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?
Wednesday, February 11, 2009
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.
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