The expected return somewhere in the 7-9% range for Buffett holdings.
http://online.wsj.com/article/SB10001424052970203363504577185440666871560.html
Saturday, January 28, 2012
Saturday, January 21, 2012
Infosys (INFY) Analysis
Infosys (INFY) is an Indian IT services company that has world wide presence. It gets most of its business from north america (~60%) with significant revenue from Europe and a very small incremental revenue (~2%) from India.
In the last year, the return (excluding dividends) has been -25% for Infosys and overall return for the past five years has been ~-7% excluding dividends.
Let us see if this is a business worth investing in given that it is the premier IT company in India. Revenues per share have grown from 78 cents/share to $12.78/share from 2000 - 2011. Earnings have grown from 24 cents/share in 2000 to $3/share in 2011.
So, it is not the company fundamentals that have caused stagnation in the stock price. It is the unreasonable expectations of the past that have made the stock price a lot higher than it should have been given the fundamentals.
So, is infosys a good investment now? Infosys faces many challenges moving forward - especially an uncertain 2012 with economic turmoil in Europe. The company can't be termed cheap with respect to cash flow or earnings in the U.S market. There are many companies that are cheaper than Infosys in the U.S market at the moment. However, Infosys is a well run company ( no significant dilution to shareholders from 2006 onwards ) with a strong balance sheet and no debt. It should do well over the long haul.
In the last year, the return (excluding dividends) has been -25% for Infosys and overall return for the past five years has been ~-7% excluding dividends.
Let us see if this is a business worth investing in given that it is the premier IT company in India. Revenues per share have grown from 78 cents/share to $12.78/share from 2000 - 2011. Earnings have grown from 24 cents/share in 2000 to $3/share in 2011.
So, it is not the company fundamentals that have caused stagnation in the stock price. It is the unreasonable expectations of the past that have made the stock price a lot higher than it should have been given the fundamentals.
So, is infosys a good investment now? Infosys faces many challenges moving forward - especially an uncertain 2012 with economic turmoil in Europe. The company can't be termed cheap with respect to cash flow or earnings in the U.S market. There are many companies that are cheaper than Infosys in the U.S market at the moment. However, Infosys is a well run company ( no significant dilution to shareholders from 2006 onwards ) with a strong balance sheet and no debt. It should do well over the long haul.
Google Earning Analysis
I went through google earnings through this table. I like to do my own analysis despite what the analysts say and come to my own conclusions.
After going through this table, the operating income grew by 11% year over year for the full year despite revenue going up 29%. It is still pretty decent but we aren't seeing the heady growth in income we saw before. Google is executing well with mobile (700K phones activated everyday), display ads (5 billion business), youtube and other businesses and will be a force to contend with for years to come. The stock valuation is a different story and it is not cheap by any means. This is keeping in mind that Google is about to buy Motorola Mobility which likely will change the MO relationship in a significant way for Android.
Since we are talking about business as a whole, let us look at the earning call transcript. From Larry Page:
After going through this table, the operating income grew by 11% year over year for the full year despite revenue going up 29%. It is still pretty decent but we aren't seeing the heady growth in income we saw before. Google is executing well with mobile (700K phones activated everyday), display ads (5 billion business), youtube and other businesses and will be a force to contend with for years to come. The stock valuation is a different story and it is not cheap by any means. This is keeping in mind that Google is about to buy Motorola Mobility which likely will change the MO relationship in a significant way for Android.
Since we are talking about business as a whole, let us look at the earning call transcript. From Larry Page:
Each of improved execution and velocity is focus. There are so many opportunities for Google today. But to make a real impact in the world, we need to make hard choices about where to focus our efforts.
Since we last spoke, we've announced that we're closing 12 of our products, including Buzz, Knol and Friend Connect, integrating a whole bunch of others into features of existing products. This means that we can double down on the really big bets we had made like Android, Chrome, Gmail, Display and YouTube. And I'm pleased to say this big bets are really paying off. We're seeing extraordinary velocity, the kind of velocity we only we can dream about. Android is, quite simply, mind-boggling. 700,000 phones are lit up every day. And I'm pleased to announce 250 million Android devices in total, up 50 million since our last announcement just in November. In just 2 days over the holiday weekend, 3.7 million Androids were activated. And today, we're announcing over 11 billion downloads from Android markets. Wow. Ice Cream Sandwich, which is the new Android release in October, is by far our best build yet. And our exciting new phones. I simply love my Galaxy Nexus. Superfast, it's great for photos, has an amazing 720p screen.
Chrome is on fire, too. It's a wonderful example of kind of beautifully simple, intuitive experience that really improves users' lives. People thought we were crazy. Who wants another browser? It turns out a lot of people wanted to get to web quickly and securely, and we've got an amazing, fast-growing fan base all around the world.
From the start, Gmail had security, accessibility. Get all your emails from anywhere on any device. An insane storage. That made it a winner with consumers, businesses and education. From an internal beta project 8 years ago, I'm proud to tell you today that Google Gmail now has more than 350 million active users, and it's growing rapidly. That [indiscernible] said, our merging high-use project -- products can generate huge new businesses for Google in the long run, just like Search, and we have a ton of experience monetizing those old [ph] products over time. Take Display. We brought the science of search to the art of the Display, creating a business that our latest figures show has now reached an annualized run rate of over $5 billion.
I have some exciting new numbers also for the DoubleClick Ad Exchange, spending is up over 130% year-on-year, and the number of buyers and sellers have both more than doubled over the same period. I'm very pleased with the advertising on YouTube. TrueView gives users much more choice over what they watch, and advertisers only pay when someone watches their ad.
It's not just in advertising that we're doing well. Enterprise is doing great with over 5,000 new customers signing up every day. In fact, last week, we signed our biggest ever deal, about 110,000 users at BBDA, one of the world's leading banks. All of our experience says that well-run technology businesses with tremendous consumer research, make a lot of money over the long term.
MSFT - the stock popped, should one buy more or sell?
Microsoft reported its earnings this week and the stock popped as it beat analyst estimates. Let us look at the business as a whole to see if one should buy more or less?
The company's operating income for the first six months of the year decreased by ~1% and declined by ~2% in the December quarter. It is not huge but shows the business dynamics as a whole. The slow down is mostly because of the windows client slow down which will eventually show up in other businesses. However, the net income was up because of other income and a more favorable income tax rate. It didnt hurt that the number of shares outstanding declined by some 2.1%.
The other measure one must watch out for is the growth in share holder equity. The company pays out nearly 7 billion in dividends every year from its cash flows. The shareholder equity increased by about 7 billion dollars for the first six months of the year compared to June 2011. All the increase is from goodwill from the Skype purchase. Since Skype doesn't add to the bottom line yet, this increase in share holder equity will have to wait out to see how it does over time.
The company has prodigious cash flows even though it is somewhat stagnant/slightly declining year over year. The company is impacted by windows client decline but has had increases in server & tools, microsoft business division (where growth is moderating to low single digits) and declining losses in the search business. The entertainment and devices division is showing a larger decline in profits this year probably because of the acquisition of Skype.
With operating income of 27 billion in 2011 that is slightly declining year over year and not much in capex other than people that can be disposed of, a case can be made that Microsoft is under valued. However, a declining business has its own risks and there are many under valued investments available in today's market and will continue to be available. Microsoft provides a good yield that should remain reliable with increasing stock buy back even with declining cash flows. Microsoft's businesses remain solid but their hold on the market may be declining as customers flock to other form factors such as the tablet where Microsoft has been lagging.
The company's operating income for the first six months of the year decreased by ~1% and declined by ~2% in the December quarter. It is not huge but shows the business dynamics as a whole. The slow down is mostly because of the windows client slow down which will eventually show up in other businesses. However, the net income was up because of other income and a more favorable income tax rate. It didnt hurt that the number of shares outstanding declined by some 2.1%.
The other measure one must watch out for is the growth in share holder equity. The company pays out nearly 7 billion in dividends every year from its cash flows. The shareholder equity increased by about 7 billion dollars for the first six months of the year compared to June 2011. All the increase is from goodwill from the Skype purchase. Since Skype doesn't add to the bottom line yet, this increase in share holder equity will have to wait out to see how it does over time.
The company has prodigious cash flows even though it is somewhat stagnant/slightly declining year over year. The company is impacted by windows client decline but has had increases in server & tools, microsoft business division (where growth is moderating to low single digits) and declining losses in the search business. The entertainment and devices division is showing a larger decline in profits this year probably because of the acquisition of Skype.
With operating income of 27 billion in 2011 that is slightly declining year over year and not much in capex other than people that can be disposed of, a case can be made that Microsoft is under valued. However, a declining business has its own risks and there are many under valued investments available in today's market and will continue to be available. Microsoft provides a good yield that should remain reliable with increasing stock buy back even with declining cash flows. Microsoft's businesses remain solid but their hold on the market may be declining as customers flock to other form factors such as the tablet where Microsoft has been lagging.
Sunday, August 14, 2011
Biglari Holdings - BH quarterly analysis
BH is known as a Berkshire wannabe. Biglari Holdings reported quarterly earnings this week. Let us take a quick glance.
The way to value BH is by taking into account three components.
1. Operating cash flow
2. Investments
3. Subtract the incentive compensation part paid to the Chairman
Let us value BH based on these three components:
Operating cash flow:
The SnS brand sales growth is leveling off and Western Sizzling is going down. The top line growth went up by 3.5% and operating earnings by 10%; for the quarter both SNS amd Western Sizzling had less operating profit.
Earning before income tax was 29 million for the first forty weeks. Normalizing to 52 weeks gives a value of 37.7 million.
Investments
Investments totaled 117 million at the end of Q2. Most likely the investments have dropped since Q2 after the market adjusted. The BH group made money with FMMH.PK but the market value of CBRL has dropped since then. Anyway, we will leave it as is for the sake of this analysis.
Adjustment for chairman's compensation
Shareholders equity went up by 10% from Sept of last year, we can assume it will be up by 12% for the year. The chairman will take 1.5% of the addition in book value over 5%. This brings chairmans compensation to ~4 million.
Valuation
At the low end, we will pay 6 multiple for the earnings before income tax as the earnings are flat or declining for the restaurant business. This in addition to the investments and subtracting chairman's compensation gives us a valuation of ~340 million.
At the high end, we will pay 8 multiple for the earnings before income tax. This in addition to the investments and subtracting the chairman's compensation gives us a valuation of ~420 million.
Current Price
Using the treasury stock, we get a valuation of 580 million. Treasury stock is stock held by the various partnerships that Biglari runs under the BH umbrella. The treasury stock is used when voting for the chairman's causes but not used in calculating the EPS figure.
Without the treasury stock, we get a valuation of 450 million with a share price of $340/share.
We believe that BH is currently overvalued. Even adding back 40 million in retained earning for SnS/West and investment gains of 24 million for the next year without including chairman's compensation, we don't find BH to be a bargain even with a high multiple for earnings.
More at: http://valueinvesting.proboards.com/
The way to value BH is by taking into account three components.
1. Operating cash flow
2. Investments
3. Subtract the incentive compensation part paid to the Chairman
Let us value BH based on these three components:
Operating cash flow:
The SnS brand sales growth is leveling off and Western Sizzling is going down. The top line growth went up by 3.5% and operating earnings by 10%; for the quarter both SNS amd Western Sizzling had less operating profit.
Earning before income tax was 29 million for the first forty weeks. Normalizing to 52 weeks gives a value of 37.7 million.
Investments
Investments totaled 117 million at the end of Q2. Most likely the investments have dropped since Q2 after the market adjusted. The BH group made money with FMMH.PK but the market value of CBRL has dropped since then. Anyway, we will leave it as is for the sake of this analysis.
Adjustment for chairman's compensation
Shareholders equity went up by 10% from Sept of last year, we can assume it will be up by 12% for the year. The chairman will take 1.5% of the addition in book value over 5%. This brings chairmans compensation to ~4 million.
Valuation
At the low end, we will pay 6 multiple for the earnings before income tax as the earnings are flat or declining for the restaurant business. This in addition to the investments and subtracting chairman's compensation gives us a valuation of ~340 million.
At the high end, we will pay 8 multiple for the earnings before income tax. This in addition to the investments and subtracting the chairman's compensation gives us a valuation of ~420 million.
Current Price
Using the treasury stock, we get a valuation of 580 million. Treasury stock is stock held by the various partnerships that Biglari runs under the BH umbrella. The treasury stock is used when voting for the chairman's causes but not used in calculating the EPS figure.
Without the treasury stock, we get a valuation of 450 million with a share price of $340/share.
We believe that BH is currently overvalued. Even adding back 40 million in retained earning for SnS/West and investment gains of 24 million for the next year without including chairman's compensation, we don't find BH to be a bargain even with a high multiple for earnings.
More at: http://valueinvesting.proboards.com/
Sunday, June 19, 2011
TARP Warrants issues by company
Company Name
JPM
Capital One
BAC-WTA
BAC-WTB
PNC
WFC
CMA
AIG
citi-a
citi-b
HIG
LNC
FFBCW
VLY
SBIB
WFSLW
BPFHW
WTFCW
TCB/WS
JPM
Capital One
BAC-WTA
BAC-WTB
PNC
WFC
CMA
AIG
citi-a
citi-b
HIG
LNC
FFBCW
VLY
SBIB
WFSLW
BPFHW
WTFCW
TCB/WS
Saturday, June 18, 2011
New forum for financial news and investments
New forum for value investing at http://valueinvesting.proboards.com/
Also you can follow the value investing news at @valinvest
Also you can follow the value investing news at @valinvest
Sunday, October 03, 2010
Why Microsoft stock is not moving up?
In the past columns, we have looked at the balance sheets of several companies. In this analysis, we will take a look at Microsoft balance sheet. Let us see why Microsoft stock is not going up and is there is any prospect for it to go up significantly.
First, let us look at the top line. The overall revenue went up by about 6.8% compared to 2009 and about 3% compared to 2008. The operating income increased by about 18% compared to 2009. Let us look at division by division on how the growth looks like.
Windows & windows live:
Although the profits in windows & windows live went up by 26% compared to FY2009, the profit edged up only by 1.8% compared to FY2008. While some of this can be attributed to a weak economy, the growth of smart phones and the tablet platform may also be contributing to the slow growth.
Server and Tools:
Server and tools has done pretty well even in a tight economy increasing profits through FY 2009 and FY 2010. This division has contributed close to 5 billion in net income to Microsoft's bottom line.
Microsoft Business Division:
Microsoft business division's growth has been flat through FY 2008, FY 2009 and FY 2010. While some of the flat growth may be attributed to the new version of Office coming out, more likely than not, it is likely that the growth in this division will be in single digits.
Online service division:
Microsoft's online service division has been losing money and the gap has increased widely in FY2010. It lost 2.4 billion in FY2010 from 1.6 billion in FY2009. The increased loss is likely to be persist well into FY2011 and FY2012 as Microsoft/Yahoo partnership comes into play.
Entertainment and Devices Division:
It looks as though this division has finally turned the corner and has become profitable. It has generated 589 million in annual profit. I expect this profit to cross 1 billion in FY2011 with continued market share gains for XBox and also increased sales of the Kinect system for gaming.
Microsoft has an excellent cash position which is bolstered by additional debt. The main concern here is the use of cash. Microsoft has shown in the past that it is not very adept in using cash wisely. Thus the increased dividend is a welcome sign for the shareholders. However, the growth of long term debt is not encouraging as it increases the liabilities and weakens the company's otherwise strong balance sheet.
The main concern with Microsoft is the stagnant top line growth in its primary businesses of Windows and Office. The huge losses suffered by the online services division doesnt help the situation. The bright spot for Microsoft is the Server and Tools business. This is followed by the Entertainment and Devices division finally turning the corner.
Microsoft can increase the attractiveness of the stock to the shareholders by increasing the share re-purchase followed by increased dividend payout. As a top rated company, the payout will eventually get investor interest.
First, let us look at the top line. The overall revenue went up by about 6.8% compared to 2009 and about 3% compared to 2008. The operating income increased by about 18% compared to 2009. Let us look at division by division on how the growth looks like.
Windows & windows live:
Although the profits in windows & windows live went up by 26% compared to FY2009, the profit edged up only by 1.8% compared to FY2008. While some of this can be attributed to a weak economy, the growth of smart phones and the tablet platform may also be contributing to the slow growth.
Server and Tools:
Server and tools has done pretty well even in a tight economy increasing profits through FY 2009 and FY 2010. This division has contributed close to 5 billion in net income to Microsoft's bottom line.
Microsoft Business Division:
Microsoft business division's growth has been flat through FY 2008, FY 2009 and FY 2010. While some of the flat growth may be attributed to the new version of Office coming out, more likely than not, it is likely that the growth in this division will be in single digits.
Online service division:
Microsoft's online service division has been losing money and the gap has increased widely in FY2010. It lost 2.4 billion in FY2010 from 1.6 billion in FY2009. The increased loss is likely to be persist well into FY2011 and FY2012 as Microsoft/Yahoo partnership comes into play.
Entertainment and Devices Division:
It looks as though this division has finally turned the corner and has become profitable. It has generated 589 million in annual profit. I expect this profit to cross 1 billion in FY2011 with continued market share gains for XBox and also increased sales of the Kinect system for gaming.
Microsoft has an excellent cash position which is bolstered by additional debt. The main concern here is the use of cash. Microsoft has shown in the past that it is not very adept in using cash wisely. Thus the increased dividend is a welcome sign for the shareholders. However, the growth of long term debt is not encouraging as it increases the liabilities and weakens the company's otherwise strong balance sheet.
The main concern with Microsoft is the stagnant top line growth in its primary businesses of Windows and Office. The huge losses suffered by the online services division doesnt help the situation. The bright spot for Microsoft is the Server and Tools business. This is followed by the Entertainment and Devices division finally turning the corner.
Microsoft can increase the attractiveness of the stock to the shareholders by increasing the share re-purchase followed by increased dividend payout. As a top rated company, the payout will eventually get investor interest.
Sunday, June 20, 2010
Microsoft, Google, Apple, Yahoo revisited
In a previous article we looked at Microsoft, Google and Yahoo. In this article, we will look at these companies again. We have added Apple and Yahoo to the list to see how the tech industry is shaping up.
Microsoft
In the latest quarter, Microsoft had earnings of 4006 million dollars. After paying out dividends of 1139 million dollars for the quarter with a capex of 408 million dollars, Microsoft has a net accretion of 2459 million dollars. Microsoft also spent 143 million dollars for acquisitions which we wont include in this computation.
From the balance sheet, Microsoft has 39,666 million dollars in cash, cash equivalents and short term investments. Of this amount,~6000 million dollars is from short term, long term debt. Backing the debt out, Microsoft has approximately 33,666 million dollars in cash, cash equivalents and short term investments.
Google
Google had a net income of 1955 million dollars in Q1 2010. Google spent 239 million dollars in capex in the same quarter. Google doesnt pay out any dividends - this left Google with a net positive cash flow of 1716 million dollars.
Google also has cash and marketable securities worth 26.5 billion dollars on the balance sheet. While this is not the same as Microsoft, the war chest is comparable in size while being off by about seven billion dollars.
Apple
Apple had a net income of 6452 million for the first six months of the year. Backing out the capex, the income averages to 2951 million dollars for the quarter.
Apple has cash, short term securities and long term marketable securities in the amount of 41704 million dollars.
Yahoo
Yahoo had operating income of 118.7 million dollars. The company had a capex of 70 million in the same period. The net cash flow was 48.7 million dollars in that period.
The company has more than 2 billion in cash and equivalents.
Comparison
Microsoft has very robust revenue stream primarily from the windows and office franchises. The server and tools business has generated net income of about a billion dollars. The server and tools business is facing a well entrenched adversary in Oracle who recently bought Sun which gives it the range it didnt have before.
Apple is on the acendancy where the popularity of its iPhone platform has enabled it to gain market share with iPad tablets and also with Mac converts. Its overall cash balance is higher than that of Microsoft its net income is robust.
Google has a very strong balance sheet and continues to build its cash pile. Although it made a mistake in dealing with China, it has got a very strong international presence. Microsoft has 2 billion dollars yearly revenue from its online services division but is losing a dollar for every dollar in revenue. Google is closing in on 28 billion dollar in annual revenue which makes it about ten times bigger than Microsoft in the same space. Even taking over all of Yahoo's search isn't likely impact Google much in the search space. Google is increasingly becoming the dominant player in the mobile handset space by taking over market share with its Android OS. Android is expected to displace RIMM as the top OS in the smart phone space in the next three years.
Microsoft
In the latest quarter, Microsoft had earnings of 4006 million dollars. After paying out dividends of 1139 million dollars for the quarter with a capex of 408 million dollars, Microsoft has a net accretion of 2459 million dollars. Microsoft also spent 143 million dollars for acquisitions which we wont include in this computation.
From the balance sheet, Microsoft has 39,666 million dollars in cash, cash equivalents and short term investments. Of this amount,~6000 million dollars is from short term, long term debt. Backing the debt out, Microsoft has approximately 33,666 million dollars in cash, cash equivalents and short term investments.
Google had a net income of 1955 million dollars in Q1 2010. Google spent 239 million dollars in capex in the same quarter. Google doesnt pay out any dividends - this left Google with a net positive cash flow of 1716 million dollars.
Google also has cash and marketable securities worth 26.5 billion dollars on the balance sheet. While this is not the same as Microsoft, the war chest is comparable in size while being off by about seven billion dollars.
Apple
Apple had a net income of 6452 million for the first six months of the year. Backing out the capex, the income averages to 2951 million dollars for the quarter.
Apple has cash, short term securities and long term marketable securities in the amount of 41704 million dollars.
Yahoo
Yahoo had operating income of 118.7 million dollars. The company had a capex of 70 million in the same period. The net cash flow was 48.7 million dollars in that period.
The company has more than 2 billion in cash and equivalents.
Comparison
Microsoft has very robust revenue stream primarily from the windows and office franchises. The server and tools business has generated net income of about a billion dollars. The server and tools business is facing a well entrenched adversary in Oracle who recently bought Sun which gives it the range it didnt have before.
Apple is on the acendancy where the popularity of its iPhone platform has enabled it to gain market share with iPad tablets and also with Mac converts. Its overall cash balance is higher than that of Microsoft its net income is robust.
Google has a very strong balance sheet and continues to build its cash pile. Although it made a mistake in dealing with China, it has got a very strong international presence. Microsoft has 2 billion dollars yearly revenue from its online services division but is losing a dollar for every dollar in revenue. Google is closing in on 28 billion dollar in annual revenue which makes it about ten times bigger than Microsoft in the same space. Even taking over all of Yahoo's search isn't likely impact Google much in the search space. Google is increasingly becoming the dominant player in the mobile handset space by taking over market share with its Android OS. Android is expected to displace RIMM as the top OS in the smart phone space in the next three years.
Microsoft is competing in multiple markets and each of the markets, it is facing well entrenched competitors with huge war chests. The other companies are attacking Microsoft from the fringes which is likely to put increasing pressure on Microsoft's core franchises. The tech landscape is likely change significantly in the next several years with power shifting to different players in the tech space. This is likely to spur more innovation in the tech space and offer more opportunities to tech entrepreneurs.
Sunday, May 09, 2010
BH - Biglari Holdings, A turn for the worse?
Recently, BH (Biglari Holdings) which was renamed from SNS announced a new incentive package for the CEO and Chairman, Sardar Biglari. In the new scheme, the company plans to pay Mr. Biglari an incentive bonus of 25% of book value above 5% increase in book value every year. The matter is subject to share holder approval. Given that the name change to Biglari Holdings got 90% approval, it is likely that the change in compensation scheme will also pass shareholder approval.
Let us take a quick look at the financials to see why this deal is a good one for Mr Biglari but a bad one for the shareholders.
Looking at value line, the book value increased at 25%/year clip from 1994-1999 and at an 8.9% clip from 1999 - 2007 well before Mr. Biglari took over the reins of the company. Even if Biglari didn't do anything, BH is likely grow the book value at 8-10% pace/year. Since Biglari's compensation is tied to book value growth, the growth would have been limited to 20%/year from 94-99 and 7.9%/year from 94-99. The shareholders compounding rate will be limited because of this change.
More importantly, Biglari generated quite a bit of good will among investors for turning around SNS and improving the share holder value. However, Mr Biglari's recent actions have lost him some of the goodwill. He effected a reverse split and also named the company after himself. He will be facing headwinds moving forward. His current approach to incent himself and not have anything for his employees is likely cause problems downstream to retain talented employees.
His attempts to buy out itex and fmmh have been spurned. It is likely that future acquisition targets will continue to site the SNS case, the name change and then the compensation scheme on why future acquisitions are a bad value.
The company's intrinsic value is lower than what it was before the new incentive scheme. The company is fairly valued to slightly overpriced at current book value and taking into account the 2010/2011 estimated EPS of $15 and $18/share respectively. The EPS still likely not hit the highs of 2004-2006 at $20+/share. The compensation scheme and the fate of SNS post acquisition will reduce value for shareholders in this company.
Let us take a quick look at the financials to see why this deal is a good one for Mr Biglari but a bad one for the shareholders.
Looking at value line, the book value increased at 25%/year clip from 1994-1999 and at an 8.9% clip from 1999 - 2007 well before Mr. Biglari took over the reins of the company. Even if Biglari didn't do anything, BH is likely grow the book value at 8-10% pace/year. Since Biglari's compensation is tied to book value growth, the growth would have been limited to 20%/year from 94-99 and 7.9%/year from 94-99. The shareholders compounding rate will be limited because of this change.
More importantly, Biglari generated quite a bit of good will among investors for turning around SNS and improving the share holder value. However, Mr Biglari's recent actions have lost him some of the goodwill. He effected a reverse split and also named the company after himself. He will be facing headwinds moving forward. His current approach to incent himself and not have anything for his employees is likely cause problems downstream to retain talented employees.
His attempts to buy out itex and fmmh have been spurned. It is likely that future acquisition targets will continue to site the SNS case, the name change and then the compensation scheme on why future acquisitions are a bad value.
The company's intrinsic value is lower than what it was before the new incentive scheme. The company is fairly valued to slightly overpriced at current book value and taking into account the 2010/2011 estimated EPS of $15 and $18/share respectively. The EPS still likely not hit the highs of 2004-2006 at $20+/share. The compensation scheme and the fate of SNS post acquisition will reduce value for shareholders in this company.
Saturday, July 04, 2009
Infosys Analysis
In this account, we will take a look at Infosys, the Indian outsourcing giant that has continued to do well inspite of the economic turmoil in the last two quarters.
Infosys is an Indian outsourcing company that has done remarkably well in the past ten years. The net income after income taxes has increased from 61.5 million dollars in 1998 to 1.281 billion dollars in 2008. The EPS has also grown from 0.12 cents a share to 2.25 dollars a share in the same period. The number of shares has increased from 526 million to 570 million in the same period. The growth in the number of shares has diminished somewhat from 2008 till now primarily because of the elimination of stock option grants to employees.
The cashflow and balance sheet at Infosys is very sound. Infosys has about 1.1 billion in free cash flow yearly with about 2.7 billion in net cash in the balance sheet. Although the current economic climate may last for sometime, Infosys is well equipped to weather the storm.
Infosys employs about 100,000 people world wide with more than 75 nationalities represented. Infosys revenue grew by 35% in 2008 and 12% in 2009 in dollar terms. However, in Rupee terms, it grew by 20% in 2008 and 30% in 2009. Since most of Infosys employees are based in India, the depreciation in the value of the Indian currency has played to Infosys's advantage. During fiscal 2009, Infosys has added more clients (579) compared to the year before (538) with average sales per client coming in at 8.05 million dollars. The average sales per client has increased in 2009 compared to 2008. The revenue mix from the top ten clients has increased in 2009 compared to 2008.
From a price/cashflow basis, Infosys stock is cheaper than Google, RIMM and Amazon. However, it is also slightly more expensive than Microsoft and Apple.
Comparing companies in the outsourcing business, Infosys is cheaper than Wipro and Cognizant. However, it is more expensive than Accenture, Hewlett Packard and IBM. In the general market, there may also be better value plays than Infosys at the moment.
From a business model perspective, Infosys has fewer risks compared to tech giants such as Google, RIMM, Microsoft and Apple. Changes in technology are unlikely to hurt Infosys in any major way and may infact help increase Infosys revenues significantly.
Infosys is an Indian outsourcing company that has done remarkably well in the past ten years. The net income after income taxes has increased from 61.5 million dollars in 1998 to 1.281 billion dollars in 2008. The EPS has also grown from 0.12 cents a share to 2.25 dollars a share in the same period. The number of shares has increased from 526 million to 570 million in the same period. The growth in the number of shares has diminished somewhat from 2008 till now primarily because of the elimination of stock option grants to employees.
The cashflow and balance sheet at Infosys is very sound. Infosys has about 1.1 billion in free cash flow yearly with about 2.7 billion in net cash in the balance sheet. Although the current economic climate may last for sometime, Infosys is well equipped to weather the storm.
Infosys employs about 100,000 people world wide with more than 75 nationalities represented. Infosys revenue grew by 35% in 2008 and 12% in 2009 in dollar terms. However, in Rupee terms, it grew by 20% in 2008 and 30% in 2009. Since most of Infosys employees are based in India, the depreciation in the value of the Indian currency has played to Infosys's advantage. During fiscal 2009, Infosys has added more clients (579) compared to the year before (538) with average sales per client coming in at 8.05 million dollars. The average sales per client has increased in 2009 compared to 2008. The revenue mix from the top ten clients has increased in 2009 compared to 2008.
From a price/cashflow basis, Infosys stock is cheaper than Google, RIMM and Amazon. However, it is also slightly more expensive than Microsoft and Apple.
Comparing companies in the outsourcing business, Infosys is cheaper than Wipro and Cognizant. However, it is more expensive than Accenture, Hewlett Packard and IBM. In the general market, there may also be better value plays than Infosys at the moment.
From a business model perspective, Infosys has fewer risks compared to tech giants such as Google, RIMM, Microsoft and Apple. Changes in technology are unlikely to hurt Infosys in any major way and may infact help increase Infosys revenues significantly.
Sunday, June 28, 2009
Microsoft, Google and Yahoo!
In this blog, we will look at the balance sheets of Microsoft, Google and Yahoo! to see how these companies are doing in the downturn.
In the last quarter of 2008, the market was in a freefall causing dislocations in the search, advertising businesses. Thus Q1 of 2009 provides a good picture of how the companies are doing with respect to search and advertising businesses. Let us take a look.
Google:
Google had total income of 1.4 billion dollars after income taxes. Google spent 262 million dollars to purchase plant, property and equipment. Google doesnt pay a dividend - this makes the overall cash available for other activities 1.138 billion dollars.
Yahoo!:
Yahoo!'s income from operations fell to 117 million dollars in Q1 of 2009 from about 530 million dollars in Q1 of 2008. Yahoo! also spent about 70 million on capex. Thus the cash available for other activities is about 47 million dollars.
Microsoft:
Microsoft on the other hand relies exclusively on its other businesses to fund the search operations. Let us take a look at Microsoft's online services business.
In the January - March quarter, the online services business had revenues of 721 million dollars and a loss of 575 million dollars. For the first nine months of the year, Microsoft had revenues of 2.4 billion dollars and a loss of 1.5 billion dollars.
Let us see how Microsoft's other businesses are doing to see if Microsoft can keep up these losses without impairing its ability to compete in other areas.
In the Jan-March quarter, Microsoft had 2.977 billion in net income. Microsoft paid 1.155 billion dollars in dividends in the quarter. In addition, Microsoft had capital expenditures for plant, property and equipment of 632 million dollars. Overall cash that is available after these expenses is 1.19 billion dollars.
Microsoft took a large hit in the windows client operating profits with profits dropping by more than a billion dollars because of the rise of netbooks.
Thus looking at the cash flows and the cash on the balance sheet, it doesnt look as though Microsoft will be able to unseat the incumbent Google in the search market unless Google makes mistakes and hands over the reigns to Microsoft.
The Yahoo! market cap is about 22 billion dollars. It is unlikely that any buyout can happen for less than 30-35 billion dollars. Also, the parting of Yahoo! search to Microsoft is likely to cost Microsoft good amounts of money.
In the last quarter of 2008, the market was in a freefall causing dislocations in the search, advertising businesses. Thus Q1 of 2009 provides a good picture of how the companies are doing with respect to search and advertising businesses. Let us take a look.
Google:
Google had total income of 1.4 billion dollars after income taxes. Google spent 262 million dollars to purchase plant, property and equipment. Google doesnt pay a dividend - this makes the overall cash available for other activities 1.138 billion dollars.
Yahoo!:
Yahoo!'s income from operations fell to 117 million dollars in Q1 of 2009 from about 530 million dollars in Q1 of 2008. Yahoo! also spent about 70 million on capex. Thus the cash available for other activities is about 47 million dollars.
Microsoft:
Microsoft on the other hand relies exclusively on its other businesses to fund the search operations. Let us take a look at Microsoft's online services business.
In the January - March quarter, the online services business had revenues of 721 million dollars and a loss of 575 million dollars. For the first nine months of the year, Microsoft had revenues of 2.4 billion dollars and a loss of 1.5 billion dollars.
Let us see how Microsoft's other businesses are doing to see if Microsoft can keep up these losses without impairing its ability to compete in other areas.
In the Jan-March quarter, Microsoft had 2.977 billion in net income. Microsoft paid 1.155 billion dollars in dividends in the quarter. In addition, Microsoft had capital expenditures for plant, property and equipment of 632 million dollars. Overall cash that is available after these expenses is 1.19 billion dollars.
Microsoft took a large hit in the windows client operating profits with profits dropping by more than a billion dollars because of the rise of netbooks.
Thus looking at the cash flows and the cash on the balance sheet, it doesnt look as though Microsoft will be able to unseat the incumbent Google in the search market unless Google makes mistakes and hands over the reigns to Microsoft.
The Yahoo! market cap is about 22 billion dollars. It is unlikely that any buyout can happen for less than 30-35 billion dollars. Also, the parting of Yahoo! search to Microsoft is likely to cost Microsoft good amounts of money.
Sunday, March 22, 2009
Cloud platform - the next generation of computing
There are several players in the cloud computing market at the moment. They vary from tech behemoths such as Microsoft, Amazon and Google to small players such as Rackspace. In this blog, we will analyze the different players and check their strengths and weaknesses.
Google offers web hosting and provides storage services through its app engine platform. However, the range of programming languages one can use with Google app engine platform is limited. The limited options also limit Google's ability to attract more programmers.
Microsoft has started offering web hosting and storage service. Currently this service is free and can be used within limits.
Offering widely used cloud services may not work well for Microsoft or Google. This business is a low margin business. While Microsoft enjoys wide margins on its productivity and operating system businesses, Google enjoys wide profit margins in its search business. The cloud business offers very low margins and it is a model that can threaten Microsoft's entire business model.
Amazon offers the best of breed cloud storage service. It also provides EC2 compute service. Amazon has also moved to offer CDN services based off of its storage engine.
Rackspace offers better pricing than Amazon in providing cloud storage and web hosting services. It also offers to host e-mail for qualified customers. Rackspace has teamed up with limelight networks to offer CDN service.
Sun Microsystems and EMC are also interested in cloud computing. Sun has historically been a player with storage technologies. EMC meanwhile has an interest in the cloud to sell more storage. It could get really interesting if IBM buys SUN. IBM would likely sell consulting services on top of the cloud software developed by SUN. There are other players such as AT&T, EDS, CSC who are also in this market.
Rackspace Systems is based off of San Antonio, Texas. It is a public company and provides details of its operations. It has been in the cloud business for some time now – its 10K shows revenue of $720/customer/year. The company doesn’t break down its profit margins for cloud vs other services ( like web hosting, hosted e-mail etc. ) The majority of the company’s revenue is through non cloud services. In fact, cloud services only make up 4% of Rackspace's market segment. However, the cloud segment is growing very quickly with 500% growth year over year. Overall, Rackspace's business is growing at 46% year over year. Rackspace has a pretax margin of 7% and after tax margin of 4%
The allure of cheaper maintenance and less capex will lure more services to migrate to the cloud in the coming years. It is difficult to predict a winner at this time, more likely than not, the winner will be a company that is not a prominent tech titan. The low margins make this model particularly attractive to companies such as Amazon and Rackspace. Others such as IBM ( with SUN ) may also find this space interesting as they add value added services and special hardware.
Google offers web hosting and provides storage services through its app engine platform. However, the range of programming languages one can use with Google app engine platform is limited. The limited options also limit Google's ability to attract more programmers.
Microsoft has started offering web hosting and storage service. Currently this service is free and can be used within limits.
Offering widely used cloud services may not work well for Microsoft or Google. This business is a low margin business. While Microsoft enjoys wide margins on its productivity and operating system businesses, Google enjoys wide profit margins in its search business. The cloud business offers very low margins and it is a model that can threaten Microsoft's entire business model.
Amazon offers the best of breed cloud storage service. It also provides EC2 compute service. Amazon has also moved to offer CDN services based off of its storage engine.
Rackspace offers better pricing than Amazon in providing cloud storage and web hosting services. It also offers to host e-mail for qualified customers. Rackspace has teamed up with limelight networks to offer CDN service.
Sun Microsystems and EMC are also interested in cloud computing. Sun has historically been a player with storage technologies. EMC meanwhile has an interest in the cloud to sell more storage. It could get really interesting if IBM buys SUN. IBM would likely sell consulting services on top of the cloud software developed by SUN. There are other players such as AT&T, EDS, CSC who are also in this market.
Rackspace Systems is based off of San Antonio, Texas. It is a public company and provides details of its operations. It has been in the cloud business for some time now – its 10K shows revenue of $720/customer/year. The company doesn’t break down its profit margins for cloud vs other services ( like web hosting, hosted e-mail etc. ) The majority of the company’s revenue is through non cloud services. In fact, cloud services only make up 4% of Rackspace's market segment. However, the cloud segment is growing very quickly with 500% growth year over year. Overall, Rackspace's business is growing at 46% year over year. Rackspace has a pretax margin of 7% and after tax margin of 4%
The allure of cheaper maintenance and less capex will lure more services to migrate to the cloud in the coming years. It is difficult to predict a winner at this time, more likely than not, the winner will be a company that is not a prominent tech titan. The low margins make this model particularly attractive to companies such as Amazon and Rackspace. Others such as IBM ( with SUN ) may also find this space interesting as they add value added services and special hardware.
Sunday, March 01, 2009
Saturday, February 28, 2009
Berkshire Hathaway 2008 Annual Report
Berkshire Hathaway released its Q4 and annual report today. We have covered Berkshire in other sections in this blog. For the previous sections please take a look at this report:
The last report in this blog.
Now fast forward to the current year, will Berkshire be a sound investment for 2009 and 2010?
The company continues to be very sound and is increasing its moat in many segments of its operating businesses. Let us do a quick intrinsic value check as of 12/31/2008. If we use Warren Buffett's two column method, we have 122 billion in cash and investments + earnings per share of 3224. At the end of 2008, the intrinsic value of the company was around 110K/A share.
Berkshire as a company earns between 10-12 billion dollars a year from its various operations. This is accretive to the book value of the company. Typically, this money is invested to return 10-15% returns. It is very important to note that Berkshire is a compounding asset even when the markets are down as opposed to some of the other companies which rely on the consumer spending to rebound.
To see how the operating businesses will do, let us look at how the operating businesses did in Q4 of 2008 and equate it to 2009. In 2009, we have:
1. Insurance, Re-insurance:
This should do better than 2008. Primarily this is because of the financial position of hedge funds and other businesses having problems with capital.
2. Utility sector:
This sector should continue to do well in 2009 inspite of the economy. We can peg its earnings at par with 2008 if not more.
3. Investment and derivative gains/losses:
This should abate from its 2008 levels. My expectation is that it should start posting a gain from 2010 onwards.
4. Dividend and interest income:
I believe this should increase significantly in 2009 compared to 2008. This declined slightly in 2008 compared to 2008 but should pick up in 2009, 2010.
5. Income from manufacturing and other businesses:
This may decline by upto 20% but such a decline will reduce operating earnings by about 500 million dollars. I believe this should be made up by the gains in insurance which is gaining market share.
6. Investment portfolio:
This should recover from current position by end of 2009 or atleast in 2010.
From a three-five year horizon, Berkshire looks attractive. It looks more attractive than many other stand alone businesses which are trading at low prices in today's market.
The last report in this blog.
Now fast forward to the current year, will Berkshire be a sound investment for 2009 and 2010?
The company continues to be very sound and is increasing its moat in many segments of its operating businesses. Let us do a quick intrinsic value check as of 12/31/2008. If we use Warren Buffett's two column method, we have 122 billion in cash and investments + earnings per share of 3224. At the end of 2008, the intrinsic value of the company was around 110K/A share.
Berkshire as a company earns between 10-12 billion dollars a year from its various operations. This is accretive to the book value of the company. Typically, this money is invested to return 10-15% returns. It is very important to note that Berkshire is a compounding asset even when the markets are down as opposed to some of the other companies which rely on the consumer spending to rebound.
To see how the operating businesses will do, let us look at how the operating businesses did in Q4 of 2008 and equate it to 2009. In 2009, we have:
1. Insurance, Re-insurance:
This should do better than 2008. Primarily this is because of the financial position of hedge funds and other businesses having problems with capital.
2. Utility sector:
This sector should continue to do well in 2009 inspite of the economy. We can peg its earnings at par with 2008 if not more.
3. Investment and derivative gains/losses:
This should abate from its 2008 levels. My expectation is that it should start posting a gain from 2010 onwards.
4. Dividend and interest income:
I believe this should increase significantly in 2009 compared to 2008. This declined slightly in 2008 compared to 2008 but should pick up in 2009, 2010.
5. Income from manufacturing and other businesses:
This may decline by upto 20% but such a decline will reduce operating earnings by about 500 million dollars. I believe this should be made up by the gains in insurance which is gaining market share.
6. Investment portfolio:
This should recover from current position by end of 2009 or atleast in 2010.
From a three-five year horizon, Berkshire looks attractive. It looks more attractive than many other stand alone businesses which are trading at low prices in today's market.
Sunday, February 15, 2009
Preferred stocks
Let us take a look at what constitutes a preferred stock. From investopedia, we have the following definition:
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
Many of the preferred stocks are callable. Let us see what does this mean, again from investopedia:
A type of preferred stock that carries the provision that the issuer has the right to call in the stock at a certain price and retire it. Also known as "redeemable preferred stock".
The preferred stock is different than a convertible. A convertible is typically a bond that pays a certain interest that later can be converted to common stock.
When we analyze some of the preferred stocks, it is common to see the term "debenture" in the literature. Let us see what this stands for. Investopedia helps us again.
"A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital."
Now, let us take a look to see who issues preferred stocks. It is typically the financial institutions and utilities that issue preferred stocks. The banks typically issue preferred stocks as they are able to raise capital without diluting the equity holders.
Typically, a preferred is not a great investment as they may not be called on the callable date as they typically pay a dividend to perpetuity. The second problem with preferred stocks is that the dividend doesnt increase with the companies earnings but the price of the preferred may see wide fluctuations.
So, why is the preferred stock interesting? From Wall Street Journal page, many preferred stocks are generating attractive yields. Some of the banks are particularly interesting. The strongest banks in the US include Wells Fargo and USB. How do we analyze the preferred stocks? There are two tests that come to play.
1. Is the bank stable enough to pay the dividends and outlast this downturn?
2. How is the interest rate calculated? E.g: If the interest is a fixed percentage, one may lose out if the market rebounds and inflation creeps in. However, if the interest is pegged to the LIBOR, the odds of failing against inflation is low.
Investopedia helps us define LIBOR again:
The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.
Now, let us see which banks have yield against the LIBOR and which ones dont. The WSJ article shows us the current yields on preferred stocks. The yields are wider on banks with troubled assets - e.g: Bank of America and MBNA. The yields are lower on Wells Fargo and USB which have stronger franchises. The regional banks such as Suntrust also enjoy a higher yield as they are perceived to be weaker franchises compared to the larger operations.
The website Quantum Online lists some exotic securities one can follow through. Let us look at a couple of securities.
The first one is USB-L and USB-H. USB-L is currently trading at a higher price but offers about the same dividend as USB-L. While there is certainly more downside risk for both, there is a key difference between these two offerings. While offering identical yields, USB-H is trading at a significantly lower price than USB-L. This is because USB-L offers a higher yield that is fixed at a specific rate. If the inflation is to increase, USB-H will become more attractive than USB-L. From a longer term point of view, USB-H is more attractive than USB-L as USB-H offers more upside. Specifically, USB-H offers more opportunities for capital gains than USB-L.
There are other preferred stocks that one can browse in the above links. Each of them offers its own risks and rewards. One should do one's own due diligence before jumping and buying these stocks.
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
Many of the preferred stocks are callable. Let us see what does this mean, again from investopedia:
A type of preferred stock that carries the provision that the issuer has the right to call in the stock at a certain price and retire it. Also known as "redeemable preferred stock".
The preferred stock is different than a convertible. A convertible is typically a bond that pays a certain interest that later can be converted to common stock.
When we analyze some of the preferred stocks, it is common to see the term "debenture" in the literature. Let us see what this stands for. Investopedia helps us again.
"A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital."
Now, let us take a look to see who issues preferred stocks. It is typically the financial institutions and utilities that issue preferred stocks. The banks typically issue preferred stocks as they are able to raise capital without diluting the equity holders.
Typically, a preferred is not a great investment as they may not be called on the callable date as they typically pay a dividend to perpetuity. The second problem with preferred stocks is that the dividend doesnt increase with the companies earnings but the price of the preferred may see wide fluctuations.
So, why is the preferred stock interesting? From Wall Street Journal page, many preferred stocks are generating attractive yields. Some of the banks are particularly interesting. The strongest banks in the US include Wells Fargo and USB. How do we analyze the preferred stocks? There are two tests that come to play.
1. Is the bank stable enough to pay the dividends and outlast this downturn?
2. How is the interest rate calculated? E.g: If the interest is a fixed percentage, one may lose out if the market rebounds and inflation creeps in. However, if the interest is pegged to the LIBOR, the odds of failing against inflation is low.
Investopedia helps us define LIBOR again:
The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.
Now, let us see which banks have yield against the LIBOR and which ones dont. The WSJ article shows us the current yields on preferred stocks. The yields are wider on banks with troubled assets - e.g: Bank of America and MBNA. The yields are lower on Wells Fargo and USB which have stronger franchises. The regional banks such as Suntrust also enjoy a higher yield as they are perceived to be weaker franchises compared to the larger operations.
The website Quantum Online lists some exotic securities one can follow through. Let us look at a couple of securities.
The first one is USB-L and USB-H. USB-L is currently trading at a higher price but offers about the same dividend as USB-L. While there is certainly more downside risk for both, there is a key difference between these two offerings. While offering identical yields, USB-H is trading at a significantly lower price than USB-L. This is because USB-L offers a higher yield that is fixed at a specific rate. If the inflation is to increase, USB-H will become more attractive than USB-L. From a longer term point of view, USB-H is more attractive than USB-L as USB-H offers more upside. Specifically, USB-H offers more opportunities for capital gains than USB-L.
There are other preferred stocks that one can browse in the above links. Each of them offers its own risks and rewards. One should do one's own due diligence before jumping and buying these stocks.
Saturday, January 31, 2009
Amazon.com analysis
Amazon's business is as follows:
We seek to be Earth’s most customer-centric company for three primary customer sets: consumer customers, seller customers and developer customers. In addition, we generate revenue through co-branded credit card agreements and other marketing and promotional services, such as online advertising.
Consumer Customers
We serve our consumer customers through our retail websites and focus on selection, price, and convenience. We design our websites to enable millions of unique products to be sold by us and by third parties across dozens of product categories. We strive to offer our customers the lowest prices possible through low everyday product pricing and free shipping offers, including Amazon Prime, and to improve our operating efficiencies so that we can continue to lower prices for our customers. We also provide easy-to-use functionality, fast and reliable fulfillment through our global fulfillment center network, timely customer service, and a trusted transaction environment.
We fulfill customer orders in a number of ways, including through the U.S. and international fulfillment centers and warehouses that we operate and through co-sourced and outsourced arrangements in certain countries. We operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.”
Seller Customers
We offer programs that enable seller customers to sell their products on our websites and their own branded websites and to fulfill orders through us. We are not the seller of record in these transactions, but instead earn fixed fees, revenue share fees, per-unit activity fees, or some combination thereof.
Developer Customers
We serve developer customers through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable virtually any type of business.
It is interesting that Amazon has added a new category of customers called "Developer Customers" for whom it provides technology infrastructure to enable any type of technology business.
Amazon's top line increased by 29.19% whereas the bottom line increased by 35.5% year over year before the dilutive effects of stock options. More importantly, the free cash flow increased by 15.5% year over year, a lower rate than EPS growth. Although free cash flow increased at a lower rate, Amazon has been able to retire debt ( almost 800 million ) and increase its assets.
46.6% of Amazon's sales come outside of north america. The remaining 53.4% come from within north america. While the north america margins declined year over year, the international margins increased.
From a growth perspective, Amazon's growth in media was 20%, growth in electronics and other goods was 45% and the other segment was 29%. The total other revenue was 542 million in 2008.
Also, Amazon's shipping costs are negative. It costs Amazon money to ship goods to the customers. In 2008, Amazon spent 1.465 billion in shipping costs of which it was able to recover 835 million from the customers.
While amazon is a well run business and is doing well, the total share count has increased by about 30% in the last ten years. Amazon also trades at a price/cashflow multiple of 19, which is higher than some better run businesses in this field. The trend of increasing in share count continues to go up. Also, in this environment, there are many cheaper alternatives available to invest one's money.
We seek to be Earth’s most customer-centric company for three primary customer sets: consumer customers, seller customers and developer customers. In addition, we generate revenue through co-branded credit card agreements and other marketing and promotional services, such as online advertising.
Consumer Customers
We serve our consumer customers through our retail websites and focus on selection, price, and convenience. We design our websites to enable millions of unique products to be sold by us and by third parties across dozens of product categories. We strive to offer our customers the lowest prices possible through low everyday product pricing and free shipping offers, including Amazon Prime, and to improve our operating efficiencies so that we can continue to lower prices for our customers. We also provide easy-to-use functionality, fast and reliable fulfillment through our global fulfillment center network, timely customer service, and a trusted transaction environment.
We fulfill customer orders in a number of ways, including through the U.S. and international fulfillment centers and warehouses that we operate and through co-sourced and outsourced arrangements in certain countries. We operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.”
Seller Customers
We offer programs that enable seller customers to sell their products on our websites and their own branded websites and to fulfill orders through us. We are not the seller of record in these transactions, but instead earn fixed fees, revenue share fees, per-unit activity fees, or some combination thereof.
Developer Customers
We serve developer customers through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable virtually any type of business.
It is interesting that Amazon has added a new category of customers called "Developer Customers" for whom it provides technology infrastructure to enable any type of technology business.
Amazon's top line increased by 29.19% whereas the bottom line increased by 35.5% year over year before the dilutive effects of stock options. More importantly, the free cash flow increased by 15.5% year over year, a lower rate than EPS growth. Although free cash flow increased at a lower rate, Amazon has been able to retire debt ( almost 800 million ) and increase its assets.
46.6% of Amazon's sales come outside of north america. The remaining 53.4% come from within north america. While the north america margins declined year over year, the international margins increased.
From a growth perspective, Amazon's growth in media was 20%, growth in electronics and other goods was 45% and the other segment was 29%. The total other revenue was 542 million in 2008.
Also, Amazon's shipping costs are negative. It costs Amazon money to ship goods to the customers. In 2008, Amazon spent 1.465 billion in shipping costs of which it was able to recover 835 million from the customers.
While amazon is a well run business and is doing well, the total share count has increased by about 30% in the last ten years. Amazon also trades at a price/cashflow multiple of 19, which is higher than some better run businesses in this field. The trend of increasing in share count continues to go up. Also, in this environment, there are many cheaper alternatives available to invest one's money.
Saturday, January 24, 2009
Microsoft Analysis
Microsoft announced FY09 earnings and employee layoffs on 22nd January, 2009.
First let us take a look at Microsoft's earning per share and margins for the last ten years. Microsoft's earning per share increased from 0.71/share to 1.87/share in the last ten years. It is expected to stay the same this year as well.
Cashflow per share increased from 0.84/share to around 2.16/share in the same period. However, the interesting thing here is the margin before income taxes. The margins declined to 39.4 cents on the dollar in 2008 from 60.2 cents on the dollar in 1999.
The number of shares outstanding declined from 10.964 billion to 9.490 billion. The company bought back stock in the open market in the last year and has further declined the number of shares outstanding to 8.914 billion.
For the first six months of FY 2009, the cost of revenue went up by 8.64%. The cost of R&D increased by 22.86%. Sales and marketing expenditures went up by 9.88%. The total expenditures increased by 10.8% for the first six months of FY09 compared to FY08.
Let us look at the revenues and profitability of each of the divisions at Microsoft.
Windows Client had revenues of 8.2 billion and income of 6.2 billion. The windows client revenue declined on a year over year basis by about 500 million. The server and tools division revenue and income increased by about 600 million making up for the downward shift in windows client. The online services business revenue increased slightly but it also opened a huge loss of 900+ million. The entertainment and devices division (includes XBoX and Zune) had flat revenue and declining profits. The cost of corporate level activity increased year over year. Consolidated net income declined to 11.9 billion from 12.3 billion dollars year over year despite increase in revenue.
Microsoft also announced layoff of 1400 employees immediately with 3600 more to follow in the next year and half. Interestingly enough, MAC gained market share against windows by about 1% point in the Oct-Dec quarter. The increase in operational expenditures will keep the EPS near 2008 levels.
As an investment, the EBT margin for Microsoft declined in the most recent quarter to about 35% from about 38%. The increase in costs continues to be a factor. Unless the company takes some measures to cut down on its various spending initiatives, it is likely that the stock will continue to underperform the broader market.
First let us take a look at Microsoft's earning per share and margins for the last ten years. Microsoft's earning per share increased from 0.71/share to 1.87/share in the last ten years. It is expected to stay the same this year as well.
Cashflow per share increased from 0.84/share to around 2.16/share in the same period. However, the interesting thing here is the margin before income taxes. The margins declined to 39.4 cents on the dollar in 2008 from 60.2 cents on the dollar in 1999.
The number of shares outstanding declined from 10.964 billion to 9.490 billion. The company bought back stock in the open market in the last year and has further declined the number of shares outstanding to 8.914 billion.
For the first six months of FY 2009, the cost of revenue went up by 8.64%. The cost of R&D increased by 22.86%. Sales and marketing expenditures went up by 9.88%. The total expenditures increased by 10.8% for the first six months of FY09 compared to FY08.
Let us look at the revenues and profitability of each of the divisions at Microsoft.
Windows Client had revenues of 8.2 billion and income of 6.2 billion. The windows client revenue declined on a year over year basis by about 500 million. The server and tools division revenue and income increased by about 600 million making up for the downward shift in windows client. The online services business revenue increased slightly but it also opened a huge loss of 900+ million. The entertainment and devices division (includes XBoX and Zune) had flat revenue and declining profits. The cost of corporate level activity increased year over year. Consolidated net income declined to 11.9 billion from 12.3 billion dollars year over year despite increase in revenue.
Microsoft also announced layoff of 1400 employees immediately with 3600 more to follow in the next year and half. Interestingly enough, MAC gained market share against windows by about 1% point in the Oct-Dec quarter. The increase in operational expenditures will keep the EPS near 2008 levels.
As an investment, the EBT margin for Microsoft declined in the most recent quarter to about 35% from about 38%. The increase in costs continues to be a factor. Unless the company takes some measures to cut down on its various spending initiatives, it is likely that the stock will continue to underperform the broader market.
Sunday, January 18, 2009
USB Analysis
US Bancorp (USB) is bank with presence in north america and europe. It has the following lines of business.
1. Payment Services. USB got 27% of its revenue in 2007 through payment services segment. This segment involves corporate payment systems, merchant payment services, NOVA information systems, Retail payment services (debit, credit card) and transaction services.
2. The second segment involves wholesale banking - which earned 19% of USB revenue in 2007. This involves corporate, commercial and real estate banking.
3. The third segment involves wealth management and securities services. This accounted for 12% of USB's earnings in 2007. USB allows individuals, muncipalities and businesses build, manage, preserve and protect wealth and distribute obligations.
4. Consumer banking which involves home mortages supplied 40% of USB revenue in 2007.
This mix changed slightly into 3Q 2008 where payments accounted for 27% of revenue, consumer 41% of revenue, wealth management 13% of revenue and wholesale accounted for 19% of revenue.
Let us analyze USB with the criteria that WEB established for Wells Fargo in 1990.
a. Is the management team able?
b. Dont have a larger headcount than necessary.
c. Attack costs when profits are at record levels as they are under pressure.
d. Stick with what they understand and let their abilities, not their egos determine what they attempt.
For the first question, USB seems like a well run company without being affected by the problems in subprime and other lending despite its large exposure to the California market. Richard Davis has run the company well.
USB hasnt had any layoffs as experienced by Citi, BAC and other players. Wells Fargo also played its hand conservatively. However, its acquisition of Wachovia probably altered its asset mix.
Attack costs when profits are at record levels as they are under pressure. This is somewhat answered by no layoffs - keeping the costs under control with personnel has paid off for USB.
Finally, USB hasnt tried to swallow smaller companies using TARP money. Let us take a look at the 3Q conference call. This was an exchange between Mike Mayo and Richard Davis.
Mike Mayo - Deutsche Bank
Following up on the deal question, why wouldn’t you go out and buy another bank that’s less efficient, especially if you had a government guarantee? Also, are there certain parts of the country that you are interested in, either near or long term?
Richard Davis
Did you say “why wouldn’t we?”
Mike Mayo - Deutsche Bank
Yes, why wouldn’t you? I mean it makes sense what you have done and now the price has come down and maybe even some government assistance. Everyone asks, “what about U.S. Bancorp?” Everyone else has shown some kind of move, whether it is JP Morgan or Bank of America or Wells Fargo.
Richard Davis
I hear you. Now first of all, you know me and I am not motivated by what everybody else is doing. It only works if it works for us. The prices actually don’t come down. I mean the fact of the matter is that there is more money in the market. I suspect that the target prices might actually go up. So for us it’s just going to have to be a deal, like I said, that fits all of our criteria which is immediate accretion and long-term value. I do think that there is more of that out there. I am telegraphing that we are more active and more interested than we might have been before, but it doesn’t change any of the parameters and it doesn’t change our appetite for taking risk. It’s got to be the right deal and it’s got to make sense. So sure, we are looking at it more.
Let us look at the bank as a whole and how it compares to others.
Asset Size: 247 billion
Deposit: 140 billion
Loans: 170 billion
Customers: 14.9 million
Market Cap: 32.1 billion
Branches: 2769
ATMs: 5159
Through 3Q 2008, the ROA was 1.45% and and ROE was 16.6%. Let us see how this compares to Buffett's Wells Fargo buy in 1990. The ROA and ROE numbers were hampered by Q3 weakness. This is likely to reduce further with Q4 numbers.
Wells Fargo is big - it has $56 billion in assets - and has been earning more than 20% on equity and 1.25% on assets.
The growth in net charge offs and loan loss reserve build is expected to accelerate in Q4 2008. It is expected that the company will take 600 million in charge offs and 650 million to build reserves in Q4 2008. This compares to a total cost of 748 million in Q3 2008. While the increase in charge offs and loan losses will reduce the income, we expect the income to be still positive. The company paid out more in dividends than what it earned in Q3 and we definitely expect the dividend to come under pressure in 2009.
Risk
From Buffett's 1990 letter to share holders on Wells Fargo:
Of course, ownership of a bank - or about any other business - is far from riskless. California banks face the specific risk of a major earthquake, which might wreak enough havoc on borrowers to in turn destroy the banks lending to them. A second risk is systemic - the possibility of a business contraction or financial panic so severe that it would endanger almost every highly-leveraged institution, no matter how intelligently run. Finally, the market's major fear of the moment is that West Coast real estate values will tumble because of overbuilding and deliver huge losses to banks that have financed the expansion. Because it is a leading real estate lender, Wells Fargo is thought to be particularly vulnerable.
None of these eventualities can be ruled out. The probability of the first two occurring, however, is low and even a meaningful drop in real estate values is unlikely to cause major problems for well-managed institutions. Consider some mathematics: Wells Fargo currently earns well over $1 billion pre-tax annually after expensing more than $300 million for loan losses. If 10% of all $48 billion of the bank's loans - not just its real estate loans - were hit by problems in 1991, and these produced losses (including foregone interest) averaging 30% of principal, the company would roughly break even.
USB is likewise in a strong position. The recession in 2008 is more severe than the one in 1990-1991. The economy will likely continue to contract in Q1 2009 and Q2 2009. The stress in residential housing market may continue into 2009. It is likely that the stress will spread to other areas such as commercial real estate - this can put further pressure on the bank. However, there are segments of the bank that continue to do well.
TARP:
In 2008, the company received 6.599 billion in TARP payments. At a rate of interest of 5%, the company is required to pay out $330 million to the federal government every year.
Dividend payout:
Another factor is the dividend yield. While the stock paid out $1.70 in 2008, the earning as well as payout is likely come under pressure in 2009.
We expect 2009 to be a good year to invest in USB if the current market conditions dont lead to a full blown depression.
1. Payment Services. USB got 27% of its revenue in 2007 through payment services segment. This segment involves corporate payment systems, merchant payment services, NOVA information systems, Retail payment services (debit, credit card) and transaction services.
2. The second segment involves wholesale banking - which earned 19% of USB revenue in 2007. This involves corporate, commercial and real estate banking.
3. The third segment involves wealth management and securities services. This accounted for 12% of USB's earnings in 2007. USB allows individuals, muncipalities and businesses build, manage, preserve and protect wealth and distribute obligations.
4. Consumer banking which involves home mortages supplied 40% of USB revenue in 2007.
This mix changed slightly into 3Q 2008 where payments accounted for 27% of revenue, consumer 41% of revenue, wealth management 13% of revenue and wholesale accounted for 19% of revenue.
Let us analyze USB with the criteria that WEB established for Wells Fargo in 1990.
a. Is the management team able?
b. Dont have a larger headcount than necessary.
c. Attack costs when profits are at record levels as they are under pressure.
d. Stick with what they understand and let their abilities, not their egos determine what they attempt.
For the first question, USB seems like a well run company without being affected by the problems in subprime and other lending despite its large exposure to the California market. Richard Davis has run the company well.
USB hasnt had any layoffs as experienced by Citi, BAC and other players. Wells Fargo also played its hand conservatively. However, its acquisition of Wachovia probably altered its asset mix.
Attack costs when profits are at record levels as they are under pressure. This is somewhat answered by no layoffs - keeping the costs under control with personnel has paid off for USB.
Finally, USB hasnt tried to swallow smaller companies using TARP money. Let us take a look at the 3Q conference call. This was an exchange between Mike Mayo and Richard Davis.
Mike Mayo - Deutsche Bank
Following up on the deal question, why wouldn’t you go out and buy another bank that’s less efficient, especially if you had a government guarantee? Also, are there certain parts of the country that you are interested in, either near or long term?
Richard Davis
Did you say “why wouldn’t we?”
Mike Mayo - Deutsche Bank
Yes, why wouldn’t you? I mean it makes sense what you have done and now the price has come down and maybe even some government assistance. Everyone asks, “what about U.S. Bancorp?” Everyone else has shown some kind of move, whether it is JP Morgan or Bank of America or Wells Fargo.
Richard Davis
I hear you. Now first of all, you know me and I am not motivated by what everybody else is doing. It only works if it works for us. The prices actually don’t come down. I mean the fact of the matter is that there is more money in the market. I suspect that the target prices might actually go up. So for us it’s just going to have to be a deal, like I said, that fits all of our criteria which is immediate accretion and long-term value. I do think that there is more of that out there. I am telegraphing that we are more active and more interested than we might have been before, but it doesn’t change any of the parameters and it doesn’t change our appetite for taking risk. It’s got to be the right deal and it’s got to make sense. So sure, we are looking at it more.
Let us look at the bank as a whole and how it compares to others.
Asset Size: 247 billion
Deposit: 140 billion
Loans: 170 billion
Customers: 14.9 million
Market Cap: 32.1 billion
Branches: 2769
ATMs: 5159
Through 3Q 2008, the ROA was 1.45% and and ROE was 16.6%. Let us see how this compares to Buffett's Wells Fargo buy in 1990. The ROA and ROE numbers were hampered by Q3 weakness. This is likely to reduce further with Q4 numbers.
Wells Fargo is big - it has $56 billion in assets - and has been earning more than 20% on equity and 1.25% on assets.
The growth in net charge offs and loan loss reserve build is expected to accelerate in Q4 2008. It is expected that the company will take 600 million in charge offs and 650 million to build reserves in Q4 2008. This compares to a total cost of 748 million in Q3 2008. While the increase in charge offs and loan losses will reduce the income, we expect the income to be still positive. The company paid out more in dividends than what it earned in Q3 and we definitely expect the dividend to come under pressure in 2009.
Risk
From Buffett's 1990 letter to share holders on Wells Fargo:
Of course, ownership of a bank - or about any other business - is far from riskless. California banks face the specific risk of a major earthquake, which might wreak enough havoc on borrowers to in turn destroy the banks lending to them. A second risk is systemic - the possibility of a business contraction or financial panic so severe that it would endanger almost every highly-leveraged institution, no matter how intelligently run. Finally, the market's major fear of the moment is that West Coast real estate values will tumble because of overbuilding and deliver huge losses to banks that have financed the expansion. Because it is a leading real estate lender, Wells Fargo is thought to be particularly vulnerable.
None of these eventualities can be ruled out. The probability of the first two occurring, however, is low and even a meaningful drop in real estate values is unlikely to cause major problems for well-managed institutions. Consider some mathematics: Wells Fargo currently earns well over $1 billion pre-tax annually after expensing more than $300 million for loan losses. If 10% of all $48 billion of the bank's loans - not just its real estate loans - were hit by problems in 1991, and these produced losses (including foregone interest) averaging 30% of principal, the company would roughly break even.
USB is likewise in a strong position. The recession in 2008 is more severe than the one in 1990-1991. The economy will likely continue to contract in Q1 2009 and Q2 2009. The stress in residential housing market may continue into 2009. It is likely that the stress will spread to other areas such as commercial real estate - this can put further pressure on the bank. However, there are segments of the bank that continue to do well.
TARP:
In 2008, the company received 6.599 billion in TARP payments. At a rate of interest of 5%, the company is required to pay out $330 million to the federal government every year.
Dividend payout:
Another factor is the dividend yield. While the stock paid out $1.70 in 2008, the earning as well as payout is likely come under pressure in 2009.
We expect 2009 to be a good year to invest in USB if the current market conditions dont lead to a full blown depression.
Subscribe to:
Posts (Atom)