Wednesday, August 28, 2013

Principal Financial Pinned at Neutral - Analyst Blog

Top 5 Heal Care Stocks To Buy For 2014

We have retained our Neutral recommendation on Principal Financial Group Inc. (PFG) as the low interest rate environment and rising expenses might weigh on the company's performance. The investment manager currently carries a Zacks Rank #3 (Hold).

Why Reiteration?

Principal Financial's businesses across most lines and segments continue to deliver solid results. The company's asset under management (AUM) portrays an uptrend driven by better results at three asset management and asset accumulation segments. We expect that the company's extensive distribution footprint, best-in-class solutions and operational discipline will help it support AUM growth going forward.

Principal Financial also follows an inorganic route to ramp up its growth profile. Management intends to utilize a significant portion of its operating earnings for mergers and acquisitions.

Principal Financial's capital deployment through share buybacks and dividend payment looks impressive, making it an attractive pick for yield-seeking investors. Management has set aside $400–$600 million for quarterly dividends, share buybacks and acquisitions in 2013, with share repurchases slated for the latter half of the year.

On a tepid side, low interest rates continue to weigh on the results of Principal Financial. Net investment income has been showing a declining trend in the recent years, partly due to lower yields on average invested assets. We are also concerned about the company's increasing debt.

A surge in fees and other revenues along with an increase in asset under management aided Principal Financial to deliver operating earnings of 79 cents per share in the last reported quarter. Operating earnings exceeded the Zacks Consensus Estimate by 5.33% and improved 11.3% year over year. In addition, a lower share count buoyed the bottom line. The Zacks C! onsensus Estimate for the second quarter is pegged at 82 cents, translating to a year-over-year improvement of 14.5%

Other Stocks to Consider

We prefer to remain on the sidelines for Principal Financial. However, SEI Investments Co. (SEIC) with Zacks Rank #1 (Strong Buy) looks attractive. Among other stocks, Ameriprise Financial, Inc. (AMP) and Artisan Partners Asset Management Inc. (APAM) both with a Zacks Rank #2 (Buy), are also worth considering.


Tuesday, August 27, 2013

Top 5 Companies To Invest In Right Now

We view this company as one of the dominant players in small molecule drug development, and that includes Big Bio and Big Pharma, suggests biotechnology expert John McCamant in The Medical Technology Stock Letter.

Incyte's (INCY) crackerjack medicinal chemistry team continues to show that they can create better and differentiated drug candidates from the competition.

The key near-term driver for INCY is Jakafi growth, and with the increased sales guidance, the company is delivering. The drug's overall profile continues to improve and the recent survival data proves that Jakafi does much more for myelofibrosis patients than just control symptoms.

We expect results from the pivotal Phase III trial for patients with polycythemia vera��nown by the name, RESPONSE��arly next year, which will allow INCY to submit a supplemental new drug application for Jakafi in the first half of 2014.

Top 5 Companies To Invest In Right Now: Keegan Resources Inc(KGN.TO)

Keegan Resources Inc., a natural resource company, engages in the acquisition and exploration of mineral resources in west Ghana, Africa. The company primarily explores for gold ores. It principally owns interests in the Esaase gold property and the Asumura gold property located in south west Ghana. The company was formerly known as Quicksilver Ventures Inc. and changed its name to Keegan Resources Inc. in August 2004. Keegan Resources Inc. was incorporated in 1999 and is based in Vancouver, Canada.

Top 5 Companies To Invest In Right Now: Calmena Energy Services Inc. (CEZ.TO)

Calmena Energy Services Inc., a diversified energy services company, provides well construction services for the exploration and development of oil and gas reserves in Canada, the United States, Latin America, the Middle East, and north Africa. The company�s services include well construction engineering and planning, contract drilling, directional drilling, microseismic, frac fluids management, and equipment rental services, as well as drilling and wireline technology solutions. It also offers project management solutions to its clients; and various commercial applications, including day rate, turnkey, and fixed price projects. The company was formerly known as BlackWatch Energy Services Corp. and changed its name to Calmena Energy Services Inc. in June 2010. Calmena Energy Services Inc. was founded in 2006 and is headquartered in Calgary, Canada.

Best Insurance Companies To Own For 2014: Arcos Dorados Holdings Inc (ARCO.N)

Arcos Dorados Holdings Inc., incorporated on December 9, 2010, is a McDonald�� franchisee. As of December 31, 2010, the Company operated or franchised 1,755 McDonald��-branded restaurants, which represented 6.7% of McDonald�� total franchised restaurants globally. It operates McDonald��-branded restaurants under two different operating formats, Company-operated restaurants and franchised restaurants. As of December 31, 2010, of its 1,755 McDonald��-branded restaurants in the territories, 1,292 (or 74%) were Company-operated restaurants and 463 (or 26%) were franchised restaurants. It generates revenues from two sources: sales by Company-operated restaurants and revenues from franchised restaurants, which consist of rental income, which is based on the greater of a flat fee or a percentage of sales reported by franchised restaurants. As of December 31, 2010, it owned the land for 510 of its restaurants (totaling approximately 1.2 million square meters) and the buildings for all but 12 of its restaurants. It divides its operations into four geographical divisions: Brazil; the Caribbean division, consisting of Aruba, Curacao, French Guiana, Guadeloupe, Martinique, Puerto Rico and the United States Virgin Islands of St. Croix and St. Thomas; North Latin America division (NOLAD), consisting of Costa Rica, Mexico and Panama, and South Latin America division (SLAD), consisting of Argentina, Chile, Colombia, Ecuador, Peru, Uruguay and Venezuela. As of December 31, 2010, 35.1% of its restaurants were located in Brazil, 29.7% in SLAD, 27.1% in NOLAD and 8.1% in the Caribbean division. The Company conducts its business through its indirect, wholly owned subsidiary Arcos Dorados B.V.

Company-Operated and Franchised Restaurants

The Company operates its McDonald��-branded restaurants under two basic structures: Company-operated restaurants operated by the Company and franchised restaurants operated by franchisees. Under both operating alternatives the real estate location m! ! ay either be owned or leased by the Company. It owns, fully manages and operates the Company-operated restaurants and retains any operating profits generated by such restaurants, after paying operating expenses and the franchise and other fees owed to McDonald�� under the Master Franchise Agreements (MFAs). In Company-operated restaurants, it assumes the capital expenditures for the building and equipment of the restaurant and, if it owns the real estate location, for the land as well. Under its franchise arrangements, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurants, and by reinvesting in the business over time. It is required by the MFAs to own the real estate or to secure long-term leases for franchised restaurant sites. It subsequently leases or subleases the property to franchisees.

In exchange for the lease and services, franchisees pay a monthly rent to the Comp any, based on the greater of a fixed rent or a certain percentage of gross sales. In addition to this monthly rent, it collects the monthly continuing franchise fee, which generally is 5% of the United States dollar equivalent of the restaurant�� gross sales, and pays these fees to McDonald�� pursuant to the MFAs. However, if a franchisee fails to pay its monthly continuing franchise fee, it remains liable for payment in full of these fees to McDonald��. As of December 31, 2010, it was engaged in several joint ventures, which collectively owned 24 restaurants, in Argentina, Chile and Colombia.

Restaurant Categories

The Company classifies its restaurants into one of four categories: freestanding, food court, in-store and mall stores. Freestanding restaurants are the type of restaurant, which have ample indoor seating and include a drive-through area. Food court restaurants are located in malls and consist of a front counter and kitchen and do not have their own seating area. In-store restaurants are! pa! rt o! f a l! arger building and resemble freestanding restaurants, except for the lack of a drive-through area. Mall stores are located in malls like food court restaurants, but have their own seating areas. As of December 31, 2010, 808 (or 46.2%) of its restaurants were freestanding, 359 (or 20.5%) were food court, 265 (or 15.1%) were in-stores and 319 (or 18.2%) were mall stores. In addition, it has four non-traditional stores, such as food carts.

Reimaging

As of December 31, 2010, the Company had completed the reimaging of 308 of 1,569 restaurants. Many of the reimaging projects include the addition of McCafe locations to the restaurant. It has developed system-wide guidelines for the interior and exterior design of reimaged restaurants.

McCafe Locations and Dessert Centers

McCafe locations are stylish, separate areas within restaurants where customers can purchase a range of customizable beverages, including lattes, cappuccinos, mochas, hot and iced premium coffees and hot chocolate. As of December 31, 2010, there were 267 McCafe locations in the Territories, of which 12% were operated by franchisees. Argentina, with 71 locations, has McCafe locations, followed by Brazil, with 67 locations. In addition to McCafe locations, it has Dessert Centers. Dessert Centers operate from existing restaurants, but depend on them for supplies and operational support. As of December 31, 2010, there were 1,306 Dessert Centers in the Territories.

Product Offerings

The Company�� menus feature three tiers of products: affordable entry-level options, such as its Big Pleasures, Small Prices or Combo del Dia (Daily Extra Value Meal) offerings, core menu options, such as the Big Mac, Happy Meal and Quarter Pounder, and premium options, such as Big Tasty or Angus premium hamburgers and chicken sandwiches and low-calorie or low-sodium products, which are marketed through common platforms rather t han as individual items. These platforms can be base! d on the!! type of ! products, such as beef, chicken, salads or desserts, or on the type of customer targeted, such as the children�� menu.

Top 5 Companies To Invest In Right Now: Northwest Natural Gas Company(NWN)

Northwest Natural Gas Company stores and distributes natural gas primarily in Oregon, Washington, and California. The company operates in two segments, Local Gas Distribution and Gas Storage. The Local Gas Distribution segment distributes natural gas in Oregon and southwest Washington. The Local Gas Distribution segment distributes natural gas in Oregon and southwest Washington. This segment engages in building and maintaining pipeline distribution system, purchasing gas from producers and marketers, contracting for the transportation of gas over pipelines from the supply basins to service territory, and reselling the gas to customers. It also transports gas owned by customers from the interstate pipeline connection, or city gate, to the customers? facilities. This segment serves various industries, including pulp, paper, and other forest products; companies manufacturing electronic, electrochemical, and electrometallurgical products; companies engaged in processing of fa rm and food products; metal fabrication and casting companies; organizations that produce various mineral products, machine tools, machinery, and textiles; companies that manufacture asphalt, concrete, and rubber; printing and publishing companies; nurseries; government and educational institutions; and electric generation companies. It has approximately 674,000 utility customers comprising approximately 611,000 residential, 62,000 commercial, and 1,000 industrial customers. The Gas Storage segment offers underground natural gas storage services to interstate and intrastate customers. It holds interests in approximately 9,900 net acres of underground natural gas storage in Oregon and approximately 5,000 net acres of underground natural gas storage in California. This segment serves primarily natural gas distribution, electric generation, and energy marketing companies. The company was founded in 1910 and is headquartered in Portland, Oregon.

Top 5 Companies To Invest In Right Now: Montpelier RE Holdings Ltd (MRH)

Montpelier Re Holdings Ltd., through its subsidiaries, provides insurance and reinsurance solutions worldwide. It provides reinsurance products, including property catastrophe reinsurance, which provides coverage for losses from earthquakes, hurricanes, floods, tornados, fires, and storms; and property specialty reinsurance products. The company also offers other specialty reinsurance products, such as aviation liability, aviation war, engineering, space, marine, personal accident, workers� compensation, political violence, casualty, credit, surety, crop, and other specialty reinsurance products, as well as physicians� treaty and professional liability reinsurance products. In addition, it provides direct insurance and facultative reinsurance coverage on industrial, commercial, and residential property; liability; marine; and space risks, as well as political violence, pandemic and event contingency, and terrorism coverages. The company offers its products through indepe ndent brokers, general agents, and intermediaries. Montpelier Re Holdings Ltd. was founded in 2001 and is headquartered in Pembroke, Bermuda.

Monday, August 26, 2013

Leggett & Platt Inc. (LEG) Dividend Stock Analysis

Hot Value Companies To Watch In Right Now

Linked here is a detailed quantitative analysis of Leggett & Platt Inc. (LEG). Below are some highlights from the above linked analysis:

Company Description: Leggett & Platt Inc. makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as products for non-furnishings markets.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page 2 of the linked PDF for a detailed description):

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

LEG is trading at a premium to all four valuations above. The stock is trading at a 70.9% premium to its calculated fair value of $17.47. LEG did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics (see page 2 of the linked PDF for a detailed description):

1. Free Cash Flow Payout
2. Debt to Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-Year Div. Greater Than 15%

LEG earned two Stars in this section for 1.) and 3.) above. A Star was earned since the free cash flow payout ratio was less than 60% and there were no negative free cash flows over the last 10 years. LEG earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1939 and has increased its dividend payments for 41 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two i! tems are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

LEG earned a Star in this section for its NPV MMA Diff. of the $684. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LEG has. The stock's current yield of 3.95% exceeds the 3.22% estimated 20-year average MMA rate.

Memberships and Peers: LEG is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Hooker Furniture Corp. (HOFT) with a 2.4% yield, Flexsteel Industries Inc. (FLXS) with a 2.7% yield and Ethan Allen Interiors Inc. (ETH) with a 1.4% yield.

Conclusion: LEG did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks LEG as a 3-Star Hold stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $33.01 before LEG's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 41 years of consecutive dividend increases. At that price the stock would yield 3.6%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 2.4%. This dividend growth rate is slightly lower than the 3.5% used in this analysis, thus providing a slight margin of safety. LEG has a risk rating of 1.75 which classifies it as a low-risk stock.

In spite of being a highly cyclical company, LEG has a long history of profitability and generating strong free cash flows. Its debt to total capital of 45% provides additional flexibility. The stock's yield makes it appealing to many income investors, though its price run up has significantly lowered its yield.

Modest growth in! resident! ial furnishings and automotive, along with cost controls, should help offset declines in the commercial segment and slowdown in Europe and China. The stock is trading 70% above my calculated fair value of $17.47. I will continue to wait for a more favorable time to add to my position.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in LEG (1.7% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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Sunday, August 25, 2013

Virtual Piggy Growth over a Quarter Million Users (OTCBB:VPIG, OTCMKTS:CLNO)

vpig

Virtual Piggy, Inc. (VPIG)

Today, VPIG has shed (-4.37%) down -0.10 at $2.19 with 144,475 shares in play thus far (ref. google finance Delayed: 1:26PM EDT June 26, 2013), but don't let this get you down.

Virtual Piggy, Inc. previously reported it has reached a membership of over 250,000 users.

Virtual Piggy promotes financial management while empowering youth under 18 to make purchasing, saving and other money management decisions for themselves, within the boundaries setup by parents. The technology serves as a family wallet that is available online or via mobile, and is always 100% free to use.

Take a look at Virtual Piggy, Inc. (VPIG) 5 day chart:

vpigchart

clno

Cleantech Transit, Inc. (CLNO)

Cleantech Transit, Inc. (OTCMKTS:CLNO) (www.cleantechtransit.net) through its Discovery Carbon subsidiary, develops emissions offset strategies for companies, municipalities, and countries. CLNO currently has surged (+6.43%) up +0.011 at $.182 with 2,079,078 shares in play thus far (ref. google finance Delayed:  1:38PM June 26, 2013). Earlier this morning (June 26, 2013), this company hit as low as $.152 and as high as $.191. The fact that their is over a million shares in play thus far only ignites the excitement that CLNO brings to the table.

Today (June 26) CLNO's daily range was at ($.191 – $.152) currently at $.182 would be considered a (+16445.45%) gain above the 52 wk low of $.0011. Eventhough CLNO has surged (+6.43%) up +0.011 at $.182 with 2,079,078 shares in play  thus far (ref. google finance Delayed:  1:38PM June 26, 2013), the stock is up +12033.33% since the concerning dates of December 27, 2013 – June 26, 2013. +12033.33% is the 6 month high and rightly so.

Earlier this month (June 3), CLNO acquired control of Discovery Carbon Environmental Securities Corporation ("Discovery"). The acquisition advances the strategy of developing significant market share in the alternative clean energy sector. Discovery's proprietary GreenTrees™ for renewable energy, and EvoCert™ environmental credits for offsetting business and individual carbon foot prints are some of the exciting products Discovery provides to clients throughout the world.

CLNO reported last Friday (June 21), that it has acquired 81% of the issued and outstanding shares of Discovery Carbon Environmental Securities Corporation ("Discovery"), a Nevada corporation. The acquisition advances the strategy of developing significant market share in the alternative clean energy sector. Discovery's proprietary GreenTrees™ for renewable energy, and EvoCert™ environmental credits for offsetting business and individual carbon foot prints are some of the exciting products Discovery provides to clients throughout the world.

The Exchange Agreement between the parties required that at least 80% of Discovery's issued and outstanding shares be exchanged for shares of the Company's common stock, in restricted form. The parties are now in the final stages of closing the transaction. As part of the closing of this acquisition, the Company has announced that it will be changing its name to EQCO2, Inc. as well as implementing a 1 for 5 forward stock split for its common stock.

eqco2video

To view EQCO2 video click URL http://www.crwetube.com/media/billy-barnwell-ceo-of-eqco2-talks-about-the-compan

clnovideochart

To view CLNO video chart (June 24, 2013) brought to you by BlueHorseshoeStocks click URL http://www.youtube.com/watch?v=r8UJpn5IJ_c

Check out, Barchart.com detailed opinion about CLNO looks very enticing: URL http://www.barchart.com/opinions/stocks/CLNO

Keep in mind, (June 25) CLNO closed at $.17 with 3,217,105 in play (ref. google finance June 25, 2013 – Close).  (June 24) CLNO closed at $.16 with 1,006,552 in play (ref. google finance June 24, 2013 – Close).  (June 21) CLNO closed at $.13 with 1,747,826 in play (ref. google finance June 21, 2013 – Close). (June 20) CLNO closed at $.10 with 1,644,340 in play (ref. google finance June 20, 2013 – Close). (June 19) CLNO closed at $.09 with 1,786,438 in play (ref. google finance June 19, 2013 – Close). (June 18) CLNO closed at $.08 with 1,224,685 in play (ref. google finance June 18, 2013 – Close). (June 17) CLNO closed at $.06 with 2,681,749 in play (ref. google finance June 17, 2013 – Close). (June 14) CLNO closed at $.09 with 4,923,706 in play (ref. google finance June 14, 2013 – Close). (June 13), CLNO closed at $.09 with 2,457,486 in play (ref. google finance June 13, 2013 – Close). (June 12) CLNO closed at $.07 with 2,067,313 in play (ref. google finance June 12, 2013 – Close). (June 11) CLNO closed at $.04 with 1,978,366 in play (ref. google finance June 11, 2013 – Close). (June 10) CLNO closed at $.03 with 1,134,672 in play (ref. google finance June 10, 2013 – Close).

Now take a look at the Cleantech Transit, Inc. (CLNO ) 5 day chart:

clnochart1

Saturday, August 24, 2013

At Midyear, Bob Doll Judges His Top 10 Predictions for 2013

Bob Doll, chief equity strategist and senior portfolio manager for Nuveen Asset Management, kicked off 2013 by offering 10 market and economy predictions for 2013.

So how did Doll do? By his own accounting, he got five predictions right and three wrong, and two are still too early to call.

Bob Doll, Nuveen chief equity strategist and senior portfolio managerSumming up his market calls, Doll (left) on Monday wrote in “A Mid-Year 10 Predictions Assessment” that equities had a strong six-month period despite a May and June correction primarily due to a very difficult bond market.

“Perhaps the ‘great rotation’ started late in the second quarter as investors moved from bonds and bond-like equities, with measured progress for cyclical and growth equities,” Doll said. “Anxiety remains over the Fed ending its quantitative easing experiment, and there are also financial issues in China that are cause for concern.”

Looking ahead, Doll ventures that the big question will be the Federal Reserve’s exit strategy from quantitative easing: “What does this look like and does it work?” Also, he wants to see how financial concerns in China play out, and he wonders whether nominal growth will be strong enough in the U.S. and globally for earnings to improve.

“It appears as if the multiple-driven equity market is finished, and we will need better earnings for the equity market to move higher,” Doll concludes.

On the next pages, read about Doll’s five correct predictions followed by the three he got wrong and the two that are still too early to call.

(Read Bob Doll’s Top 10 Predictions on Economy for 2013 at AdvisorOne.)


1) The U.S. economy continues to muddle through with nominal growth below 5% for the seventh year in a row.

“Real GDP in the U.S. will be around 2% with inflation at 2%, equating to nominal growth of 4%,” Doll writes. “The private economy is potentially growing closer to 3% (real), with the dampening factors being sequestration and fiscal drag.”

2) The U.S. yield curve steepens as financial risks recede and deflationary threats lessen.

“Certainly the U.S. yield curve has steepened,” Doll asserts. “The 10-year U.S. Treasury yield began the year at 1.84% and has flirted with 2.60%. We anticipate it will settle in the 2.40% to 2.60% range. The 10-year yield was as low as 1.68% during the commodities sell-off early in the second quarter.”

3) U.S. stocks record a new all-time high as stocks advance for the fifth year in a row.

“U.S. equities are off to a good start as the S&P 500 has increased 13.82% through the second quarter," Doll says. "The P/E ratio continued to rise as has been the case since the end of 2011, although earnings growth has been mediocre.”

4) Dividends increase at a double-digit rate as payout ratios rise.

“Dividends are growing faster than earnings and payout ratios are moving up,” Doll writes. “In fact, dividends are up more than the stock market year to date, which means the yield on the equity market is higher today than at the beginning of the year.”

5) A nascent U.S. manufacturing renaissance continues, powered by cheap natural gas.

“This is heading in the right direction,” Doll writes. “The U.S. has the benefit of cheap natural gas versus big industrial export competitive countries like Japan, Germany and Korea. Manufacturing has been mixed in the U.S. and is generally doing better than the overall economy.”


1) Emerging-market equities outperform developed-market equities.

“The emerging markets are struggling with liquidity and economic growth problems,” Doll concedes in “A Mid-Year 10 Predictions Assessment.” “Emerging-market economies share concerns over [the Federal Reserve] ending quantitative easing. We don’t think this one will reverse.”

2) After two years of underperformance, U.S. multinationals outperform domestically focused companies.

“While this prediction is not out of the question, there is some catching up to do," Doll says. "Multinational companies have lagged because of concerns in the emerging markets and Europe.”

3) The U.S. government passes a $2 trillion to $3 trillion 10-year budget deal.

“Our position has been that this would be gradual,” Doll writes. “The U.S. federal budget deficit has decreased based on modest revenue increases and expense cuts largely due to acrimony between the two parties in the absence of an agreement. So we may get the notion of this right, but the facts may be wrong.”


1) Europe begins to exit recession by the end of year as the European Central Bank eases and financial stresses lessen.

“The good news is that European financial stresses seem to be on the back burner,” writes Nuveen’s chief equity strategist. “Europe remains in a recession, although there are some signs that the recession is becoming less of a negative.”

2) Large-cap stocks outperform small-cap stocks and cyclical companies outperform defensive companies.

“Large and small caps have been in a close race for some time now,” Doll says. “Cyclicals have picked up steam, as the defensive companies led by utilities and telecom significantly underperformed in the second quarter, after doing reasonably well in the first quarter.”

Read Bob Doll’s Top 10 Predictions on Economy for 2013 at AdvisorOne.

Friday, August 23, 2013

What should you watch for when analyzing the balance sheet?

To that regard, balance sheet analysis is something that often goes ignored, especially, when you are looking at stocks but its something that is perhaps the central driving force of understanding what makes a company tick.

Nikhil Vora, MD of IDFC Securities and Bharat Iyer, Head-India Equity Research at JPMorgan, in an interview with CNBC-TV18's Mitali Mukherjee break up the workings of a balance sheet and explain how it should be analyzed.

Below is a verbatim transcript. For the complete details watch the accompanying video.

Q: How would you define what a balance sheet is and what its analysis entails?

Vora: The genesis or the core of any investment research lies in how one is able to understand and analyze balance sheets and make a slightly more informed decision making post that. Its important to read the numbers beyond what is published, be it on the revenue growth of businesses and how that's getting derived, to what are the salience's of certain balance sheet items, be it on the debt part, be it on receivables and so on.

It's important to judge particular businesses and companies in the context of how their reporting standards are and how transparent and consistent they are in the same as we move forward.

Q: For a lot of people who analyze stocks it is a non-sexy item in terms of analyzing the company, it's easier to work with earnings or ratios rather than read some kind of conclusion?

Iyer: I guess while earnings is just one particular number what you want to see is the key drivers and the key pressure points behind the number and it's very important to look out for these. Reporting a set of numbers given some constraints is always easy but from an analyst perspective we want to see what is driving numbers and what is impacting numbers.

For that you need better disclosures and you want to see the background information behind it. Luckily in India, we have fairly well set accounting standards. Earnings are reported almost four times a year every quarter and we also have access to balance sheet and cash flow data at least once in a year. So while you prefer balance sheet and cash flow data more often, I guess even the earnings numbers given to us once a quarter are fairly well defined and we have fairly decent disclosure standards so that does help.

Q: To get to the broad heads of a balance sheet that we are looking at, there is assets liabilities, equity of cost but let's take it with assets. What are the ABC items you would look at while analyzing the asset side of a company?

Vora: I think the most critical element of any balance sheet read that one would look at is to look at the size of the balance sheet first level and its important from the construe that one makes about growth of a business whether the balance sheet size also keeps growing in pace with that because the revenue generation capability of any business is dependent on the investments or the asset base that the company has over a period of time and how they build it up.

The first level is to look at how the overall fixed asset of the business mold grows and the second part is to look at the constituent of that fixed asset and how that is getting financed out, be it through the net worth of the company or through the debt of the business. To me that's the two critical elements to look out for.

The third part is to look at the receivables in that business because as we move forward whether the business growth is been driven by the underlying cash flow generation capability of the company or it's been funded by pushing the business through a receivable cycle which can literally lead to debt trap over a period of time that's the critical element to look at.

Q: Aside from the size of a balance sheet does the structure and style of the business matters as well because on your point about cash flows, it makes something like a construction company more vulnerable versus another sector, right?

Vora: It does. That's the reason why you also see in lot of cases how businesses tend to get de-rated or rerated based on how the balance sheet is perceived to move today and forward. A business which has the capability to grow on its own cash flow which would mean that its generating adequate cash reserves and thereby growing on net worth and not on debt does tend to get rerated significantly ahead rather than a business which is growing on external capital at every stage in their growth path.

That's the difference which ideally gets realized very early in life. You start to look at businesses accordingly and the fact that they are a branded business for instance will grow significantly on their own cash generation whereas in a lot of infra businesses that we look at today, it does grow on external capital. Thereby the rerates in those businesses do take a lot more time and a lot more persistence than a branded business or a consumer business would do.

Q: What do you watch for while analyzing the balance sheet for company in order to understand the liabilities what do you watch for while analyzing the balance sheet of a company in order to understand the liabilities and more importantly the size of them and the impact on earnings thereof?

Iyer: When you are looking at the liabilities, you look at quite a few factors. It's just not the quantum of liabilities; you are looking at the solvency of the company itself whether the sheer size of the liability in relation to the size of the company's operations. You are also looking at the liquidity situation of the company.

You are looking at the tenure of the debt in particular because what you don't want as a mismatch between the borrowing side and the asset side, you don't what long-term borrowings going into short-term assets or visa versa.

Besides this, you also look at few factors like the nature of balance sheet items, if the company has indulged in sale and leaseback for example or even the contingent liabilities they tend to be very important because these are very easy to ignore but they do have a material impact on the company's operations down the line. It's quite important to take at comprehensive view.

Q: Why is it that a lot of people also tend to work with cash flow statement rather than the balance sheet and what would you draw as a defining line between the two?

Vora: At lot of points in time, balance sheets are a statement of intent which the business does over a period of time because a lot of times you do tend to capitalize the business ahead of time and thereby the impacts on cash flows are not as significant in the near-term as it ought to be. Hence, the return ratios or return on capital does tend to look significantly lower than adequate or fair return on capital of those businesses.

Cash flows are more dependent on the profitability or the underlying business merit as of that moment. The near-term visibility of a business is determined by the cash flow generation capability of a business whereas the longer-term longevity of a business would possibly be driven by how the balance sheet structure is and how capitalization moves.

Both of them are not independent factors. It's interdependent. I would think that cash flows are something which I would be comfortable if I had to look at the next two-three years of business growth and how the underlying businesses are. Balance sheet would be more dependent about the amount of capitalization and the amount of growth needs for a business and thereby the longevity of a business over a period of time.

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Tags: Informed Investor, Nikhil Vora, IDFC Securities, Bharat Iyer, JPMorgan, Mitali Mukherjee, balance sheet, assets liabilities, cash flows
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