Related to one of our class exercises is the question of how much can these social networking sites be worth?
As a starting point you will notice that all three of the commentators in this article "How much is facebook really worth?" are basing their estimates on multiples of revenue. Of course revenue growth without growth in earnings (and hopefully even residual earnings) tends not to add value in the long-run.
Another point of contention arises between the three authors on the selection of a suitable comparable firm, is it myspace (1st author)? or is it yahoo (last author)? Clearly the assumptions of the value of facebook are widely varied based on the selection of the comparable firm.
Is facebook worth 15 billion?
Tuesday, March 31, 2009
Wednesday, February 11, 2009
The hard(ware) and soft(ware) of it
Apple Inc, is involved in lawsuits relating to the use of its operating system software on computers with PC hardware. According to this article "German Mac clone maker claims immunity from Apple" is selling Intel loaded computers with Mac OS X operating system software pre-installed. An entry-level computer sells for about $643, relative to the entry-level iMac selling at $1199. The issue is that the end user license agreement (EULA) for the operating system 'forbids' the user from installing the software on non-Mac hardware.
But for Apple's valuation, we have a bigger issue in play, what happens if the anti-trust lawsuits prevent Apple from 'forbidding' the installation of their software on non-Mac hardware? Is the EULA an effective barrier to entry?
Clearly, Apple's strategy is likely to remain the same - product differentiation - rather than them trying to compete in low cost alternatives. Does this news, however, change your expectations of future ROE for Apple? How would you expect the profit margin and asset turnover ratios to change in the next few years? How would this affect your forecasts?
But for Apple's valuation, we have a bigger issue in play, what happens if the anti-trust lawsuits prevent Apple from 'forbidding' the installation of their software on non-Mac hardware? Is the EULA an effective barrier to entry?
Clearly, Apple's strategy is likely to remain the same - product differentiation - rather than them trying to compete in low cost alternatives. Does this news, however, change your expectations of future ROE for Apple? How would you expect the profit margin and asset turnover ratios to change in the next few years? How would this affect your forecasts?
Some more banckruptcy predictions
In this article in Seeking Alpha, Rick Newman highlights 15 companies that he thinks will not survive 2009. Given how much we have analyzed Blockbuster, are we surprised that it makes the list?
In our financial ratio analysis of Blockbuster it may be well worth our time to estimate some of the default probabilities. Perhaps this would be a good time to try out your eVal software and take a closer look at BBI's numbers?
In our financial ratio analysis of Blockbuster it may be well worth our time to estimate some of the default probabilities. Perhaps this would be a good time to try out your eVal software and take a closer look at BBI's numbers?
Overstock's overstuffed profits...
I hadn't looked at Overstocked for a while, but I came across this article recently "Overstock.com and CEO Patrick Byrne Violate Accounting Rules in Q4 2008 Financial Report" interestingly enough it appears that there is no interest by the company to correct, or in accounting terminology, to restate, their financial reports (see here).
What do you think the market response to firms that restate their earnings to be on average? In a paper published in the Journal of Accounting & Economics, Palmrose, Richardson and Scholz find that over a two day window, these firms experience a negative 9% drop in their share price, with the most negative declines being when the restatement is enforced by the SEC.
My guess is that Overstock is headed for a rough time... what kind of change would this make in our valuation world? Obviously the current period earnings are affected, but does this change our opinions of growth too? How important is it for a firm to 'return to GAAP profitability'?
What do you think the market response to firms that restate their earnings to be on average? In a paper published in the Journal of Accounting & Economics, Palmrose, Richardson and Scholz find that over a two day window, these firms experience a negative 9% drop in their share price, with the most negative declines being when the restatement is enforced by the SEC.
My guess is that Overstock is headed for a rough time... what kind of change would this make in our valuation world? Obviously the current period earnings are affected, but does this change our opinions of growth too? How important is it for a firm to 'return to GAAP profitability'?
Monday, February 9, 2009
Valuing Netflix earnings and growth
At the time of this post, the market was valuing Netflix at $37 per share, one year ago the share price was $26.89. The raw return for the stock over the past year was( ($37-26.89)/26.89) = 37.6%
One question to ask was how did Netflix beat the expectations set at the end of last year...?
One interesting article that discusses some of these expectations (at the time) is the article "Netflix looks like a bargain again" written about a year ago, along with expectations about 2008 written in the companion piece "Netflix 2008 Outlook" where the author discusses expected growth rates in subscriptions.
What do you believe the Outlook for 2009 will look like?
One question to ask was how did Netflix beat the expectations set at the end of last year...?
One interesting article that discusses some of these expectations (at the time) is the article "Netflix looks like a bargain again" written about a year ago, along with expectations about 2008 written in the companion piece "Netflix 2008 Outlook" where the author discusses expected growth rates in subscriptions.
What do you believe the Outlook for 2009 will look like?
Tuesday, February 3, 2009
The value of 'free'
A recent promotion by the Denny's restaurant chain - the giving away of breakfast for free, raises some interesting valuation questions: what is the expected future value of a promotions that involve free 'gifts' and how do firms successfully sustain repeat business? Read the article here.
Now obviously the two questions are related. The immediate costs of the free breakfasts are associated with an intangible asset that we can call "customer loyalty". Now we know as accountants that this asset is not capitalized and we would question any attempt to measure this asset due to uncertainty. Clearly it would appear that a gimmick like this could be easily replicated by other restaurant chains, so it is less likely to give rise to any sustainable competitive advantage. Would you return to a restaurant that (willingly) gave you a free meal? does getting something 'free' give you some kind of irrationally happy feeling that makes you want to return to where you got something free? Even though you know that you won't get something free there again?
Another approach may be to look at their ROE generating ability in terms of the DuPont decomposition. In general, I'd imagine most of us would agree that Denny's is going to be profitable as a low margin high turnover company, and based on the google finance numbers for profit margin, this certainly appears to be the case.
Is this promotion consistent with their strategy? How does this strategy have to affect their turnover and/or margins in order to be effective? what do you think the overall affect on value is likely to be?
Now obviously the two questions are related. The immediate costs of the free breakfasts are associated with an intangible asset that we can call "customer loyalty". Now we know as accountants that this asset is not capitalized and we would question any attempt to measure this asset due to uncertainty. Clearly it would appear that a gimmick like this could be easily replicated by other restaurant chains, so it is less likely to give rise to any sustainable competitive advantage. Would you return to a restaurant that (willingly) gave you a free meal? does getting something 'free' give you some kind of irrationally happy feeling that makes you want to return to where you got something free? Even though you know that you won't get something free there again?
Another approach may be to look at their ROE generating ability in terms of the DuPont decomposition. In general, I'd imagine most of us would agree that Denny's is going to be profitable as a low margin high turnover company, and based on the google finance numbers for profit margin, this certainly appears to be the case.
Is this promotion consistent with their strategy? How does this strategy have to affect their turnover and/or margins in order to be effective? what do you think the overall affect on value is likely to be?
Monday, January 26, 2009
Wednesday, January 21, 2009
bricks and mortar
In his article "Why Blockbuster brick and mortars will be gone in five years" Don Reisinger points out the failings of Blockbuster.
If we applied Altman's Z-score to the last few years of Blockbuster's results, do we see a trend? from the points raised in the above article, what do you think is the most devastating failing of blockbuster in terms of value generation?
If we applied Altman's Z-score to the last few years of Blockbuster's results, do we see a trend? from the points raised in the above article, what do you think is the most devastating failing of blockbuster in terms of value generation?
Is your company headed for bankruptcy?
I read an interesting article in Businessweek entitled "Stocks:Bracing for more bankruptcies" where the author noted that in 2009 he expects the bankruptcy rate will increase. In the article, the author cites that Edward Altman (NYU) was predicting a double-digit bankruptcy rate for 2009.
Altman was the author of "Financial Ratios, Discriminant Analysis and the prediction of Corporate Bankruptcy" published in the Journal of Finance in 1968, from which the "Altman Z-Score" became the standard in assessing a firm's probability of going bankrupt. If you are interested in calculating the Altman Z-Score for your company, the formular is relatively simple, and this website makes it even easier... just plug in the required financial statement variables and take a look at your resulting score. Perhaps before you make your stock recommendation it'd be worth checking if your company is expected to be around for the rest of the year.
Altman was the author of "Financial Ratios, Discriminant Analysis and the prediction of Corporate Bankruptcy" published in the Journal of Finance in 1968, from which the "Altman Z-Score" became the standard in assessing a firm's probability of going bankrupt. If you are interested in calculating the Altman Z-Score for your company, the formular is relatively simple, and this website makes it even easier... just plug in the required financial statement variables and take a look at your resulting score. Perhaps before you make your stock recommendation it'd be worth checking if your company is expected to be around for the rest of the year.
Tuesday, January 20, 2009
Netflix Conference Call
The conference call will be held on Monday the 26th at 3pm Mountain Time, more information at PRNewswire.
Monday, January 19, 2009
Instant Netflix II
So I signed up for Netflix and bought the fancy new LG BD300 Blu-ray player that allows for Netflix streaming content to be played... similar to the feelings of the author of this article, I was a little underwhelmed by the quality of the picture and sound delived by my fancy little network DVD player...
Regardless, an interesting point is raised by the author, he feels that streaming content was meant to see the demise and eventual end of the DVD. In our case, we focus our comparisons between Netflix and Blockbuster, with Blockbuster a clear second in the agility stakes. In the instant market, though, there are some more players, Vudu, Playstation 3 and Apple TV all have a hand in the market.
What are Netflix's advantages in the instant market? Their disadvantages?
Regardless, an interesting point is raised by the author, he feels that streaming content was meant to see the demise and eventual end of the DVD. In our case, we focus our comparisons between Netflix and Blockbuster, with Blockbuster a clear second in the agility stakes. In the instant market, though, there are some more players, Vudu, Playstation 3 and Apple TV all have a hand in the market.
What are Netflix's advantages in the instant market? Their disadvantages?
Are smaller cars coming to the US?
I noticed a few reports floating around about a potential partnership deal between Euro auto manufacturer Fiat and the US auto manufacturer Chrysler. A discussion of the possible partnership is discussed in this article.
So who benefits from this deal? According to the article, and my own views, it looks likely that both companies would benefit. Fiat is likely to gain access to US markets and will hold an equity stake in Chrysler, while Chrysler will have access to a small car line-up with little capital invested.
Consider the top-down analysis approach (macro and industry). What is happening in the economy that potentially effects the auto-industry? If we think back to last summer, the media was somewhat fixated on the price of gasoline...
So are smaller cars likely to be in greater demand? If so, who is already in this market?
As a side note, the Treasury is loaning Chrysler $1.5B to support it's financing arm. In this article, the author notes that Chrysler "plans to offer zero-percent financing on several models and expand lending to car buyers with less than ideal credit" what does this tell you about Chrysler's customer acquisition policy? Is this consistent with the current economic climate?
So who benefits from this deal? According to the article, and my own views, it looks likely that both companies would benefit. Fiat is likely to gain access to US markets and will hold an equity stake in Chrysler, while Chrysler will have access to a small car line-up with little capital invested.
Consider the top-down analysis approach (macro and industry). What is happening in the economy that potentially effects the auto-industry? If we think back to last summer, the media was somewhat fixated on the price of gasoline...
So are smaller cars likely to be in greater demand? If so, who is already in this market?
As a side note, the Treasury is loaning Chrysler $1.5B to support it's financing arm. In this article, the author notes that Chrysler "plans to offer zero-percent financing on several models and expand lending to car buyers with less than ideal credit" what does this tell you about Chrysler's customer acquisition policy? Is this consistent with the current economic climate?
Thursday, January 15, 2009
Is Apple ripe?
I couldn't help partially stealing the title of this article: "BUY OR SELL - Are Apple shares ripe for buying?" the article is essentially discussing whether the market is too heavily discounting Apple shares following the news of Steve Jobs (Apple's CEO) taking leave for health reasons.
As I have mentioned in class a few times now, market prices in the current market suggest to me that we are currently in a buyer's market.
Let's consider Apple's price at around $83 per share (at the time of writing). That's about a PE (price to earnings) ratio of under 16.5, the lowest PE ratio for Apple in the last 5 years is about 15.9 (note that the forward PE ratio, that is when the earnings are the expected earnings for this year and not last year's, the ratio drops to around 11). With an ROE (return on equity) of about 27 and sales growth in excess of 20% how can we reconcile the apparent strength of the company's financials with their PE ratio?
If we think about our model of value, what does this suggest that the market "feels" about the earnings of Apple? For example, does it seem like the pricing is reflecting a low sustainability (or persistence) of this past performance?
Does it appear that the sustainability of their earnings is low?
Does one individual make that much of a difference to the strategy of the company?
Or maybe, it's being undervalued due to speculation...?
As I have mentioned in class a few times now, market prices in the current market suggest to me that we are currently in a buyer's market.
Let's consider Apple's price at around $83 per share (at the time of writing). That's about a PE (price to earnings) ratio of under 16.5, the lowest PE ratio for Apple in the last 5 years is about 15.9 (note that the forward PE ratio, that is when the earnings are the expected earnings for this year and not last year's, the ratio drops to around 11). With an ROE (return on equity) of about 27 and sales growth in excess of 20% how can we reconcile the apparent strength of the company's financials with their PE ratio?
If we think about our model of value, what does this suggest that the market "feels" about the earnings of Apple? For example, does it seem like the pricing is reflecting a low sustainability (or persistence) of this past performance?
Does it appear that the sustainability of their earnings is low?
Does one individual make that much of a difference to the strategy of the company?
Or maybe, it's being undervalued due to speculation...?
Wednesday, January 14, 2009
Getting more information
I wanted to quickly outline how to get files from EDGAR (Electronic Data Gathering, Analysis and Retrieval System). The first step is to look-up your firm's CIK (Central Index Key) which is used by the SEC to index the filings of each individual firm. Go here and type in your company's name, such as "Netflix" the search engine will come back with potential matches, in Netflix's case there where two possible choices (but both had the same CIK suggesting it was the same company).
Now after you click on your company, EDGAR will provide you with a list of forms that have been lodged with the SEC, they are dated and the form type is also displayed. If we go to the section "Form-type" we can tell EDGAR to limit the forms by a certain type. For example, I want to find Netflix's churn metric in their most recent 10-Q, so I tell EDGAR to only to return Form type "10-Q" and then I click on the first filing.
After getting the filing (in html format), I scoll down to the management discussion and analysis section and find the churn metric at 4.2%. Note the management define churn:
Churn: Churn is a monthly measure defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, then divided by three months. Management reviews this metric to evaluate whether we are retaining our existing subscribers in accordance with our business plans.
Now after you click on your company, EDGAR will provide you with a list of forms that have been lodged with the SEC, they are dated and the form type is also displayed. If we go to the section "Form-type" we can tell EDGAR to limit the forms by a certain type. For example, I want to find Netflix's churn metric in their most recent 10-Q, so I tell EDGAR to only to return Form type "10-Q" and then I click on the first filing.
After getting the filing (in html format), I scoll down to the management discussion and analysis section and find the churn metric at 4.2%. Note the management define churn:
Churn: Churn is a monthly measure defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, then divided by three months. Management reviews this metric to evaluate whether we are retaining our existing subscribers in accordance with our business plans.
Tuesday, January 13, 2009
Value-to-price
I will post some results from relevant accounting studies over the course of the semester. The first I'd like to highlight relates to today's discussion of the residual income model. The paper I want to highlight examines the predictive ability of the residual income value to price ratio over future stock returns. The paper is by Rich Frankel and Charles Lee, who published "Accounting valuation, market expectation, and cross-sectional stock returns" in the Journal of Accounting Research in 1998.
In their paper they find that over holding periods of 36 months, a strategy based on buying high value to price stocks (i.e., stocks the market undervalues relative to the model of fundamental value) and selling stocks low value to price stocks (i.e., stocks the market overvalues relative to the model of fundamental value) earns over a 45% return.
Do you think that these results are likely to hold in our current economy?
In their paper they find that over holding periods of 36 months, a strategy based on buying high value to price stocks (i.e., stocks the market undervalues relative to the model of fundamental value) and selling stocks low value to price stocks (i.e., stocks the market overvalues relative to the model of fundamental value) earns over a 45% return.
Do you think that these results are likely to hold in our current economy?
some advice...
Now I know this is repetitive.... but:
it is best to find similar firms to your group members as this will make your analysis (significantly) easier.
How can I find a firm in my sector??
Easy: go to http://finance.google.com/finance
You'll notice the list of sectors at the bottom of the page, simply click on your sector and a whole range of companies will be displayed. Easy... so now as a group you may see a company that you know interests you... so what next... click on that company and you'll notice under the graph that Google finance provides a list of "Related Companies." Now you have what you are after, choosing a set of companies in your group couldn't be easier (unless I just assigned them to you)...
remember for the daytime students, you need to report to me the firm you select by next class (i.e., his Thursday).
it is best to find similar firms to your group members as this will make your analysis (significantly) easier.
How can I find a firm in my sector??
Easy: go to http://finance.google.com/finance
You'll notice the list of sectors at the bottom of the page, simply click on your sector and a whole range of companies will be displayed. Easy... so now as a group you may see a company that you know interests you... so what next... click on that company and you'll notice under the graph that Google finance provides a list of "Related Companies." Now you have what you are after, choosing a set of companies in your group couldn't be easier (unless I just assigned them to you)...
remember for the daytime students, you need to report to me the firm you select by next class (i.e., his Thursday).
Sunday, January 11, 2009
Overstock's new debt agreements
This article discusses the debt covenants engaged in by Overstock.com in their loan with Wells Fargo.
A debt covenant is basically an agreement over a loan that restricts some of the actions a borrower may engage in. If the covenant is violated then the lender has the right to repossess their loan. Often these covenants will refer to accounting information, including restrictions on leverage ratios. An academic study by Illa Dichev and Doug Skinner found that debt covenants that are violated by healthy firms are not always repossessed, however, if we were to believe Gary Weiss, if Overstock violates their covenant it might be because they are heading to bankruptcy...
Do you agree with Gary Weiss on Overstock's impending doom?
How might the loan affect your forecasts of overstocks operating performance?
A debt covenant is basically an agreement over a loan that restricts some of the actions a borrower may engage in. If the covenant is violated then the lender has the right to repossess their loan. Often these covenants will refer to accounting information, including restrictions on leverage ratios. An academic study by Illa Dichev and Doug Skinner found that debt covenants that are violated by healthy firms are not always repossessed, however, if we were to believe Gary Weiss, if Overstock violates their covenant it might be because they are heading to bankruptcy...
Do you agree with Gary Weiss on Overstock's impending doom?
How might the loan affect your forecasts of overstocks operating performance?
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