, an effort to help rebuild healthcare and education models in the Sichuan,
  • China region impacted by the May 2008 earthquake.
  • Mr. Chambers also cosponsored the Jordan Education Initiative, which Cisco has worked on in partnership with His Majesty King Abdullah II of Jordan and the World Economic Forum.
  • In late 2006, Chambers co-led a delegation of U.S. business leaders, in partnership with the U.S. State Department, to form the Partnership for Lebanon, helping provide critically needed resources for ongoing reconstruction in Lebanon.

Further,

  • Chambers has also spearheaded several other education initiatives, including the 21st Century Schools Initiative, to improve education and opportunity for children in the Gulf Coast Region affected by Hurricane Katrina.
  • He has served two American presidents, most recently as Vice Chairman of the President George W. Bush National Infrastructure Advisory Council (NIAC), where he provided industry experience and leadership to help protect the United States’ critical infrastructure.
  • He also served on President George W. Bush’s Transition Team and Education Committee, and on President Bill Clinton’s Trade Policy Committee.

History

  • Chambers joined Cisco in 1991 as Senior Vice President, Worldwide Sales, and Operations.
  • He assumed the role of President and CEO in 1995.
  • Prior to joining Cisco, he spent eight years at Wang Laboratories (1982-1990) and
  • six years with IBM (1976-1982).
  • Further, he holds a Bachelor of Science / Bachelor of Arts degree in business and a law degree from West Virginia University and a master of business administration degree in finance and management from Indiana University.

Frank Calderoni, Executive Vice President & Chief Financial Officer 

   CSCO Frank Calderoni

Frank Calderoni is the Executive Vice President and Chief Financial Officer (CFO) at Cisco. Mr. Calderoni is managing the financial strategy and operations of a company with more than 72,000 employees. During his management with CISCO, the total revenue was $46 billion for the fiscal year 2012. Mr. Calderoni was committed to maximizing long-term shareholder value, ensuring a balanced portfolio of growth initiatives, and maintaining the high level of integrity and transparency for which Cisco is known.

Achievements

  • Previously as Cisco’s Senior Vice President, Customer Solutions Finance, he manages to be effective and efficient in bringing a profitable growth, disciplined decision making, and transparency in Cisco’s reporting.
  • He led the efforts to create and define the value chain for the sales and services model from which organization, staffing, compensation plans, targets, territory definition, and sales goals could be derived.
  • He was responsible for the decision support model on investments related to sales, services, and marketing, including acquisitions.

History

  • In 2004, Calderoni joined Cisco from QLogic Corporation, where he was the Senior Vice President and CFO.
  • Prior to that, he was the Senior Vice President, Finance and Administration and CFO for SanDisk Corporation.
  • He spent 21 years at IBM Corporation and was promoted to Vice President prior to taking on two CFO roles.
  • At IBM he held Controller responsibilities for several divisions, including Global Small Business, Storage Systems, and the IBM Server Group.
  • Calderoni is an active volunteer, and he sits on the board of the Children’s Discovery Museum of San Jose.
  • He has been recognized as the 2013 Bay Area CFO of the Year.
  • Calderoni has also been awarded the 2012 Excellence Award for Leadership in Finance for North America,
  • And was considered one of the Best CFO’s in 2012 from the Institutional Investor.

Education

  • Calderoni holds a bachelor’s degree in accounting and finance from Fordham University and a master of business administration degree in finance from Pace University.
  • He sits on the Board of Directors for Adobe Systems and Nimble Storage.

Do you trust the people and are they competent?

The incredible profiles of these two brilliant men of Cisco, who would ever say that they are not competent?   John T. Chambers, Chairman, and CEO has been awarded several times for his 18 years philanthropic leadership and contributed to the growth of Cisco. Frank Calderoni, Executive Vice President and CFO of Cisco has been successful in managing the financial strategy and operations of the company, hence bringing profitable growth to Cisco.

CSCO Value Investing Guide 

The Balance Sheet 

Liquidity and Solvency

Solvency and liquidity are a measure which refers to the company’s state of financial health, but with some substantial differences. This measure is both important measures, and healthy companies are both solvents and have adequate liquidity. Solvency refers to a company’s capacity to meet its long-term financial obligations. On the other hand, liquidity means that the company has the ability to pay short-term financial obligations. It also refers to the company’s capability to sell assets quickly to produce cash. Likewise, a solvent company is one that owns more than it owes; in other words, it has a positive net worth and an average debt that can be paid when the due date comes.

CSCO Liquidity

Explanation

Looking at the table above, the current ratio was averaging 3.09. The rule of thumb is 2.0 and the result obviously tells us that CSCO is in a good situation financially. In other words, it has $3.09 of current assets for every dollar of current liabilities. It indicates that the company has the ability to meet short-term obligations, in other words, the company has enough resources to pay its debts over 12 months. Further, the quick ratio or sometimes called the acid test ratio was averaging 2.78. The rule of thumb is 1.0. This again indicates that CSCO is in a good position when it comes to liquidity. In other words, the company has the ability to pay its short-term debt using cash and near cash assets.

Interpretation

Going forward, let us examine what the solvency ratios tell us. The table shows that the solvency ratio was averaging 0.82 or 82 percent. The rule of thumb is 20 percent. This indicates that Cisco Systems Inc has the ability to meet its long-term obligations. Solvency ratio is calculated by net earnings after tax plus depreciation and amortization over its total debt. Therefore, it indicates that Cisco Systems Inc is financially healthy. Moreover, the leverage ratio was averaging 0.29 or 29 percent. This again indicates that the company is really in good standing. This ratio measures how much debt is being used against the shareholders’ equity. Overall, it indicates that Cisco Systems Inc is financially healthy.

CSCO Income Statement

Profitability 

Gross profit margin measures how much of every dollar of revenues is left over after paying the cost of goods sold. While net profit margin is the percentage of revenue remaining, after all, operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company’s total revenue.

CSCO Profitability

Explanation

Going further, the gross margin ratio was averaging 62.6 percent. This indicates a good standing, in other words, this is the profit retained by the company after the direct costs of producing its products are deducted. The Net Margin tells us that it has an average of 18.29 percent. It means that 18.29 was retained in the profits after deducting all of the expenses of the company for a period of time.  Overall, it indicates that the CSCO is financially healthy

CSCO Cash Flow Statement 

The Cash Flow Margin is a measure of how efficiently a company converts its sales dollars into cash. Since expenses and purchases of assets are paid by cash, this is an extremely useful and important profitability ratio. It is also a margin ratio.

CSCO CF

Facts:

The above table shows that the cash flow margin was averaging 0.27 or 27 percent. Therefore, it indicates that CSCO is efficient in converting its revenue into cash. While the Free Cash Flow was averaging $10.13 billion. CSCO is able to generate sufficient revenue from its operation. Moreover, the company has available cash that can be used in paying dividends and for future investments. Finally, it indicates that CSCO is financially healthy.

CSCO on Investment Valuation 

The Totem Investment model in the valuation of equity adopts the investment style of Benjamin Graham, the Father of value investing. The essence of Graham Value Investing is that any investment should be worth much more than an investor has to pay for it. Graham believed in the complete analysis, which we call fundamental analysis.  Even more, he was looking for companies with a sound balance sheet or those with little debt, above average profit margin and acceptable cash flow. His philosophy was to buy wisely when prices fall and to sell wisely when the price increase a great deal.

Benjamin Graham Method

CSCO BG

Explanation

The Sustainable Growth Rate (SGR) was averaging 19.86 percent. This is the measure of how fast a company can grow. In other words, this is the rate where the company can sustain its operations internally without using additional borrowed funds or equity. In addition, in the calculation of Sustainable Growth Rate, you need to know the company’s return on equity, it’s earning per share, and its payout ratio.  Formula:

                               Sustainable growth rate = ROE x (1 – dividend-payout ratio)

It shows that the margin of safety was averaging 75.83 percent. This formula is used to identify the difference between company value and price. In other terms, it is the difference between the real value of the stock and the market price. Consequently, the result indicates that it passed the requirement of Graham of at least 40 percent margin of safety. Therefore, the stock is a good candidate for a Buy.

CSCO Relative Valuation Methods

The relative valuation methods in valuing stock of a company are to compare market values of the stock with the fundamentals like the earnings, book value, growth multiples, cash flow, and other metrics.

CSCO Relative

Facts

  • The current book value per share was $10.98 and averaging $8.25 per share.
  • The price to earnings ratio in the trailing twelve months (ttm) was $12.2 per share and averaging $15.35 per share.
  • The earning per share at trailing twelve months was $1.87 and averaging $1.38,
  • The return on equity at trailing twelve months was $18.08 and was averaging $18.1 per share.

Overview, it indicates that Cisco Systems Inc has a good measure of profitability, it also indicates that the company was able to generate a favorable and stable return on the invested capital.

CSCO Discounted Cash Flow Method 

The discounted free cash flow analysis uses the free cash flow projections and discounts them to arrive at the present value. In this analysis, I used five years of historical financial data to arrive at the present value and future value.

CSCO DCF

Explanation

  • Capitalization rate that was used was 15 percent.
  • Return on investment was averaging 18.10 percent.
  • Price to Earnings used was the 15.85 ratio.
  • The present value of CSCO was $28.62 per share a total value of $154.6 billion.
  • Further, the future value was $56.56 per share a total value of $311 billion.
  • Furthermore, net income at year 5 was $4.36 per share at a total value of $23.56 billion.

The Warren Buffet  Method

Totem also adopts the Warren Buffet method using the financial calculator in the company’s equity selection.  The table below is the summary of the calculations.

CSCO Buffett

Facts

  • The equity growth was 13.5 percent while the dividend yield was 7.79 percent.
  • The calculated value of appreciation was $11.45 per share, this is equivalent to Warren Buffett’s margin of safety or 40 percent of the calculated present value.
  • Further, the computed value dividend was $35.49
  • And also the computed total value was $46.77. per share.
  • The price that the investor is willing to pay was $64.97.
  • Furthermore, the market price of Cisco Systems Inc to date, October 23, 2013, was $22.65 per share.  If we compare this to the total value of $46.77 per share, it indicates that the stock is trading at an undervalued price, therefore, a good candidate for a Buy.

Conclusion 

Above all, the liquidity and solvency ratios, as well as the profitability ratios, tell us that CSCO is in good standing and financially sound. Moreover, the cash flow margins and the free cash flows indicate that the company has the ability to generate sufficient revenue. And also has available funds left for future investments and for payment of dividends. Furthermore, the investment valuation shows that the margin of safety of 76 percent using the Benjamin Graham method has passed the requirement of at least 40 percent. In addition, the company has 20 percent able to sustain its operation internally without issuing additional debt and equity. Noteworthy, CSCO has positive earnings rising all throughout the period of 10 years.  Overall, the company is financially healthy.

Furthermore,

The discounted cash flow method indicates that the present value was $28.62 which is 62 percent above the book value to date.  On the other hand, the computed total value was higher than the market price, therefore, it tells us that the stock of CSCO is trading at an undervalued price hence, a good candidate for a Buy.  I, therefore, recommend a BUY on the stock of Cisco Systems Inc.

CITATION 

Researched and Written by Criselda

Twitter: criseldarome

Is it a Go or a No for Blackberry – Totem Talk Value Investing Guide

July 23rd, 2013 Posted by Company Research Report No Comment yet

Blackberry Ltd or BBRY (formerly known as Research in Motion Limited (USA)) is a global leader in wireless innovation and developed mobile industry with the introduction of BlackBerry. Stories team had introduced Research in Motion Limited (USA) company research in the previous reports. This company research provides information about the company including its founder or how it started, history and development, its nature of the business, the people running and directing the company, how it makes money or in the industry,  suppliers and customers, workforce, and the company’s pay and working condition.

Please read the whole version of BBRY’s company research here:

http://totemtalk.com/research-in-motion-limited-usa-rimm/

Let us help you get to know more on current feedback and trends about the company that might help on your investing. Information was gathered from reliable sources that may include negative and positive news combined with our researcher’s interpretation of these data. For the latest news about Research in Motion Limited (USA), here is Cris’ company update:

http://totemtalk.com/blackberry-ltd-bbry-company-updates/

We all know the backbone of the company. We already met the people behind the company, the nature of their business. Now, let’s get ourselves updated with the financial status of the company. Rio, from our Numbers team will reveal the story behind the digits.

 Liquidity & Solvency

Rio reviewed further the liquidity and solvency of BBRY for the last four quarters, Q3-2012, Q4-2012, Q1-2013 and Q2-2013 in comparison with its performance in the past four years. Here are the results:

The company’s current ratio was still above the standard of 2, there was no change in material amount. Its quick ratio’s trend was still the same which did not go below 1.8 on the latest four quarters. When we speak about the solvency ratio, it was quite very high in the last four years but reduced to a moderate level in the first three quarters but consistently increasing. However, it tremendously dipped down to 9 percent in the 2nd quarter of 2013. It needs close monitoring.

BBRY is still financially healthy as far as its current resources are concerned. The company has the capacity to pay its obligations as its solvency ratio was above the standard rate of 20 percent except in the last quarter of 2013 which is too early to make a conclusion, as shown in the above table.

Financial Leverage

BlackBerry Ltd

The company operates its business with very little borrowing. Debt ratio average is only 27 percent while debt to equity ratio was 37 percent.

Efficiency Ratios

Efficiency ratios are used to measure the quality of the company’s receivables and how efficiently it uses its other assets. Let’s get to meet each of these efficiency ratios. 

  • Inventory turnover ratio represents the number of times inventory is sold and restocked each year.
  • The receivable turnover ratio measures the number of days it takes a company to collect its credit accounts from its customers.
  • Payable turnover ratio is the number of times the company pays its obligation each period. This ratio measures how the company pays its suppliers in relation to the sales volume being transacted.
  • Asset turnover ratio shows how efficient the company’s total assets generate sales.

The table below tells us how efficient BBRY uses its resources in generating revenue.

Efficiency ratios show that BBRY was consistent to be efficient yearly and quarterly in generating sales revenue out of its resources as shown in the above table.  There was no abrupt change noted.

Income Statement

  • · Revenue showed progress every year with a growth of 35, 33 and -7 percent while declining from Q3-2012 to Q1-2013 but recover in Q2-2013 by growth of 15percent. Its gross profit average had a growth rate of 29, 34 and -25 percent from 2009 to 2012  while 5, 26 and -3 percent in Q3-2012 to Q2-2013.
  • And income after tax was also increasing yearly by  30, 39 and -66 percent while from Q2-2012 to Q2-2013 results were -1.04, 9.89 and -1.86 percent.

Expenses

The majority of the expenses fall under the cost of revenue, which consumed a range of 54 to 71 percent on gross sales while operating expenses average from 2009 to 2012 was the only 23percent. However, in the last four quarters; 2nd quarter of 2012 to the 2nd quarter of 2013 it exceeded the total revenue of the company. It tells us that the company was not able to control its operating expenses.

Margin

  • Gross margin was slightly changed by an average of 2 percent both in yearly and quarterly data. After deducting operating and other related expenses it resulted in a negative 3 percent in the latest quarter. BBRY’s net margin did not even reach the standard of 20 percent in the past four year’s analysis.

Blackberry Cash Flow

Cash Flow from Operating Activities

The cash flow from operating activities of BBRY  indicates positive results, though it’s up and down trend, it shows that the company was effective in generating cash flow out of its revenue. So, the company has sufficient funds for its operating activities.

Cash Flow from Investing Activities

Investing transactions generate cash outflows, such as capital expenditures for property, plant and equipment, business acquisitions and the purchase of investment securities while inflows come from the sale of assets, businesses and investment securities.  For BBRY, its investing cash flow shows negative results because of cash outflows exceeded cash inflows.

Cash Flow from Financing Activities

This refers to the company’s continuous borrowing and repayment of debt.  Similar to investing cash flow, the company’s cash outflow exceeded its cash inflows.

Free Cash Flow

  • It shows positive results from 2010 to 2011 while negative in 2009 and 2012 however, it is consistent positive in the 3rd quarter of 2012 to the 2nd quarter of 2013.
  • Cash flow margin of BBRY from 3Q-2012 to 1Q-2013 was going up however it dropped to 21 percent in Q2-2013.

After getting all those results, I asked Rio for the overall view. Gladly she gave me her quick answer. Please join me on the conclusion below.

Conclusion

“Results of my analysis show that BBRY is still financially healthy as far as its current resources are concerned. The company is debt- free and insolvent only in the last quarter of 2013. Income wise, the company is continuously generating income, however, its operating expenses are uncontrolled which resulted in a negative profit margin. When it comes to generating cash flow, the company has sufficient cash flow used for operating activities and positive free cash flow”, Rio said.

We already know the financial health of BlackBerry Ltd from Rio’s report. How about the market value of the company? This is where Cris’ investment valuation report will bring us delight. She will inform u of the pricing status of the company. So, what are we waiting for? Let’s get to it.

The Investment in Enterprise Value on BlackBerry Ltd        

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.  It measures the value of the productive assets that brought about its product or services, both equity capital (market capitalization) and debt capital.

In this evaluation, I believed the historical data is important and not just the current data, “Cris explained. As we can see in the table, it shows that the market capitalization dropped 75 percent in 2011. A dropped can be noticed again during 2012 and the trailing twelve months 2013 by 17 and 23 percent, respectively. Further, the company has zero debt, thus the enterprise value was lesser of 13 percent as the cash represents 13 percent of the enterprise value. The equation for buying the entire BBRY was 100 percent equity. The current cash per share was $5.39 while the average cash per share was $3.93.

The takeover price of the entire business of BlackBerry Ltd to date, July 18, 2013, was $2 billion at $3.77 per share.  While the market price to date was $9.24 per share. The difference was 59 percent.

 The Margin of Safety

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. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value.

Now, let us reveal what the table would say about BBRY’s margin of safety.

The table tells us that the historical margin of safety averaged to 58 percent, while 2012 and ttm2013 has zero margin of safety. This means that the current margin of safety was insufficient and is not a good candidate for a buy position because there will be no safety in buying the stocks of BBRY.  This further implies that the true value of the stock is lesser than the market price.

Intrinsic Value

Intrinsic value factors the calculations for the margin of safety.

The historical intrinsic value was averaging $217 and the annual growth was averaging 49 percent, in addition, the earning per share was averaging $2.44.

For the annual growth, please see the table below:

BlackBerry Ltd

To summarize, the average growth of BlackBerry Ltd was favorable as well as the return on equity. However, the previous year 2012 and the trailing twelve months of 2013 showed an unfavorable outcome. Return on equity was negative 7 and 2 on 2012 and trailing twelve months, respectively.

In order to determine the trend in the true value of the stock of BBRY and the market price, Cris prepared a graph for our easy understanding.

Explanation

As seen in the graph above, the true value line or the IV line was high during the period 2008 up to 2010. Then it dropped very steeply at 87, 93 and 135 percent from 2011 up to the trailing twelve months, respectively. It fell below the market value; this means there was a zero margin of safety in the current period, further it means that the stock price was trading above the true value of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)             

BlackBerry Ltd

The stock of BBRY was undervalued. The P/E*EPS was averaging 32 percent while the price was averaging 29 percent.

Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) or (EV/EBITDA)               

BlackBerry Ltd

The table for EV/EBTDA indicates that it will take 5 years to recover the cost of purchasing the entire business of BBRY.  In other words, it will take 5 times of the cash earnings of the company to cover the costs of purchasing the entire stock. 

In the earlier part of this report, Rio gave us the summary about the financial health.

Summary

BBRY’s market capitalization dropped 75 percent in 2011. While in 2012 and the trailing twelve months 2013, it dropped again by 17 and 23 percent, respectively. Further, the company has zero debt, thus the enterprise value was lesser by 13 percent as the cash represents 13 percent of the enterprise value. The equation for buying the entire BBRY was 100 percent equity. The current cash per share was $5.39 while the average cash per share was $3.93.

The takeover price of the entire business of BlackBerry Ltd to date, July 18, 2013, was $2 billion at $3.77 per share.  While the market price to date was $9.24 per share. The difference was 59 percent.

Margin of Safety

The historical margin of safety averaged 58 percent, while 2012 and ttm2013 has zero margin of safety.  This further implies that the true value of the stock is lesser than the market price. The historical intrinsic value was averaging $217 and the annual growth was averaging 49 percent, in addition, the earning per share was averaging $2.44. The ROE was negative 7 and 2 for 2012 and trailing twelve months, respectively.

Further, the relative valuation indicates that in the P/E*EPS stock price of Blackberry was undervalued. The P/E*EPS was averaging 32 percent while the price was averaging 29 percent.

Furthermore, the EV/EBTDA indicates that it will take 5 years to recoup the cost of buying the entire business of BBRY.  In other words, it will take 5 times of the cash earnings of the company to recover the costs of purchasing the entire company.

Overall

It shows a frustrating result in the market value of the company as well as the deteriorating growth in the current periods. The downfall of Blackberry’s price was very steep and climbing to the top might be hard, as the company has a long way to go to make a comeback to its former condition. Although, the price seems undervalued considering the relative valuation, the intrinsic value of the company reveals the true value of the stock, thus indicating that the stock is trading above its true value. Cris concluded,”Since the company is still in its early phase of transformation, I therefore recommend a SELL on the stock of Blackberry Ltd.

Researched and Written by: Meriam, Karla, Rio and Cris

Interested to learn more about the company? Here’s company research to know more of it’s background and history; and investment valuation for the pricing.

Research In Motion Ltd (RIMM)

Is it a Go or a No for Blackberry Limited (BBRY)

July 23rd, 2013 Posted by Company Research Report No Comment yet

BlackBerry Ltd or BBRY (formerly known as Research in Motion Limited (USA)) is a global leader in wireless innovation and developed mobile industry with the introduction of BlackBerry. Stories team had introduced Research in Motion Limited (USA) company research in the previous reports. This company research provides information about the company including its founder or how it started, history and development, its nature of the business, the people running and directing the company, how it makes money or in the industry,  suppliers and customers, workforce, and the company’s pay and working condition.

Please read the whole version of BBRY’s company research here:

http://totemtalk.com/research-in-motion-limited-usa-rimm/

Let us help you get to know more on current feedback and trends about the company that might help on your investing. Information was gathered from reliable sources that may include negative and positive news combined with our researcher’s interpretation of these data. For the latest news about Research in Motion Limited (USA), here is Cris’ company update:

http://totemtalk.com/blackberry-ltd-bbry-company-updates/

We all know the backbone of the company. We already met the people behind the company, the nature of their business. Now, let’s get ourselves updated with the financial status of the company. Rio, from our Numbers team, will reveal the story behind the digits.

 Liquidity & Solvency

Rio reviewed further the liquidity and solvency of BBRY for the last four quarters, Q3-2012, Q4-2012, Q1-2013 and Q2-2013 in comparison with its performance in the past four years. Here are the results:

bbryliq

The company’s current ratio was still above the standard of 2, there was no change in material amount. Its quick ratio’s trend was still the same which did not go below 1.8 on the latest four quarters. When we speak about the solvency ratio, it was quite very high in the last four years but reduced to a moderate level in the first three quarters but consistently increasing. However, it tremendously dipped down to 9 percent in the 2nd quarter of 2013. It needs close monitoring.

Explanation

BBRY is still financially healthy as far as its current resources are concerned. The company has the capacity to pay its obligations as its solvency ratio was above the standard rate of 20 percent except in the last quarter of 2013 which is too early to make a conclusion, as shown in the above table.

Financial Leverage

The company operates its business with very little borrowing. Debt ratio average is only 27 percent while debt to equity ratio was 37 percent.

Efficiency Ratios

Efficiency ratios are used to measure the quality of the company’s receivables and how efficiently it uses its other assets. Let’s get to meet each of these efficiency ratios. 

  • Inventory turnover ratio represents the number of times inventory is sold and restocked each year.
  • The receivable turnover ratio measures the number of days it takes a company to collect its credit accounts from its customers.
  • Payable turnover ratio is the number of times the company pays its obligation each period. This ratio measures how the company pays its suppliers in relation to the sales volume being transacted.
  • Asset turnover ratio shows how efficient the company’s total assets generate sales.

The table below tells us how efficient BBRY uses its resources in generating revenue.

Efficiency ratios show that BBRY was consistent to be efficient yearly and quarterly in generating sales revenue out of its resources as shown in the above table.  There was no abrupt change noted.

Income Statement

  • · Revenue showed progress every year with a growth of 35, 33 and -7 percent while declining from Q3-2012 to Q1-2013 but recover in Q2-2013 by growth of 15percent. Its gross profit average had a growth rate of 29, 34 and -25 percent from 2009 to 2012  while 5, 26 and -3 percent in Q3-2012 to Q2-2013.
  • And income after tax was also increasing yearly by  30, 39 and -66 percent while from Q2-2012 to Q2-2013 results were -1.04, 9.89 and -1.86 percent.

Expenses

Explanation

The majority of the expenses fall under the cost of revenue, which consumed a range of 54 to 71 percent on gross sales while operating expenses average from 2009 to 2012 was the only 23percent. However, in the last four quarters; 2nd quarter of 2012 to the 2nd quarter of 2013 it exceeded the total revenue of the company. It tells us that the company was not able to control its operating expenses.

Margin

  • Gross margin was slightly changed by an average of 2 percent both in yearly and quarterly data. After deducting operating and other related expenses it resulted in a negative 3 percent in the latest quarter. BBRY’s net margin did not even reach the standard of 20 percent in the past four year’s analysis.

Cash Flow

Cash Flow from Operating Activities

Cash flow from operating activities of BBRY  indicates positive results, though it’s up and down trend, it shows that the company was effective in generating cash flow out of its revenue. So, the company has sufficient funds for its operating activities.

Cash Flow from Investing Activities

Investing transactions generate cash outflows, such as capital expenditures for property, plant and equipment, business acquisitions and the purchase of investment securities while inflows come from the sale of assets, businesses and investment securities.  For BBRY, its investing cash flow shows negative results because of cash outflows exceeded cash inflows.

Cash Flow from Financing Activities

This refers to the company’s continuous borrowing and repayment of debt.  Similar to investing cash flow, the company’s cash outflow exceeded its cash inflows.

Free Cash Flow

BlackBerry Ltd

  • It shows positive results from 2010 to 2011 while negative in 2009 and 2012 however, it is consistent positive in the 3rd quarter of 2012 to the 2nd quarter of 2013.
  • Cash flow margin of BBRY from 3Q-2012 to 1Q-2013 was going up however it dropped to 21 percent in Q2-2013.

After getting all those results, I asked Rio for the overall view. Gladly she gave me her quick answer. Please join me on the conclusion below.

Conclusion:

“Results of my analysis show that BBRY is still financially healthy as far as its current resources are concerned. The company is debt- free and insolvent only in the last quarter of 2013. Income wise, the company is continuously generating income, however, it is operating expenses are uncontrolled which resulted in a negative profit margin. When it comes to generating cash flow, the company has sufficient cash flow used for operating activities and positive free cash flow”, Rio said.

We already know the financial health of BlackBerry Ltd from Rio’s report. How about the market value of the company? This is where Cris’ investment valuation report will bring us delight. She will inform us of the pricing status of the company. So, what are we waiting for? Let’s get to it.

The Investment in Enterprise Value on BlackBerry Ltd        

What is 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.  It measures the value of the productive assets that brought about its product or services, both equity capital (market capitalization) and debt capital.

BlackBerry Ltd

“In this evaluation, I believed the historical data is important and not just the current data.  As we can see in the table, it shows that the market capitalization dropped 75 percent in 2011. A dropped can be noticed again during 2012 and the trailing twelve months 2013 by 17 and 23, respectively. Further, the company has zero debt, thus the enterprise value was lesser of 13 percent as the cash represents 13 percent of the enterprise value. The equation for buying the entire BBRY was 100 percent equity. The current cash per share was $5.39 while the average cash per share was $3.93.

The takeover price of the entire business of BlackBerry Ltd to date, July 18, 2013 was $2 billion at $3.77 per share.  While the market price to date was $9.24 per share. The difference was 59 percent.

 Margin of Safety

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. Value investing is based on the assumption that two values are attached to all companies – the market price and the company’s business value or true value.

Now, let us reveal what the table would say about BBRY’s margin of safety.

BBRY MOS

The table tells us that the historical margin of safety averaged to 58 percent, while 2012 and ttm2013 have zero margins of safety. This means that the current margin of safety was insufficient and is not a good candidate for a buy position because there will be no safety in buying the stocks of BBRY.  This further implies that the true value of the stock is lesser than the market price.

Intrinsic Value

 

The historical intrinsic value was averaging $217 and the annual growth was averaging 49 percent, in addition, the earning per share was averaging $2.44.

For the annual growth, please see the table below:

BBRY IV

To summarize, the average growth of BlackBerry Ltd was favorable as well as the return on equity. However, the previous year 2012 and the trailing twelve months of 2013 showed an unfavorable outcome. Return on equity was negative 7 and 2 in 2012 and trailing twelve months, respectively.

In order to determine the trend in the true value of the stock of BBRY and the market price, Cris prepared a graph for our easy understanding.

BBRY Graph

As seen in the graph above, the true value line or the IV line was high during the period 2008 up to 2010. Then it dropped very steeply at 87, 93 and 135 percent from 2011 up to the trailing twelve months, respectively. It fell below the market value; this means there was a zero margin of safety in the current period, further it means that the stock price was trading above the true value of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)             

BBRY PE EPS

The overall issue of P/E*EPS tells us that the stock of BBRY was undervalued. The P/E*EPS was averaging 32 percent while the price was averaging 29 percent.

Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)               

BBRY EV EBITDA

The table for EV/EBITDA indicates that it will take 5 years to recover the cost of purchasing the entire business of BBRY.  In other words, it will take 5 times the cash earnings of the company to cover the costs of purchasing the entire stock. 

In the earlier part of this report, Rio gave us a summary of financial health. This time Cris will do the honor of sharing us the wrapped up details of her report.

Summary:

BBRY’s market capitalization dropped 75 percent in 2011. While in 2012 and the trailing twelve months 2013, it dropped again by 17 and 23 percent, respectively. Further, the company has zero debt, thus the enterprise value was lesser by 13 percent as the cash represents 13 percent of the enterprise value. The equation for buying the entire BBRY was 100 percent equity. The current cash per share was $5.39 while the average cash per share was $3.93.

The takeover price of the entire business of BlackBerry Ltd to date, July 18, 2013, was $2 billion at $3.77 per share.  While the market price to date was $9.24 per share. The difference was 59 percent.

Margin of Safety

The historical margin of safety averaged 58 percent, while 2012 and ttm2013 have zero margins of safety.  This further implies that the true value of the stock is lesser than the market price. The historical intrinsic value was averaging $217 and the annual growth was averaging 49 percent, in addition, the earning per share was averaging $2.44. The ROE was negative 7 and 2 for 2012 and trailing twelve months, respectively.

Further, the relative value indicates that the overall issue of P/E*EPS shows that the stock of BBRY was undervalued. The P/E*EPS was averaging 32 percent while the price was averaging 29 percent.

Furthermore, the EV/EBITDA indicates that it will take 5 years to recoup the cost of buying the entire business of BBRY.  In other words, it will take 5 times the cash earnings of the company to recover the costs of purchasing the entire company.

Overall

Overall view, it shows a frustrating result in the market value of the company as well as the deteriorating growth in the current periods. The downfall of BBRY’s price was very steep and climbing to the top might be hard, as the company has a long way to go to make a comeback to its former condition. Although the price seems undervalued considering the relative valuation, intrinsic value of the company reveals the true value of the stock, thus indicating that the stock is trading above its true value. Cris concluded, “Since the company is still in its early phase of transformation, I, therefore, recommend a SELL on the stock of BlackBerry Ltd.”

Researched and Written by Meriam, Karla, Rio, and Cris

Interested to learn more about the company? Here’s company research to know more of its background and history; and investment valuation for the pricing.

Berkshire Hathaway Inc (BRK.B) Investment Valuation

July 17th, 2013 Posted by Investment Valuation No Comment yet

Berkshire Hathaway Inc (BRK.B), incorporated on June 16, 1998, is a holding company owning subsidiaries engaged in a number of diverse business activities.

BRK.B

BRK.B Value Investing Approach 

Our basis of valuation is the company’s five years of historical financial records; the balance sheet, income statement, and cash flow statement. Moreover, this is a great measure of the total value of a firm. It is often great starting points for negotiation of a business.

BRK.B Investment in Enterprise Value  

BRK EV        

Explanation

The market capitalization of Berkshire Hathaway Inc was trending up at a rate averaging 228 percent. In other words, the current price rises 84 percent from 2008 to 2012. In 2009, the price dropped 90 percent from 2008 but managed to rise by 1193 percent the following year.  The total debt was averaging 31 percent and the cash and cash equivalent was averaging 22 percent.  If you are the investor and you are planning to buy the entire business of BRK.B, then you would be paying 90 percent of equity and a 10 percent total debt because cash was less than the debt.

Further, the takeover price of the entire business of BRK.B  to date, July 6, 2013, was $288 billion at $112.63 per share. The market price to date was $114.96 per share.

Net Current Asset Value (NCAV) Method            

The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.

BRK NCAVPS

Explanation

The net current asset value approach tells us that the stock price of BRK.B was trading at an overvalued price. For the reason that the market price was greater than the 66 percent ratio.  The 66 percent ratio was only 14 percent of the market price.

As we can see, the results indicate that BRK.B stock did not pass the stock test because it traded above the liquidation value of the company. Therefore, the price is said to be expensive.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation   

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying.          

BRK MC NCAV

The MC/NCAV valuation shows that stock price was overvalued from 2008 up to the trailing twelve months. For the reason, its ratio exceeded the 1.2 ratios.  Meaning the price was expensive.

 BRK.B margin of Safety (MOS)             

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.

BRK MOS

Explanation

The margin of safety was averaging 36 percent,  this means that if you are buying the stocks of BRK.B you have insufficient security. Below is the formula for intrinsic value as this factor the calculations for the margin of safety.

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable  Growth Rate)               

Explanation

  • EPS: the company’s last 12-month earnings per share;
  • G: the company’s long-  term (five years) sustainable growth estimate;
  • 9: the constant represents the appropriate P-E ratio for a no-growth company, and
  • 2: the average yield on high-grade corporate bonds.

BRK IV

Intrinsic value, it factors earning per share and the growth of the company. The result shows that the earnings per share were averaging $4.85 and the annual growth rate was averaging 23.54 percent, the formula we used is:

EPS

Explanation

The sustainable growth rate (SGR) shows how fast a company can grow by using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know how profitable the company is by its return on equity (ROE). Moreover, you also need to know what percentage of a company’s earnings per share is paid out in dividends, which is called the dividend payout ratio. And from there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

The formula is Sustainable growth rate = ROE x (1 – dividend-payout ratio).

BRK SGR

Explanation

The table shows that the return on equity was averaging 7.27 percent, while the payout ratio was zero percent. Return on Equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. It is also known as Return on net worth. Below is the formula for the return on equity.

Return on Equity = Net Income / Shareholders’ Equity

Return on equity shows how many dollars of earnings result from each dollar of equity. The average approach was used in the above calculations for the sustainable growth rate. Moreover, there is another approach in calculating and that is the average ratio approach.

BRK Relative

Explanation

To sum up the result of these two approaches, it shows that the margin of safety and the intrinsic value are higher in the relative approach. Walking further, I have prepared a graph for the intrinsic value to illustrate to you how the market and the true value is related to the margin of safety.

Intrinsic Value Graph

BRK Graph

Further, as we can see the intrinsic value line was much higher than the enterprise value line, this means there was a margin of safety because the space in between represents the margin of safety.  It is the difference between the true value and the price.

Price to Earnings/Earning Per Share (P/E*EPS)              BBRY PE EPS

Facts

The result of the P/E*EPS valuation shows that the stock price of BRK.B was undervalued from the period 2008 up to the trailing twelve months.  The market price was averaging 97 percent of the P/E*EPS ratio, meaning the stock price was cheap. The price to earnings ratio was averaging $18.15.

Explanation

This valuation shows the relationship between the stock price and the company’s earnings. The price to earnings is the price that the market is willing to pay for the company’s earnings. The price to earnings of the company can change daily as the market price changes. Analysts use the price to earnings ratio more often because it shows if the company is in the growth phase or if the company is mature and how the market is willing to pay. Price to earnings varies as economic changes, different industries and other factors that affect the market price.

The Enterprise Value (EV) /Earning Per Share (EPS) or (EV/EPS)              

BRK EV EPS

The result of the EV/EPS valuation tells us that the price (P/E) was averaging 22 percent and the earnings (EPS) was averaging 78 percent. This valuation is either over or undervalued because the result depends upon the analyst’s own discretion.

Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA).                 

This metric is used in estimating business valuation. EV/EBITDA compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. It is useful for analyzing and comparing profitability between companies and industries. This measure gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

BRK EV EBITDA

Facts

The EV/EBITDA valuation is one measure of the company’s profitability if you want to see the cash-generating power of the entire firm. And you don’t care whether it’s equity or debt financing this cash-generating operation. The reason why EV/EBITDA is used for pure valuation and it is used to find attractive takeover candidates.  The table above indicates that the EV/EBITDA multiple is averaging 8 times.  It means that in buying the entire business of BRK.B it will take 8 times  the cash earnings of the company to recover the costs of purchasing.  In other words, it will take 8 years to recover the costs of buying the entire firm.

Summary

The market capitalization of Berkshire Hathaway Inc (BRK>B) rises 84 percent from 2008. Also, the total debt was averaging 31 percent and the cash and cash equivalent was averaging 22 percent.  Buying the entire business of BRK.B, an investor would be paying 90 percent of equity and a 10 percent total debt because cash was less than the debt. Further, the takeover price of the entire business of BRK.B to date, July 6, 2013, was $288 billion at $112.63 per share. The market price to date was $114.96 per share.

Net Current Asset Value

The net current asset value approach tells us that the stock price was traded at an overvalued price because the market price was greater than the 66 percent ratio. The 66 percent ratio was only 14 percent of the market price. The MC/NCAV valuation indicates that the stock was overvalued because the ratio exceeded the 1.2 ratios.

Margin of Safety

The margin of safety was averaging 36 percent, thus, it indicates that the margin of safety was insufficient because it did not pass the requirement of at least 40 percent.  In addition, the earnings per share were averaging $4.85 and the annual growth rate was averaging 23.54 percent. Moreover, the return on equity was averaging 7.27 percent, while the payout ratio was zero percent.

PE/EPS

Moreover, the result of the P/E*EPS valuation shows that the stock price of BRK.B was undervalued. The market price was averaging 97 percent of the P/E*EPS ratio. Meaning the stock price was cheap. The price to earnings ratio was averaging $18.15.

EV/EPS

The EV/EPS valuation tells us that the price (P/E) was averaging 22 percent. Moreover, the earnings (EPS) was averaging 78 percent.

Further, the EV/EBITDA multiple is averaging 8 times. Meaning, it will take 8 years to recover the costs of buying the entire firm.

Overall

The stock price was undervalued moreover, its margin of safety was not sufficient for a good Buy. Therefore, I recommend a HOLD in the stock of Berkshire Hathaway Inc (BRK.B).

Research and Written by Criselda

Interested in learning more about the company? Here’s company research to know more about its background and history; and value investing guide for the financial status.

Ebix Inc

EBIX Inc (EBIX) Investment Valuation

July 9th, 2013 Posted by Investment Valuation No Comment yet

EBIX Inc (EBIX) is an international supplier of software and e-commerce solutions to the insurance industry have been on and off; accusing of dishonest practices in accounting which have caused the stock to drop by 57 percent from 2011. 

I think you have the idea that this investment valuation report will iterate the know-how of the company when it comes to the market side and how the news mentioned above will greatly affect Ebix Inc. Let’s dig down into the details.

Value Investing Approach on EBIX

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value on EBIX

  EBIX EV

Explanation

The market capitalization of Ebix Inc was trending at a rate of 36 percent average. During 2012, the market cap drops by 25 percent from 2011 but managed to rise by 23 percent in the trailing twelve months. The total debt was averaging 7 percent and the cash and cash equivalent was averaging 4 percent. If buying the entire business of EBIX, the investor would be paying 97 percent of equity and a 3 percent total debt because cash was less than debt. The market price had decreased by 42 percent from that of last year 2012.n:

The takeover price of the EBIX’s entire business to date, June 29, 2013, was $349 million at $8.95 per share. The market price to date was $9.26 per share. 

Net Current Asset Value (NCAV) Approach            

Graham developed and tested the net current asset value (NCAV) approach between 1930 and 1932. Graham reported that the average return, over a 30-year period, on diversified portfolios of net current asset stocks was about 20 percent. And not only that, an outside study showed that from 1970 to 1983, an investor could have earned an average return of 29.4 percent by purchasing stocks that fulfilled Graham’s requirement and holding them for one year.

Net Current Asset Value (NCAV) Method    

The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.

EBIX NCAVPS

The stock price of EBIX was trading at an overvalued price in 2008 up to the trailing twelve months because the market price was greater than the 66 percent ratio. It indicates that the stock was above the liquidation value of the company.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation    

If the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

  Ebix Inc

The MC/NCAV valuation shows that stock price was overvalued in the last five years because the ratio exceeded the 1.2 ratios. The price is considered expensive.

 The margin of Safety (MOS)          

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.

EBIX MOS

Explanation

The above table shows that the margin of safety was averaging 85 percent. The enterprise value was averaging $15, while the intrinsic value was averaging $97.  This means that if you are buying the stocks of EBIX you have the security of 98 percent, further it means that the stock was trading below the real value of the stock. And intrinsic value is the real value of the stock. The formula to be used is:

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)

For instance,

  • EPS: the company’s last 12-month earnings per share;
  • G: the company’s long-term (five years) sustainable growth estimate;
  • 9: the constant represents the appropriate P-E ratio for a no-growth company  and
  • 2: the average yield on high-grade corporate bonds.

   EBIX IV

Explanation

In the calculation of the intrinsic value, we factor earning per share and the growth of the company. The result of the calculation shows that the earning per share was averaging $1.60 and the annual growth rate was averaging 64.15 percent. The term earnings per share (EPS) represents the portion of a company’s earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock. The figure can be calculated simply by dividing net income earned in a given reporting period by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used.

Sustainable growth

Sustainable growth rate (SGR), on the other hand, shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know how profitable the company is as measured by its return on equity (ROE). You also need to know what percentage of a company’s earnings per share is paid out in dividends, which is called the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio. To cut this short, we have the formula: Sustainable growth rate = ROE x (1 – dividend-payout ratio)

     EBIX SGR

The table shows that the return on equity was averaging 28.45 percent, while the payout ratio was averaging 4.17 percent.

  ROE

Return on Equity shows how many dollars of earnings result from each dollar of equity.  Now, there are two approaches to calculating the sustainable growth rate, these are the relative ratio approach and the average ratio approach. Since sustainable growth rate is the factor of intrinsic value, whatever approach you will use might affect the result of the margin of safety and the intrinsic value depending on the result of the average return on equity. To better understand.

Summary represented in the table below

EBIX Relative

To sum up the result of these two approaches, it shows that the margin of safety has both of the same percentages which are 83 percent. However, the growth produces a higher ratio.

Intrinsic Value

EBIX Graph

Explanation

As we can see, the intrinsic value line was much higher than the enterprise value line. And the margin of safety was averaging 98 percent. To explain further, the space in between these two lines is the margin of safety which is the difference between the intrinsic value and the enterprise value. Remember, the intrinsic value is the true value of the stock of the company. The graph means the market price was lower than the true value of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)  

EBIX PE EPS

The P/E*EPS valuation shows that the stock price was undervalued in the last five years. On average, the market price was 83 percent of the P/E*EPS ratio, meaning the stock price was cheap.

This valuation shows the relationship between the stock price and the company’s earnings. The price to earnings is the price that the market is willing to pay for the company’s earnings. The price to earnings of the company can change daily as the market price changes. Analysts use the price to earnings ratio more often because it shows if the company is in the growth phase or if the company is mature and how the market is willing to pay. Price to earnings varies as to economic changes, different industries and other factors that affect the market price.

The Enterprise value (EV) /Earning Per Share (EPS) or (EV/EPS)   

EBIX EV EPS

The result of the EV/EPS valuation tells us that the price (P/E) that was separated from the enterprise value was averaging 64 percent and the earnings (EPS) was averaging 36 percent. The result depends upon the analyst’s own discretion.  It is either over or undervalued.

Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)  

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries. It gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

EBIX EV EBITDA

Explanation

The EV/EBITDA valuation is one measure of the company’s profitability because EBITDA represents the cash earnings of the company exclusive of expenses that has no cash outlays. It will take 10 years to recover the cost of buying.  In other words, to recover the cost of buying the entire business it will take 10 times of the cash earnings to cover the costs.

It will take a long period of waiting because the company was not generating sufficient cash revenues from its operation.

The Summary 

The market capitalization was moving at a rate of 36 percent average. On the other hand, the total debt was averaging 7 percent. And the cash and cash equivalent were averaging  4 percent. Buying the entire business of EBIX, the investor would be paying 97 percent of equity and 3 percent total debt. Because cash was less than debt. The takeover price of the entire business to date, June 29, 2013, was $349 million at $8.95 per share. The market price to date was $9.26 per share.

Net Current Asset Value

The net current asset value approach tells us that the stock price was trading at an overvalued price. Because the market price was greater than the 66 percent ratio. On the other hand, the MC/NCAV indicate an overvalued price because the ratios exceeded the 1.2 ratios.

Margin of Safety

Further, the margin of safety was averaging 85 percent and also, the enterprise value was averaging $15. Intrinsic value, on the other hand, was averaging $97. In addition, the earning per share was averaging $1.60 and the annual growth rate was averaging 64.15 percent. Furthermore, the return on equity was averaging 28.45 percent, and the payout ratio was averaging 4.17 percent.

P/E*EPS

The P/E*EPS valuation shows that the stock price was undervalued in the last five years.  On average, the market price was 83 percent of the P/E*EPS ratio.  In other words, the stock price was cheap. The price (P/E) that was separated from the enterprise value was 64 percent and the earnings (EPS) was 36 percent.

EV/EBITDA

The EV/EBITDA valuation indicates that it will take 10 years to recover the cost of buying the entire business.  In other words, to recover the cost of buying it will take 10 times of the cash earnings of EBIX.

Overall

The stock of EBIX has dropped 57 percent from 2011 due to allegations of inaccuracies in its financial statements.  Goldman Sachs Group Inc plans to buy Ebix at $743 million at $20 per share. Ebix might have difficulty in winning back the trust of its shareholders and the public. Therefore, I recommend a SELL in the stock of EBIX Inc.

Research and Written by Criselda

Bridgepoint Education Inc

Bridgepoint Education Inc (BPI) A Best Buy?

July 7th, 2013 Posted by Investment Valuation No Comment yet

Bridgepoint Education Inc (BPI). When we talk about community colleges, there are so many colleges that pop up in my mind and one of this is the Bridgepoint Education Inc. The question is, “Are community colleges a better bet than any other exclusive schools like Harvard? Is it wise to consider Education Services in our portfolio?”

BPI Value Investing Approach 

This Pricing Model was prepared in a very simple and easy way to value a company for business valuation.  We adopt the investment style which we think applicable to the company, we looked for companies with a strong balance sheet or those with little debt, above average profit margin and ample cash flow. This valuation style is to seek out undervalued companies whose stock price is temporarily down, but fundamentals are sound in the long run. The philosophy was to buy wisely when prices fall and to sell wisely when the prices rise a great deal. My basis of valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. In this model, we calculated first the enterprise value as our initial step in this valuation.

BPI Investment in Enterprise Value    

The concept of enterprise value is to calculate what it would cost to purchase an entire business.

BPI EV

The market capitalization of Bridgepoint Education Inc was erratic in movement. During 2012, it experienced a 53 percent drop from 2011. Total debt was zero percent while its cash and cash equivalent were 54 percent of the enterprise value, thus making the enterprise value lesser than the market value.  The equation in buying the entire business of BPI was 100 percent equity and zero percent total debt.

The takeover price of the entire business of BPI to date, May 19, 2013, was $260 million at $282 million at $5.04 per share. The market price to date was $12.49 per share.

Net Current Asset Value (NCAV) Method   

Studies have all shown that Net Current Asset Value (NCAV) method of selecting stocks has outperformed the market significantly.

 The reason for this is when a stock is trading below the Net Current Asset Value Per Share, they are essentially trading below the company’s liquidation value and therefore, the stock was trading at a bargain, and it is worth buying.

BPI NCAV

The net current asset value approach of Benjamin Graham tells us that the stock price was overvalued from 2010 up to the trailing twelve months. The net current asset value was $206 average while the average net current asset value per share was $3.63 and the 66 percent ratio was $2.40 average. In addition, the market price was $15.78 average.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation

Market Capitalization / NCAV = Result (must be lesser than 1.2)
Bridgepoint Education Inc

The MC/NCAV method tells us that the BPI’s stocks are trading overvalued because the ratio exceeded the 1.2 ratios from 2008 to the trailing twelve months.

The margin of Safety (MOS)           

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.

EV takes into account the balance sheet so it is a much more accurate measure of the company’s true market value than market capitalization. The margin of safety was calculated at Margin of Safety = Enterprise Value – Intrinsic Value. The table shows the historical calculation for the margin of safety.

 Bridgepoint Education Inc

Explanation

The average margin of safety was 97 percent. The intrinsic value was $274 average while the enterprise value was $9 average.

Formula: Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)     

The explanation in the calculation of intrinsic value was as follows:

  • EPS: the company’s last 12-month earnings per share;
  • G: the company’s long-  term (five years) sustainable growth estimate;
  • 9: the constant represents the appropriate P-E ratio for a no-growth  as proposed and
  • 2: the average yield on high-grade corporate bonds.
 Bridgepoint Education Inc

Explanation

The result of the calculation shows that the average earning per share $2.27 and the sustainable growth rate were $50.62 average.  Annual growth rate, on the other hand, was $110 average.

The term earnings per share (EPS) represents the portion of the company’s earnings, net of taxes and preferred stock dividends, that are allocated to each share of common stock. The figure can be calculated by simply dividing net income earned in a given reporting period by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used. The formula for earnings per share was:

     EPS

Sustainable Growth Rate

She sustainable growth rate (SGR), on the other hand, shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio. Sustainable growth rate = ROE x (1 – dividend-payout ratio)

Below is the table for a sustainable growth rate.

BPI SGR

Explanation

The table shows that the return on equity was 50.62 percent, average while the payout ratio was zero percent. This means that  BPI is not giving cash dividends to its shareholders. In addition, the sustainable growth rate was 50.62 as well because there was a zero payout ratio.

To be able to calculate for the SGR, we need to know first the ROE. It shows how many dollars of earnings result from each dollar of equity.

ROE

Intrinsic Value

Let us walk step by step. 

BPI Graph

As we can see, the intrinsic value line was erratic in movement. In 2009 to 2010, the increased was 188 percent, and from 2010 to 2011, there was another increase of 20 percent. Further, it suddenly dropped to 20 percent in 2012 then remained stable for the trailing twelve months.

Explanation

Let us dig a little on the net earnings of the company and find out if the trend is the same as the intrinsic value. The net earnings from 2009 to 2010 had increased by 188 percent, then it increased by 3 percent in 2011 and then dropped to 3 percent in 2012 and 1 percent in the trailing twelve months. You see, whatever trend it has in the intrinsic value, the same trend it has in the net earnings of the company. So, by just looking at the line of the true value of the stock you will know what had happened to the operation of the company, as intrinsic value factors the growth of the company.

Further, the enterprise value remained stable at an average of $9. The margin of safety is the space between these two lines. In other words, it is the difference between enterprise value and the intrinsic value. If you will notice, the intrinsic value line is high above the EV line, meaning, the MOS was high also during these periods.

Price to Earnings/Earning Per Share (P/E*EPS) 

This valuation will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

BPI PE EPS

The stock of BPI was undervalued in 2010 because the enterprise value was lesser than the P/E*EPS ratio. The enterprise value was average $9, while the P/E*EPS ratio was average $17, thus the price was cheap.

The Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS)     

The use of this ratio is to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

BPI EV EPS

The EV/EPS valuation tells us that the price (P/E) was 37 percent while the earnings (EPS) was 63 percent. It indicates that the price was undervalued because the price was lesser than earnings.

Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)     

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses.

BPI EV EBITDA

EV/EBITDA tells us that it will take 2 years to recover the costs of buying the entire business of BPI. In other words, it will take 2 times the cash earnings of BPI to recover the cost of buying the entire business. The EBITDA was 59 percent of the enterprise value.

Overview

The market capitalization of Bridgepoint Education Inc was erratic in movement. In 2012 it experienced a 53 percent drop from 2011. Total debt was zero percent while its cash and cash equivalent were 54 percent of the enterprise value. Thus making the enterprise value lesser than the market value.  The equation in buying the entire business of BPI was 100 percent equity and zero percent total debt.    

The takeover price of the entire business of BPI to date, May 19, 2013, was $260 million at $282 million at $5.04 per share. The market price to date was $12.49 per share.

Net Current Asset Value

The net current asset value approach tells us that the stock price was overvalued. Further, it tells us that the stock of BPI did not pass the stock test. Because the stock was trading above the liquidation value of the company.

On the other hand, the MC/NCAV method tells us that the stocks are trading overvalued. Because the ratio exceeded the 1.2 ratios from 2008 to the trailing twelve months.

Margin of Safety

In addition, the average margin of safety was 97 percent while the intrinsic value was $274 average. The average earning per share was $2.27 and the sustainable growth rate was $50.62 average.  While the annual growth rate was $110 average. And the return on equity was 50.62 percent average so as the sustainable growth rate of 50.62. And the payout ratio was zero percent.

P/E*EPS

The relative valuation in the P/E*EPS valuation indicates that the stock of BPI was undervalued in 2010. For the reason that the enterprise value was lesser than the P/E*EPS ratio. On the other hand, the EV/EPS valuation tells us that the price (P/E) was 37 percent while the earnings (EPS) was 63 percent.

EV/EBITDA

The EV/EBITDA tells us that it will take 2 years to recover the costs of buying the entire business. It will take 2 times the cash earnings to recover the cost of buying the entire business. The EBITDA was 59 percent of the enterprise value.

Overall, the stock price of BPI was undervalued, further, its margin of safety was impressive. Further, the EV/EBITDA was satisfactory, therefore, I recommend a BUY on the stock of Bridgepoint Education Inc.

Research and Written by Criselda

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

Apollo Group Inc

Apollo Group Inc (APOL) Investment Valuation

June 26th, 2013 Posted by Investment Valuation No Comment yet
Apollo Group Inc (APOL). The increasing competition in the Educational Industry, would it be wise to consider education services in our portfolio?  Among these, we are aware that ESI was abused in 2012 in which the stock went down 67 percent.

About APOL

Today, we will touch on the valuation of Apollo Group Inc (APOL), another Educational Services in the USA.  APOL, however, reported an 11.5 percent decrease in its net earnings, principally due to lower enrollment which was down 5.7 percent; as most educational companies experienced the same scenario like DeVry and other known institutions of the same industry peers. One reason for this is the rising competition in online education startups such as Coursera and Udacity.  These programs are giving the students the opportunity to take different courses without having to pay for them.

How long will this industry able to sustain their operations? If you are considering investing in this kind of industry, is it the right time?

APOL Value Investing Approach    

Totem’s Pricing Model was prepared in a very simple and easy way to value a company. We adopted an investment style which we think applicable to the company, we looked for companies with a good balance sheet and undervalued stock price. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. This is considered important because this is a great measure of the total value of a firm and is often good starting points for negotiation of a business.

APOL Investment in Enterprise Value    

The concept of enterprise value is to arrive at a cost to purchase the entire business. In other words, the Enterprise Value (EV) is the present value of the entire company. Market capitalization, on the other hand, is the total value of the company’s equity shares. In essence, EV is the company’s theoretical takeover price, since the buyer would have to buy all of the stock and pay off existing debt and take all any remaining cash. The table below would give us relevant data about APOL.

APOL EV

Explanation

The market capitalization of APOL was decreasing from 2008 at a rate of -80 percent. The total debt represents 7 percent while the cash and cash equivalent were 17 percent greater than the debt. Thus, this makes the enterprise value lesser than the market value because the remaining cash was deducted to the enterprise value. Buying the entire business of APOL is paying 100 percent of its equity, no debt.

The takeover price of the entire business to date, May 27, 2013, is $1.3 billion at $11.48 per share.  Moreover, the market price to date was $20.99 per share.

The Net Current Asset Value Per Share (NCAVPS)

APOL NCAVPS

Explanation

The net current asset value approach indicates that the stock price of APOL was overvalued in five years. The average 66 percent ratio represents $1.87 against the market price of $45.40, average.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation    

Market Capitalization / NCAV = Result (must be lesser than 1.2)    

APOL MC NCAV

The stock price of APOL was overvalued in the last five years because the ratio was more than 1.2 ratio.

 The margin of Safety (MOS)    

The basic meaning of “Margin of Safety” is that investors should only purchase security when the market price is trading at a discount to its intrinsic value, in other words, the market price should be lower than the intrinsic value or true price.

The margin of Safety is the difference between the market price and the intrinsic value, in other words, buying stocks when the market price is lower than its true value.

Formula:

          Margin of Safety = Enterprise Value – Intrinsic Value.

Summary:

The table below shows the historical calculation for the margin of safety.

APOL MOS

The table shows that the average margin of safety on the stock of APOL was 90 percent. This means there is safety in buying the stock of APOL and can be a good candidate for a Buy.

Intrinsic Value formula

          Intrinsic Value = Current Earnings x (9 + 2 x Sustainable  Growth Rate) 

The explanation in the calculation of intrinsic value was as follows:

  • EPS: the company’s last 12-month earnings per share;
  • G: the company’s long-term (five years) sustainable growth estimate;
  • 9: the constant represents the appropriate P-E ratio for a no-growth company and
  • 2: the average yield on high-grade corporate bonds.

APOL IV

Explanation

The average earning per share were $3.50 and the annual growth rate was 104 percent. What is earning per share (EPS)?  EPS represents the portion of a company’s earnings, net of taxes and preferred stock dividends that are allocated to each share of common stock. The figure can be calculated by dividing net income earned in a given reporting period by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used.

Retained Earnings

The formula for earning per share was:

EPS
The sustainable growth rate of a company, tells us how profitable the company is, as measured by its return on equity (ROE). You also need to know what percentage of a company’s earnings per share is paid out in dividends, which is called the dividend payout ratio. From there, multiply the company’s ROE by its low back ratio, which is equal to 1 minus the dividend payout ratio. In other words, Sustainable growth rate = ROE x (1 – dividend-payout ratio)

Sustainable Growth Rate

APOL SGR

The table above shows that the average return on equity was 47.49 percent, the same as the sustainable growth rate because there was a zero payout ratio. APOL is not paying cash dividends to its shareholders’ since 2008.

Return on Equity

Return on Equity shows how many dollars of earnings result from each dollar of equity.

    ROE

Moreover, the computations that were used in the sustainable growth rate was the relative approach. This will also affect the results of the intrinsic value and the margin of safety.  There is another way of calculating, and that is by using the average approach.

Relative and Average Approach

The table below is the summary of the results of using the relative and average approach.
APOL Relative

The table above shows the relative approach produced higher results; the average approach takes into consideration the past period’s performance of the company. If the past period is lower, the current result will be lower as well, and vice versa.

         APOL Graph

Explanation

The above graph above, the intrinsic value line was erratic in movement, uptrend, and downtrend, however, the overall view, it deteriorates from 2008, ranging 403 down to 234 a 42 percent drop. The graph indicates a 90 percent average margin of safety, calculating the difference between enterprise value and the intrinsic value.  Whether the company is in good or bad financial condition it will show in the intrinsic value line. If the earnings of the company are stable, the IV will also show a stable line. This is because the intrinsic value factors the growth of the company.

APOL Relative Valuation Methods 

The concept of relative valuation methods for valuing a stock is to compare market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)  

Multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share.

APOL PE EPS

Explanation

The P/E*EPS indicates that the overall stock price was undervalued. Because the price was lower by a 17 percent average than the P/E*EPS ratio. Thus, the stock price was cheap.

Another way of calculating this valuation is by using the Average approach. The table will show us the difference of using these two approaches. 

APOL Relative PE

It shows that the relative approach has a higher price to earnings than by the results of the average approach. Because the average approach takes into consideration the past period performance.

The Enterprise value (EV) /Earning per Share (EPS) or (EV/EPS)

The use of this ratio is, to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

Explanation

This valuation is the separation of price and earnings in the enterprise value. The price (P/E) that was separated from the enterprise value was 29 percent. And the remaining 79 percent representing the earnings (EPS). This valuation is either over or undervalued.

Enterprise Value (EV) / Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)

It is used to compare the value of the company inclusive of debt to the actual cash earnings. This measure is useful for analyzing and comparing profitability between companies and industries. It tells us how long it would take for the earnings of the company to pay off the price of buying the entire business, including debt.

APOL EV EBITDA

Explanation

The EV/EBITDA tells us that it will take 6 years to recover the cost of purchasing the entire business of APOL.  In other words, it will take 6 times of the cash earnings of the company to recover the buying cost.

EBITDA/EV was 17 percent, meaning the earnings before tax plus depreciation and interest expense represent 17 percent of the enterprise value.
In conclusion,
  • The market capitalization of APOL, in general, was decreasing from 2008 at a rate of -80 percent. The total debt represents 7 percent while the cash and cash equivalent were 17 percent greater than the debt. Buying the entire business of APOL is paying 100 percent of its equity, no debt.
  • The takeover price of the entire business to date, May 27, 2013, is $1.3 billion at $11.48 per share.  Moreover, the market price to date was $20.99 per share.
  •  The price was expensive using Graham’s MC/NCAV method.

Margin of Safety

  • Furthermore, the average margin of safety on the stock of APOL was 90 percent. Further, the average earning per share was $3.50 and the annual growth rate was 104 percent. In addition, the average return on equity was 47.49 percent. The same result for the sustainable growth rate because there was a zero payout ratio.

P/E*EPS

  • The price was lower by a 17 percent average than the P/E*EPS ratio. The price (P/E) that was separated was 29 percent and the remaining 79 percent is the earnings (EPS). This valuation is either over or undervalued depending on the analyst’s own discretion.

EV/EBITDA

  • The EV/EBITDA tells us that it will take 6 years to recover the cost of purchasing the entire business. In other words, it will take 6 times of the cash earnings of the company to recover the buying costs.

EBITDA/EV

  • On the other hand, the EBITDA/EV was 17 percent. It means the earnings before tax plus depreciation and interest expense represent 17 percent of the enterprise value.

The margin of safety was high at 90 percent average.  In addition, the growth of the company was satisfactory including its return on equity. Its price to earnings ratio and the earnings per share was acceptable.  Apollo Group Inc (APOL) was undervalued and a good candidate for a BUY.

Research and written by Criselda

Twitter: criseldarome

Note:

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