- by New Deal democrat
My new Weekly Indicator post is up at XE.com.
Several important recent negative trends appear to be moderating.
Saturday, July 12, 2014
International Week in Review: UK Data Disappoints Edition
This is up over at XE.com
http://community.xe.com/forum/xe-market-analysis/international-week-review-uk-data-disappoints-edition
http://community.xe.com/forum/xe-market-analysis/international-week-review-uk-data-disappoints-edition
Friday, July 11, 2014
GDP tanked when Medicare started, too
- by New Deal democrat
There was an interesting article by Floyd Norris in the New York Times today, describing how the horrible final first quarter GDP report was because:
a single government survey produced highly dubious numbers.....the results of a quarterly survey of service providers. The survey, conducted by the Census Bureau, [of] 18,000 companies in 11 service industries....
There are some possible explanations. Many of those who signed up for private health insurance under the Affordable Care Act did not do so until March and did not become covered until April or May. It could make sense for such people to defer some health care until they were covered.That may have been what happened in 1965, the other year when health care spending declined in a quarter. That occurred while Congress was passing the legislation that established Medicare, beginning in 1966. There were large increases in health care spending after Medicare went into effect.
Sue enough, a graph of real GDP from the 1960s, shows this:
The report goes on to note that there is some evidence that weakness in health care spending carried over into the second quarter. We'll start to see for real in a couple of weeks.
Thursday, July 10, 2014
Angie's List: How Not to Run a Company
A recent post on Seeking Alpha detailed five reasons why the author didn't like Angie's list. Two really stood out in my mind -- massive insider selling (never a good sign) and out of control expenses. To satisfy my own curiosity, I took at look at the company's financials and agree with the author: Angie's List is not a company to invest in for the following reasons:
Above is a chart of AL's current, quick and cash ratio for the last five years. In only one year -- 2011 -- the company had positive numbers. In all others (save the positive current ratio in 2012) this ratio was below 1. This tells us that, in the event the company had an extremely negative event that hit revenue, they had insufficient assets to cover liabilities. And the numbers get worse when looking at their DIR:
The DIR has never been above 1 in the last five years. In fact, it's been below .4 80% of the time. In the event all revenue stopped coming in, the company would be in very deep trouble very quickly.
Turning to the company's margins, we see that they have never had a positive operating or net margin in the last five years. And compounding that problem is the out of control expenses:
In 2010 and 2011 operating expenses were growing faster than revenue growth. And not by a small amount. They were 22.13% higher in 2010 and 10.82% higher in 2011. And while they were at least growing below revenue growth in 2012 and 2013, they were still growing at very quick rates.
An argument could be made that my observations are based more on looking at Angie's List through the eyes of someone who prefers more established company financials rather than growth company financials. This is a valid criticism. However, the above financials are a total wreck; should growth slow, the company would face a cash shortfall quickly. And given their poor net income situation, financing would be difficult to obtain on favorable terms. The first metric a bank or credit analyst would look at is their liquidity ratios, and they would not like what they saw.
And, to top it off, the insiders are dumping the stock. That's a terrible sign; if there's anybody who should know the company, it's the people running it. And they're leaving the stock as fast as they can.
The bottom line is clear: Angie's List is not well run. And the insiders obviously agree with that as they're getting out of the stock as fast as they can.
- The company is illiquid
- In the event of an extreme financial situation, they are ill-equipped to finance continuing operations
- The Company has five straight years of net losses and has negative operating margins
- The company's expenses are poorly controlled
Above is a chart of AL's current, quick and cash ratio for the last five years. In only one year -- 2011 -- the company had positive numbers. In all others (save the positive current ratio in 2012) this ratio was below 1. This tells us that, in the event the company had an extremely negative event that hit revenue, they had insufficient assets to cover liabilities. And the numbers get worse when looking at their DIR:
The DIR has never been above 1 in the last five years. In fact, it's been below .4 80% of the time. In the event all revenue stopped coming in, the company would be in very deep trouble very quickly.
Turning to the company's margins, we see that they have never had a positive operating or net margin in the last five years. And compounding that problem is the out of control expenses:
In 2010 and 2011 operating expenses were growing faster than revenue growth. And not by a small amount. They were 22.13% higher in 2010 and 10.82% higher in 2011. And while they were at least growing below revenue growth in 2012 and 2013, they were still growing at very quick rates.
An argument could be made that my observations are based more on looking at Angie's List through the eyes of someone who prefers more established company financials rather than growth company financials. This is a valid criticism. However, the above financials are a total wreck; should growth slow, the company would face a cash shortfall quickly. And given their poor net income situation, financing would be difficult to obtain on favorable terms. The first metric a bank or credit analyst would look at is their liquidity ratios, and they would not like what they saw.
And, to top it off, the insiders are dumping the stock. That's a terrible sign; if there's anybody who should know the company, it's the people running it. And they're leaving the stock as fast as they can.
The bottom line is clear: Angie's List is not well run. And the insiders obviously agree with that as they're getting out of the stock as fast as they can.
Wednesday, July 9, 2014
Wage Growth and CPI Correlation
Above is a scatterplot comparing the year over year percentage change in seasonally adjusted average hourly earnings of "non-supervisory" employees and the Y/Y rate of change in CPI. Notice the positive correlation: when wages increase at a higher rate year over year, CPI is likely to follow.
Let's place the above data into a wage context:
Right now, the average hourly earnings of non-supervisory workers is low by historical standards, indicating that we can expect weaker pressure on prices from this data set.
Unemployment rate of less than 6% in coming months looks likely
- by New Deal democrat
I have a new post up at XE.com, updating a graph I have periodically run showing how the population adjusted rate of initial jobless claims leads the unemployment rate. It appears that an unemployment rate at long last under 6% is in prospect in the next few months.
Tuesday, July 8, 2014
Monday, July 7, 2014
Blackberry's Current Asset Managment Bodes Well For the Future
A really good friend of mine used to love his Blackberry. In fact, he called it is "crackerry" because he couldn't put it down. This was about 3 years ago, and, over that time, we've seen the strong rise of Apple and Samsung as the emerging companies in the cell phone market. But recent price action of BBRY has been positive, indicating the market is taking a second look at this company.
First, here's a long-term chart:
Here we clearly see the fall from investor grace, as the stock traded from the upper 70s to now a price around 10. However, since mid-2012, the stock has been building a very strong technical base, consolidating losses. In addition, it has rallied two times from the mid level of $5 and $6 share.
All of the charts below are from the last 5 quarters of financial information.
When looking at the company's financials, our first concern should be the liquidity position. Blackberry is in a financially precarious position; it is trying to turn around in a fiercely competitive industry. That means it needs to be able to cover its short term liabilities from its balance sheet. As the chart below indicates, management is more than up to that task:
First, here's a long-term chart:
Here we clearly see the fall from investor grace, as the stock traded from the upper 70s to now a price around 10. However, since mid-2012, the stock has been building a very strong technical base, consolidating losses. In addition, it has rallied two times from the mid level of $5 and $6 share.
All of the charts below are from the last 5 quarters of financial information.
When looking at the company's financials, our first concern should be the liquidity position. Blackberry is in a financially precarious position; it is trying to turn around in a fiercely competitive industry. That means it needs to be able to cover its short term liabilities from its balance sheet. As the chart below indicates, management is more than up to that task:
All of Blackberry's short term liquidity ratios are rising. The current ratio is now slightly below 2.5 while the cash ratio is 1.52. Also note the revised quick ratio where I assume receivables are sold at 75% of reported value is rising as well. Current management has done very well in creating a highly liquid company in a very difficult environment.
Their defensive interval ratio is also in very good shape.
The DIR is a ratio of cash, cash equivalents and receivables to COGS, SGA and R&D expenditures. What we want to make sure of is the company has enough cash on hand to cover expenses. Notice that this number has been increasing. The gold column is a ratio that excludes receivables. The last two quarterly readings have been around 3, which tells us the company is extremely liquid.
Let's next turn to the receivables and inventory management. Two things are common for a company in bad financial straights:
1.) To extend an increasing amount of credit to customers thereby closing sales that are on weaker financial footing.
2.) To get caught with a large amount of inventory on their books as a result of declining sales.
Blackberry has prevented both of those situations from developing:
Receivables as a percent of current assets have decreased from 35.63% to 17.10%, while inventory as a percent of current assets has decreased from 12.46% to 2.46%.
And finally, here is a chart of their operating - investing cash flows:
The point of this metric is to determine if the company is generating sufficient cash flows to cover their investments. If this number is positive, the company begins to have more financing options, allowing it to choose between different methods of raising capital. As the chart above shows, this number has been increasing consistently over the last five quarters, turning positive in the last quarter.
None of this takes away from the daunting task facing the company. Quarterly gross revenue has dropped from a little over $3 billion to $966 million. Book value has been cut by 2/3, falling from $9 billion to $3 billion. And that's before we get into the difficulty of re-establishing a brand against two tech giants in Samsung and Apple. However, the above data indicates that at least financially, the company is in good hands.
Sunday, July 6, 2014
A thought for Sunday: the new 3/5's Rule and plight of the DREAMers
- by New Deal democrat
The 3/5's rule was one of the ugly compromises that had to be made in order to bring the slave-owning South into the Federal republic under the Constitution. It stated:
Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excludingIndians not taxed, three fifths of all other Persons.
Thus from 1789 until the Civil War, the rural South was overrepresented in the House of Representatives, and had extra influence in the Electoral College, because whites were able to "represent" African slaves.
This clause came to mind because of the acute crisis of 52,000 Latino children having been captured this year attempting to illegally cross the US border. The 10 million+ illegal immigrants (or undocumented workers depending on your persuasion), for electoral purposes, are in the same situation as the antebellum African slaves.
After the Civil War Section 2 of the Fourteenth Amendment superseded the now-moot 3/5's clause, providing:
"Representatives shall be apportioned ...counting the whole number of persons in each State, excluding Indians not taxed..."
But now the influx of illegal immigrants from Mexico and Central America has given rise to an entire new population whose have a similar lot. Frozen out of citizenship, their numbers are nonetheless included in the population of states who get to send a disproportionate number of Representatives to Congress, in order to pass laws that, among other things, ensure that their lot can never change.
Let me say that I "get" both sides of this argument. I fully appreciate that those who immigrate to the US illegally are queue-jumpers, they necessarily compete for low-wage jobs that might otherwise go to those who are here lawfully, and many may have no loyalty to the country where they have chosen to live. On the other hand, I know a fair number of immigrants who have confided information to me such that I am virtually certain they did not immigrate lawfully. They are hard workers, they want a better life for themselves and their children, and they want their children to be integrated into US society (and for what it's worth most rooted for the USA in the World Cup either first or second). This is the classic American immigrant dream.
Further, I "get" that the compromise behind the Immigration Reform Act of 1986 - amnesty for those already here, and tougher border enforcement to keep further illegal immigrants out - failed. The law was asymmetric. Once legalization happens, it is forever. But enforcement to ensure that the problem does not repeat is a chronic and permanent commitment, which is likely not to be enforced in large part due to employer desires for cheap labor.
That being said, whatever the equities of an adult crossing into the US illegally, the same does not apply to a child who did not make the choice to immigrate, and for all intents and purposes, remembers no other home except the US, and feels every bit as much of an American kid as the great great great great grandchild of Irish, Italian, Jewish, or Japanese immigrants.
There is no statute of limitations on being deported. Like murderers, who may commit the crime at age 18 and be convicted a lifetime later at 78, DREAMers - those young people who were brought here when they were young children, and know no other home - face a lifetime of fear and apprehension. Now they are college students and young adults, but even decades from now when they are 40, 60, or 80 years old, having married, raised a family, and worked for a lifetime, they will never vest in the privileges of citizenship, benefit from retirement programs, and at any moment's notice they will still be subject to arrest and deportation to a country where they were born but never really knew. This is simply unconscionable.
Meanwhile, for those decades, those who want to deport them can claim their numbers for enhanced and unequal representation in Congress.
This is abhorrent now, just as the 3/5's rule was abhorrent then. Representation should be based on the population eligible to vote.
Further, simple humanity demands that there must be a Statute of Repose for the DREAMers. After some period of time those who were brought to this country illegally when they were children, who know only the United States as their home, should - regardless of any "path to citizenship" - at the very least have the right to remain permanently without fear of deportation.
Saturday, July 5, 2014
International Week in Review: Solid US Employment Report Edition
This is over at XE.com
http://community.xe.com/forum/xe-market-analysis/international-week-review-solid-us-employment-report-edition
http://community.xe.com/forum/xe-market-analysis/international-week-review-solid-us-employment-report-edition
Weekly Indicators for June 30 - July 4 at XE.com
- by New Deal democrat
Independence Day didn't feature the only fireworks of the week. The second quarter went out with a bang, too.
Friday, July 4, 2014
Happy Fourth of July
- by New Deal democrat
Enjoy Independence Day! Regular economic blogging will resume tomorrow.
The American Revolution is a reminder that, just because a county is a representative democracy, it can't behave like a total d*ck towards a minority subject to its jurisdiction.
What separates representative democracies from tyrannies is not that they won't do horrible things, or that things won't go horribly wrong, but that at least as to their citizens who have the right to vote, when they do a nonviolent remedy is built into the foundation law. That's why tyrannies are internally popular during good times, but fail during hard times, while republics can endure. Had the Parliament of the UK granted full voting rights and representation to its American colonies, we might all be British! Or maybe Canadians. ;-)
238 years ago, the Founders decided to see if a modern Republic, grounded on the principles of the Enlightenment, could successfully overcome the flaws that had brought down its ancient predecessors. The experiment is still in progress.
Thursday, July 3, 2014
The REAL "real unemployment rate" for June 2014: 9.6%
-by New Deal democrat
Before we leave today's employment report, here is one more item of interest, which I overlooked this morning.
The unemployment rate declined for the right reason: fewer people were unemployed, even though more people entered the labor force. This is very good. Additionally, the people not counted in the unemployment rate because they were so discouraged they didn't look at all - but would like a job now - also decreased. the total decrease of over 600,000 in a labor force of 150 million or so, means that the "real" unemployment rate dropped by -0.4% to 9.6%, as shown below:
Comparing apples to apples, this is only 0.1% higher than 1995, and 0.5% higher than 2003. Not "good," but definitely moving in the right direction.
This is the right way to account for discouraged workers. Any other calculation you read that extrapolates estimates from a decade ago, or assumes no Baby Boom, is a waste of math.
The best measure yet of labor utilization?
- by New Deal democrat
I think I have found a better measure of labor utilization than Paul Krugman's employment to population ratio of people aged 25-54. It is also a measure which fully responds to the one notable weak point in today's employment repart.
ZH and a few Doomer dead-enders have touted the increase in involuntary part time jobs and the decline in full time jobs in the more volatile Household Survey. There is an easy rejoinder to this, and that is to take a more granular look by examining the aggregate hours worked in the economy, which I've indexed to 100 at its December 2007 maximum in this graph:
More hours were worked in the economy in June vs. May. As usual, in the real world DOOM has failed to appear.
Now let's take out demographics (mainly Boomer retirements). Here's the number of persons in the age group 15-64, normally thought to be the ages of employment:
Now, we divide the aggregate hours in the economy by the working age demographic group:
This tells us the number of working hours available in the economy to those in what is usually thought of as the working age demographic. It clearly shows that the economy was at its best ever in the 1960s, and had its biggest boom in the last 40 years during the tech boom of the late 1990's. It also shows that the worst times for labor were in the 1973-74, 1981-82, 1990, and the 2008-09 tecessions.
Interestingly, this shows just how significant an impact on the employment population there has been by Boomers working past age 65, shown in this graph:
(h/t Doug Short)
The number and percentage of people over 65 staying in the labor force force past age 65 has been increasing for 20 years, showing the effects of increasing healthy longevity. This even affects Krugman's preferred metric of the employment to population ratio of those ages 25-54, because the longer Boomers stay in the work force, the fewer job openings there are for members of Gen X and the Millennials.
In short, since 1973, only the top of the tech boom, and 2007, were the only times in which the work available to the prime working age labor was higher than it is now. If more Boomers can be enticed to really retire, the lot of the prime age working population will improve substantially.
June 2014 jobs report: excellent headline, meh internals, and still not good enough
- by New Deal democrat
HEADLINES:
- Not in Labor Force, but Want a Job Now: down 323,000 to 6.115 million
- Employment/population ratio ages 25-54: up from 76.4% to 76.7% equalling its recent high
- Average Weekly Earnings for Production and Nonsupervisory Personnel: up +0.2% or $.04 to $20.58, Up 2.0% YoY
The headlines numbers were very good. But since we knew the general range of job growth and unemployment, I want to focus on the 3 above headline numbers as to "real" unemployment and wages. Two of these three numbers for June have basically gone sideways since the beginning of the year, indicating that little headway has been made as to the chronic problem of stagnant wages. The relative bright spot is that we have a significant rebound in the employment population ratio in the prime working age group.
Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago. This month declinled, but was still above February's and last November's number. This is almost certainly due to the cutoff in extended unemployment benefits by Congress at the end of last year.
After inflation, real hourly wages for nonsupervisory employees were probably essentially flat from May to June, The YoY change in average hourly earnings is +2.0%.
The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mixed.
- the average manufacturing workweek was unchanged at 41.1.This is one of the 10 components of the LEI.
- construction jobs increased by 6.000. YoY 192,000 construction jobs have been added.
- manufacturing jobs increased by 16,000, and are up 129,000 YoY.
- temporary jobs - a leading indicator for jobs overall - increased by 10,100.
- the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - decreased by 149,000 to 2,410,000 compared with December's 2,255,000 low.
Other important coincident indicators help us paint a more complete picture of the present:
- The average workweek for all nonsupervisory workers was unchanged at 33.7 hours.
- Overtime hours were unchanged at 3.5 hours.
- the index of aggregate hours worked in the economy rose by 0.2 from 108.3 to 108.5.
- The broad U-6 unemployment rate, that includes discouraged workers decreased from 12.2% to 12.1%.
- The workforce increased by 81,000. Part time jobs for economic reasons increased by 275,000.
- the alternate jobs number contained in the more volatile household survey increased by 407,000 jobs. The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been almost entirely made up, with the household survey showing a 2,146,000 increase in jobs YoY.
- Government jobs increased by 26,000.
- the overall employment to population ratio for all ages 16 and above rose 0.1% from 58.9% to 60.0%, and has risen by +0.3% YoY. The labor force participation rate was unchanged at 62.8%, and has fallen by -0.7% YoY (but remember, this includes droves of retiring Boomers).
In summary, this report was yet another very good report, based on the standard of the last decade. as to the headline numbers and revisions. It is a still a mediocre report when measured against a longer timeframe. Further, many of the internals of this number were unchanged, although some of the forward looking numbers (workers in construction, manufacturing, and temp services) were positive.
We have made no headway since the beginning of this year in dealing with chronic underemployment as shown by discouraged workers, and very little headway on real wages. The relative bright spot is the significant headway on the percentage of prime working age people being employed, which has rebounded by over 1/3 from its recession low to its pre-recession peak.
We have made no headway since the beginning of this year in dealing with chronic underemployment as shown by discouraged workers, and very little headway on real wages. The relative bright spot is the significant headway on the percentage of prime working age people being employed, which has rebounded by over 1/3 from its recession low to its pre-recession peak.
Wednesday, July 2, 2014
Ebay, Part II: the Income and Cash Flow Statement
For the first part in this series on EBay's balance sheet, please go to this link.
When looking at a large, established company's earnings and cash flow statements, the main thing I want is predictability and consistency. While I don't expect the numbers to be completely uniform, lots of jumping around indicates the underlying economy is weak or that management may be having problems. With that in mind, let's start by looking at Ebay's Margins:
Over the last 5 years, the gross margin has declined from 71.58% in 2009 to 68.62% in 2013 -- a drop of about 4%. This isn't fatal; it does indicate the COGS has increased slightly over the last 5 years. At the same time, the operating margin has increased from 16.69% to 21.01%. The primary reason for this increase is SGA expenses as a percent of gross revenue have decreased from 37.86% in 2009 to 29.68% in 2013. The net margin has decreased from 27.37% in 2009 to 17.8% in 2013. But this drop is a bit of a misnomer; in 2009, the company recorded $1.4 billion in "other" income, in addition to income from continuing operations. In other words, a net margin in the high teens (17%-19%) is far more customary.
The decrease in the SGA expenses is encouraging, as it indicates costs are clearly under control. That's always a good sign. And the overall consistency in the revenue statement's margins also tells us management has a steady and disciplined hand.
Next, let's take a look at the company's overall revenue growth:
Coming out of the recession, growth was slow at a bit under 5%. 2011 and 2012 had some strong growth (perhaps pent-up demand kicking in) while 2013's figure was a bit more subdued. However, for a maturing company like Ebay, 14% is certainly nothing to sneeze at. Given Ebay is a mature company, top line revenue growth in the 14%-20% is far more likely.
Let's turn to the cash flow statement, starting with the relationship between operating earnings and investment activities. A mature company like Ebay should be able to derive investment funds from its operations, thereby freeing it on the financing side.
Here's a chart of the difference between operating cash flows and investment expenditures:
Ebay received a big cash infusing in 2009. In that year, they had $2.9 billion in operating income but only $1.1 billion in investments. Then they only had $567 million in PPE investments which was 19% of operating revenues. It's also highly probably management invested minimally as the economy was just emerging form the recession and growth was low. In 2010, there is still a net increase in cash, again with the most likely reason being conservatism on the part of management; their biggest investment expense was still PPE, but that total was only 26% of operating expenses. In 2011 and 2012, Ebay ramped up PPE investments, which totaled $963.5 million and $1.257 billion, respectively. The growth in their overall PPE expenditures is expressed in this chart:
In addition to strong increases in PPE, Ebay has been adding to their overall investment portfolio at a strong pace on an annual basis:
These investments have gone both to cash (in the form of short-term securities) and overall investments.
Finally, let's turn to the financing section of the cash flow statement. It shows two points.
1.) Over the last five years, Ebay has issued $4.4 billion in debt and repaid $1.5 billion, for a net change in debt outstanding of $2.8 billion.
2.) Ebay has repurchased a little over $4 billion in stock. Overall treasury stock has increased from $5.3 to $9.3 billion.
This leads to an interesting question: if and when Ebay will pay a dividend. Consider EBay's retained earnings:
Total retained earnings have increased from $8.3 billion in 2009 to $18 billion in 2013. The board is obviously paying shareholders now in the form of share buybacks. But, given that high level of retained earnings and EBay's ability to generate cash, a dividend might be in the future.
So, to conclude, EBay's management has costs under control as evidenced in the income statement. Margins have been constant and growth has been steady. I would expect a drop in annual growth rates to the high teens in the future. The cash flow statement indicates the company has the ability generate a large percentage of its investment needs through ongoing sales, freeing the company up when it comes to structuring their financing.
Simply put, EBay's a solid company.
When looking at a large, established company's earnings and cash flow statements, the main thing I want is predictability and consistency. While I don't expect the numbers to be completely uniform, lots of jumping around indicates the underlying economy is weak or that management may be having problems. With that in mind, let's start by looking at Ebay's Margins:
Over the last 5 years, the gross margin has declined from 71.58% in 2009 to 68.62% in 2013 -- a drop of about 4%. This isn't fatal; it does indicate the COGS has increased slightly over the last 5 years. At the same time, the operating margin has increased from 16.69% to 21.01%. The primary reason for this increase is SGA expenses as a percent of gross revenue have decreased from 37.86% in 2009 to 29.68% in 2013. The net margin has decreased from 27.37% in 2009 to 17.8% in 2013. But this drop is a bit of a misnomer; in 2009, the company recorded $1.4 billion in "other" income, in addition to income from continuing operations. In other words, a net margin in the high teens (17%-19%) is far more customary.
The decrease in the SGA expenses is encouraging, as it indicates costs are clearly under control. That's always a good sign. And the overall consistency in the revenue statement's margins also tells us management has a steady and disciplined hand.
Next, let's take a look at the company's overall revenue growth:
Coming out of the recession, growth was slow at a bit under 5%. 2011 and 2012 had some strong growth (perhaps pent-up demand kicking in) while 2013's figure was a bit more subdued. However, for a maturing company like Ebay, 14% is certainly nothing to sneeze at. Given Ebay is a mature company, top line revenue growth in the 14%-20% is far more likely.
Let's turn to the cash flow statement, starting with the relationship between operating earnings and investment activities. A mature company like Ebay should be able to derive investment funds from its operations, thereby freeing it on the financing side.
Here's a chart of the difference between operating cash flows and investment expenditures:
Ebay received a big cash infusing in 2009. In that year, they had $2.9 billion in operating income but only $1.1 billion in investments. Then they only had $567 million in PPE investments which was 19% of operating revenues. It's also highly probably management invested minimally as the economy was just emerging form the recession and growth was low. In 2010, there is still a net increase in cash, again with the most likely reason being conservatism on the part of management; their biggest investment expense was still PPE, but that total was only 26% of operating expenses. In 2011 and 2012, Ebay ramped up PPE investments, which totaled $963.5 million and $1.257 billion, respectively. The growth in their overall PPE expenditures is expressed in this chart:
In addition to strong increases in PPE, Ebay has been adding to their overall investment portfolio at a strong pace on an annual basis:
These investments have gone both to cash (in the form of short-term securities) and overall investments.
Finally, let's turn to the financing section of the cash flow statement. It shows two points.
1.) Over the last five years, Ebay has issued $4.4 billion in debt and repaid $1.5 billion, for a net change in debt outstanding of $2.8 billion.
2.) Ebay has repurchased a little over $4 billion in stock. Overall treasury stock has increased from $5.3 to $9.3 billion.
This leads to an interesting question: if and when Ebay will pay a dividend. Consider EBay's retained earnings:
Total retained earnings have increased from $8.3 billion in 2009 to $18 billion in 2013. The board is obviously paying shareholders now in the form of share buybacks. But, given that high level of retained earnings and EBay's ability to generate cash, a dividend might be in the future.
So, to conclude, EBay's management has costs under control as evidenced in the income statement. Margins have been constant and growth has been steady. I would expect a drop in annual growth rates to the high teens in the future. The cash flow statement indicates the company has the ability generate a large percentage of its investment needs through ongoing sales, freeing the company up when it comes to structuring their financing.
Simply put, EBay's a solid company.
Tuesday, July 1, 2014
What do the long leading indicators forecast for 2H 2014 and 1H 2015?
- by New Deal democrat
With the first half of 2014 in the books, I take a look at the long leading indicators, that usually turn a year or more before the economy turns, at XE.com. We now can begin to see the outlines of the first half of 2015.
Ebay, Part 1: The Balance Sheet
One of my favorite guilty pleasures is looking at guitars on EBAY. I've never purchased an instrument on line (and probably never would). But, this activity got me thinking about EBAY as a company and potential investment, which first led me to the stock's chart. Shifting to a weekly time frame, we get this picture:
Ebay was trading between the upper 40s and upper 50s for most of last year. Momentum has been declining and the CMF indicates volume is starting to flow out of the stock. This is not an encouraging picture from a technical perspective.
Then there is the relationship between EBAY and the SPYs:
The chart above shows EBAY/SPY. The declining nature of this relationship indicates the SPYs are outperforming EBAY. Clearly there is something about the company the market does not like, which led me to look at EBAYs' financials.
In the following analysis, I downloaded a spreadsheet of Ebay's balance sheet, income statement and cash flow from Morningstar.com.
Let's start by looking at the company's balance sheet starting with the liquidity position and beginning with the composition of its cash:
Over the last five years, Ebay has changed the composition of its cash holdings, slowing increasing the percentage of investments relative to cash. In 2009, the percentage of securities to cash was 19%. This percentage increased to 50% in 2013. The 10-K offers the following explanation of the firm's investment policy:
Short-term investments, which may include marketable equity securities, time deposits, certificates of deposit, government bonds and corporate debt securities with original maturities of greater than three months but less than one year when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
Long-term investments may include marketable government bonds and corporate debt securities, time deposits, certificates of deposit and cost and equity method investments. Debt securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses on our available-for-sale investments are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
Certain time deposits are classified as held to maturity and recorded at amortized cost. Our equity method investments are investments in privately held companies. Our consolidated results of operations include, as a component of interest and other, net, our share of the net income or loss of the equity method investments. Our share of investees' results of operations is not significant for any period presented. Our cost method investments consist of investments in privately held companies and are recorded at cost. Amounts received from our cost method investees were not material to any period presented.
We assess whether an other-than-temporary impairment loss on our investments has occurred due to declines in fair value or other market conditions. With respect to our debt securities, this assessment takes into account the severity and duration of the decline in value, our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and whether we expect to recover the entire amortized cost basis of the security (that is, whether a credit loss exists). We did not recognize an other-than-temporary impairment loss on our investments in 2013, 2012, or 2011.
The 10-k does not break down investment holdings, except to note they are short-term.
Next, let's turn to the company's liquidity ratios:
All of EBAYs' short term liquidity measures -- from the more liberal current ratio (assets/liabilities) to the more conservative cash ratio (cash/short term liabilities) -- are declining. What's important about this decline is it can't be attributed to a shifting of assets from cash to investments. If that were the case, we'd see a decline in the cash ratio but an increase in the quick ratio. Instead, all are moving lower.
However, this is not a fatal development. In fact, it's by design. The defensive interval ratio has never fallen below 1 in the last five years.
In addition, the company has a large credit facility. From their 10-K: We also have a $3.0 billion revolving credit facility, under which we maintain $2.0 billion of available borrowing capacity in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they come due. As of December 31, 2013, no borrowings or letters of credit were outstanding under this revolving credit facility and, accordingly, $1.0 billion of borrowing capacity was available for other purposes permitted by this credit facility.
The next issue to discuss is the growth of receivables, which is shown in this chart:
Receivables have increased as a percentage of assets from 37.69% in 2009 to 55.61% at the end of last year. As a result, we've seen a decrease in cash from 58.44% to 38.76%. Over the same period, Ebay has been increasing its payment business, which explains some of the increase. However, the increase doesn't explain the entire growth, seen on the chart below in comparison to the growth in receivables.
In two years, receivables and payments grew at similar rates. However, in 2011 and 2012 receivables growth far out-stripped the growth in payments.
Another way to look at the growth in receivables is receivables as a percentage of various assets:
It's obvious that Ebay is expanding its revenue streams and is developing payment systems for this purpose. However, Ebay's core competency is online auctions. In getting into the payments business, Ebay is become a de facto lender -- albeit to a large number of extremely small creditors. Peter Lynch called this type of activity "de-worsification," which implies the company is expanding its business into a market segment that it knows little about.
On the balance sheet, we also have the LTD/assets ratio, which is clearly under control:
And finally, there is book value. I use two methods of calculating this number: the straight assets-liabilities and a revised method in which I strip out all goodwill and assume receivables are sold at 75 cents on the dollar. Both of these values have been increasing a solid rates for the last five years:
Ebay's balance sheet is financially solid. Over the last five years they have shifted a larger percentage of their cash assets into securities with the hopes of increasing their short-term yield. Despite declining liquidity ratios, their defensive interval is still solid, indicating they have more than enough cash on hand. Book value has been growing at a good clip and the LTD debt/assets ratio's highest level over the last 5 years is 11%. The one area of concern is the growth in receivables, which could indicate the company is relaxing credit standards at the expense of prudent management. It could also be a sign the company is moving away from its core competency of online auctions.
Ebay was trading between the upper 40s and upper 50s for most of last year. Momentum has been declining and the CMF indicates volume is starting to flow out of the stock. This is not an encouraging picture from a technical perspective.
Then there is the relationship between EBAY and the SPYs:
The chart above shows EBAY/SPY. The declining nature of this relationship indicates the SPYs are outperforming EBAY. Clearly there is something about the company the market does not like, which led me to look at EBAYs' financials.
In the following analysis, I downloaded a spreadsheet of Ebay's balance sheet, income statement and cash flow from Morningstar.com.
Let's start by looking at the company's balance sheet starting with the liquidity position and beginning with the composition of its cash:
Over the last five years, Ebay has changed the composition of its cash holdings, slowing increasing the percentage of investments relative to cash. In 2009, the percentage of securities to cash was 19%. This percentage increased to 50% in 2013. The 10-K offers the following explanation of the firm's investment policy:
Short-term investments, which may include marketable equity securities, time deposits, certificates of deposit, government bonds and corporate debt securities with original maturities of greater than three months but less than one year when purchased, are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
Long-term investments may include marketable government bonds and corporate debt securities, time deposits, certificates of deposit and cost and equity method investments. Debt securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses on our available-for-sale investments are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
Certain time deposits are classified as held to maturity and recorded at amortized cost. Our equity method investments are investments in privately held companies. Our consolidated results of operations include, as a component of interest and other, net, our share of the net income or loss of the equity method investments. Our share of investees' results of operations is not significant for any period presented. Our cost method investments consist of investments in privately held companies and are recorded at cost. Amounts received from our cost method investees were not material to any period presented.
We assess whether an other-than-temporary impairment loss on our investments has occurred due to declines in fair value or other market conditions. With respect to our debt securities, this assessment takes into account the severity and duration of the decline in value, our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and whether we expect to recover the entire amortized cost basis of the security (that is, whether a credit loss exists). We did not recognize an other-than-temporary impairment loss on our investments in 2013, 2012, or 2011.
The 10-k does not break down investment holdings, except to note they are short-term.
Next, let's turn to the company's liquidity ratios:
All of EBAYs' short term liquidity measures -- from the more liberal current ratio (assets/liabilities) to the more conservative cash ratio (cash/short term liabilities) -- are declining. What's important about this decline is it can't be attributed to a shifting of assets from cash to investments. If that were the case, we'd see a decline in the cash ratio but an increase in the quick ratio. Instead, all are moving lower.
However, this is not a fatal development. In fact, it's by design. The defensive interval ratio has never fallen below 1 in the last five years.
In addition, the company has a large credit facility. From their 10-K: We also have a $3.0 billion revolving credit facility, under which we maintain $2.0 billion of available borrowing capacity in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they come due. As of December 31, 2013, no borrowings or letters of credit were outstanding under this revolving credit facility and, accordingly, $1.0 billion of borrowing capacity was available for other purposes permitted by this credit facility.
The next issue to discuss is the growth of receivables, which is shown in this chart:
Receivables have increased as a percentage of assets from 37.69% in 2009 to 55.61% at the end of last year. As a result, we've seen a decrease in cash from 58.44% to 38.76%. Over the same period, Ebay has been increasing its payment business, which explains some of the increase. However, the increase doesn't explain the entire growth, seen on the chart below in comparison to the growth in receivables.
In two years, receivables and payments grew at similar rates. However, in 2011 and 2012 receivables growth far out-stripped the growth in payments.
Another way to look at the growth in receivables is receivables as a percentage of various assets:
It's obvious that Ebay is expanding its revenue streams and is developing payment systems for this purpose. However, Ebay's core competency is online auctions. In getting into the payments business, Ebay is become a de facto lender -- albeit to a large number of extremely small creditors. Peter Lynch called this type of activity "de-worsification," which implies the company is expanding its business into a market segment that it knows little about.
On the balance sheet, we also have the LTD/assets ratio, which is clearly under control:
And finally, there is book value. I use two methods of calculating this number: the straight assets-liabilities and a revised method in which I strip out all goodwill and assume receivables are sold at 75 cents on the dollar. Both of these values have been increasing a solid rates for the last five years:
Ebay's balance sheet is financially solid. Over the last five years they have shifted a larger percentage of their cash assets into securities with the hopes of increasing their short-term yield. Despite declining liquidity ratios, their defensive interval is still solid, indicating they have more than enough cash on hand. Book value has been growing at a good clip and the LTD debt/assets ratio's highest level over the last 5 years is 11%. The one area of concern is the growth in receivables, which could indicate the company is relaxing credit standards at the expense of prudent management. It could also be a sign the company is moving away from its core competency of online auctions.
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