Five More Public Companies Who Need to Learn How to Properly Calculate EBITDA under SEC Rules
by ilene - September 12th, 2010 4:57 pm
Sam Antar makes a request to CFOs, Audit Committees, and auditors of public companies’ financial reports: study the SEC’s rules governing the calculation of non-GAAP measures such as EBITDA (earnings before interest, taxes, depreciation and amortization), and follow them. Correct the mistakes before the reports get filed so Sam doesn’t have to write an article and I don’t have to post it.
For example, Penn National Gaming (PENN) erroneously reported EBITDA as earnings before interest, taxes, depreciation, amortization AND charges for stock compensation, impairment losses, disposal of assets, losses from unconsolidated affiliates and the Empress Casino Hotel fire--that would be an "Adjusted EBITDA" or in PENN’s case, EBITDASCILDALUAECHFIRE.
To learn how to read a financial report and discover if the company you’ve invested in is calculating EBITDA properly or inflating this number, read Sam’s article. – Ilene
Five More Public Companies Who Need to Learn How to Properly Calculate EBITDA under SEC Rules
Courtesy of Sam Antar
It’s pathetic that so many public companies miscalculate EBITDA (earnings before interest, taxes, depreciation, and amortization) and violate Regulation G governing the calculation of non-GAAP measures such as EBITDA. It seems that too many CFOs, Audit Committees, and auditors don’t take the time to thoroughly review compliance with all appropriate SEC financial reporting rules.
Starting in 2007, I reported improper EBITDA calculations by Overstock.com (NASDAQ: OSTK). After a brutal yearlong public battle, Overstock.com’s embittered CEO Patrick Byrne finally changed his company’s EBITDA calculation to comply with Regulation G. For additional details, please read Lee Webb’s Stockwatch article and Richard Sauer’s book.
Last July, I reported apparently erroneous EBITDA calculations by Penson Worldwide (NASDAQ: PNSN) and Comtech Telecommunications (NASDAQ: CMTL).
In this blog post, I will report erroneous EBITDA calculations by five more public companies: A. H. Belo Corporation (NYSE: AHC), FirstService Corporation (NASDAQ: FSRV), Animal Health International, Inc. (NASDAQ: AHII), Schawk Inc. (NYSE: SGK), and Penn National Gaming Inc. (NASDAQ: PENN).
First, let’s review how EBITDA supposed to be calculated
According to the SEC Compliance & Disclosure Interpretations, EBITDA is defined as under Regulation G as net income (not operating income) before interest,…
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Week Gone By at Phil’s Stock World
by ilene - September 4th, 2010 5:29 pm
Week Gone By at Phil’s Stock World
By Elliott and Ilene
Globalism is featured in several of this week’s Favorites articles. The ever insightful Paul Craig Roberts asks whether “economists have made themselves irrelevant” in his article "Death by Globalism".
Michael Synder points out that globalism is no longer "something that is going to happen in the future", but is instead a hard reality that is currently annihilating our middle class in his article "Winners and Losers." Of our new global economy, Michael writes:
"…American workers are just far too expensive. So middle class manufacturing jobs are fleeing our shores at a staggering pace.
Since 1979, manufacturing employment in the United States has fallen by 40 percent.
Are you alarmed yet?
You should be.
The truth is that we did not have to merge our economy with nations like China. China does not have the same minimum wage laws that we do. China does not have the same environmental protection laws that we do. In China, companies can treat their workers like crap. As a result of open trade with the United States, scores of shiny new factories have opened all over China while once great manufacturing U.S. cities such as Detroit have degenerated into rotting war zones. We continue to expand trade with China even though their communist government stands for things that are absolutely repulsive and has a list of human rights abuses that is seemingly endless.
But politicians from both parties swore up and down that globalism would be so good for us. Now we have created a network of free trade agreements that would be virtually impossible to unwind…"
What is the result? We have the disparity of multinational corporations doing remarkably well in the face of a weak and sickly U.S. economy. The large corporations are relying on the U.S. consumer less and less. They have moved their factories overseas, avoided U.S. taxes, laid off U.S. workers, and taken advantage of cheap off shores labor. And their earnings may continue relatively unharmed by a lull, double dip, or continued recession in the U.S. – depending on whose perspective. (See Consumer Metrics Institute’s report on the U.S. consumer and our economic malaise.) The result of this corporate earnings/U.S. economy disparity is reflected in the stock market’s performance which seems to have decoupled…
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THE DETERIORATING MACRO PICTURE
by ilene - August 31st, 2010 3:59 am
THE DETERIORATING MACRO PICTURE
Courtesy of The Pragmatic Capitalist
Over the course of the last 18 months I’ve been adhering to a macro view that can best be summed up as follows:
1) The explosion in private
sector debt (excessive housing borrowing, excessive corporate debt, etc) levels would reveal the private sector as unable to sustain positive economic growth, de-leveraging and deflation would ensue.2) Government intervention would help moderately boost aggregate demand, improve bank balance sheets, improve sentiment, boost asset prices but fail to result in sustained economic recovery as private sector balance
sheet recession persists.3) Extremely depressed estimates and corporate cost cutting would improve margins and generate a moderate earnings rebound, but would come under pressure in 2010 as margin expansion failed to continue at the 2009 rate.
4) The end of government intervention in H2 2010 will reveal severe strains in housing and will reveal the private sector as still very weak and unable to sustain economic growth on its own.
The rebound in assets was surprisingly strong and the ability of corporations to sustain bottom line growth has been truly impressive – far better than I expected. However, I am growing increasingly concerned that the market has priced in overly optimistic earnings sustainability – in other words, estimates and expectations have overshot to the upside.
What we’ve seen over the last few years is not terribly complex in my opinion. The housing boom created what was in essence a massively leveraged household sector. The problems were compounded by the leveraging in the financial sector, however, this was merely a symptom of the real underlying problem and not the cause of the financial crisis (despite what Mr. Bernanke continues to say and do to fix the economy).
As the consumer balance sheet imploded the economy imploded with it. This shocked aggregate demand like we haven’t seen in nearly a century. This resulted in collapsing corporate revenues. The decrease in corporate revenues, due to this decline in aggregate demand, resulted in massive cost cutting and defensive posturing by corporations. This exacerbated the problems as job losses further weakened the consumer balance sheet position. Consumers, like, corporations, got defensive and began cutting expenses and paying down liabilities. Sentiment collapsed and we all know what unfolded in 2008.
The government responded by largely targeting the banking sector based on the belief that fixing the banks would fix Main…
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Banks Recruit Investors to Oppose Honest Valuation of Assets; Just how Unprepared are Banks for Major Losses?
by ilene - August 30th, 2010 4:08 pm
Banks Recruit Investors to Oppose Honest Valuation of Assets; Just how Unprepared are Banks for Major Losses?
Courtesy of Mish
Reader "Henry" has a question on the loan loss provision chart I posted in Former Fed Vice Chairman vs. Mish: Is the Fed Out of Ammo?
Henry writes …
Hello Mish,
Thanks for writing and sharing your wonderful column. It has been very informative and educational.
Could you please help us mere mortals decipher the ALLL/LLRNPT chart in a follow up post?
I have difficulty reconciling the units, and I suspect I’m not the only one. Exactly what does that chart depict?
Thanks.
Henry
From my previous post …
Assets at Banks whose ALLL Exceeds their Nonperforming Loans
The ALLL is a bank’s best estimate of the amount it will not be able to collect on its loans and leases based on current information and events. To fund the ALLL, the bank takes a periodic charge against earnings. Such a charge is called a provision for loan and lease losses.
One look at the above chart in light of an economy headed back into recession and a housing market already back in the toilet should be enough to convince anyone that banks already have insufficient loan loss provisions.
That is one of the reasons banks are reluctant to lend. Lack of creditworthy customers is a second. Quite frankly would be idiotic to force more lending in such an environment.
To further clarify, the chart depicts the ratio of loan loss provisions to nonperforming loans across the entire banking system (all banks). There are 33 ALLL charts by bank size and region for inquiring minds to consider. The above chart is the aggregate.
The implication what the chart suggests is that banks believe nonperforming loans are NOT a problem (or alternatively they are simply ignoring expected losses to goose earnings).
The implication what I suggest is banks earnings have been overstated. Why? Because provisions for loan losses are a hit to earnings. I believe losses are coming for which there are no provisions.
The chart depicts a form of "extend and pretend" and overvaluation of assets on bank balance sheets. The Fed and the accounting board ignore this happening (encourage is probably a better word), hoping the problem will get better. With more foreclosures and bankruptcies on the horizon, I suggest it won’t.
Magnitude of the Problem
The above…
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Is Earnings Optimism for the S&P 500 Justified?
by ilene - August 30th, 2010 4:18 am
Is Earnings Optimism for the S&P 500 Justified?
Courtesy of Doug Short
Regular visitors to dshort.com know I follow Howard Silverblatt’s earnings spreadsheet on the Standard & Poor’s website. Free registration is required to access this data. I’ve received several requests for more specific details on where to find the spreadsheet. It is fairly well hidden. Here are two links to help frustrated seekers: step one and step two.
I follow the "As-Reported" earnings and top-down estimates for future earnings (see column D in the spreadsheet). The chart below shows the higher estimates of future earnings from the most recent spreadsheet, dated August 24th, and three earlier spreadsheets (February 17th, April 28th, and July 15th).
The latest earnings estimate for 2Q 2010 is 67.20. Friday’s close gives us a P/E ratio of 15.84, which is close to the average trailing 12-month P/E of 15.48. Beyond the 2Q, the chart illustrates increasing optimism about next year’s earnings. The August 24th estimate of $80.20 for 4Q 2011 at today’s P/E would put the S&P 500 at 1,270 at the end of 2011. That’s a gain of 19.3% from the latest close.
But will as-reported earnings really live up to these estimates? Last month Howard Silverblatt pinpointed the problem for earnings in a Bloomberg article No Sales Means No Jobs Means No Recovery. His concluding remarks are worth repeating here:
I look to sales as a future indicator. On this basis, earnings are running ahead of Q1 2010, but sales are flat, and that’s the problem. It’s great that companies have improving earnings, but those improvements are due to high margins, which were the product of cost cuts — specifically job reductions, the very thing that we need to improve now. Until companies and consumers start to spend more, the job front will not get better, but they won’t spend more until they believe things are getting better. The stimulus programs were supposed to jump start the economy and break the downward cycle by convincing both groups that better times were here. But so far we’re not seeing the sales or the jobs; but earnings are good, at least for now.
Companies in the S&P 500 sell across the world. But consumption in the US, which remains critical for sustained earnings growth, has been undergoing a sustained contraction —, a fact that…
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The Dark Side of Deficits
by ilene - August 28th, 2010 6:30 pm
The Dark Side of Deficits
Courtesy of John Mauldin at Thoughts from the Frontline
Secular Bull and Bear Markets
It’s Not the (Stupid) Economy
The Consequences of a Credit Crisis
The Dark Side of Deficits
LA, Europe, Kansas City, and Houston
In the pre-crisis days, I used to write about things like P/E ratios, secular bull and bear markets, valuations, and all of the things we used to think about in the Old Normal. But what about those topics as we begin our trip through the New Normal? It’s time to reconvene class and think through what might change and what will remain the same. I think this will be a fun read – and let me tip my hand. I come out on the side of a new secular bull that gets us back to trend – but not just yet. The New Normal has to have its turn first. (Note: this will print out longer than usual, as there are a lot of charts.)
And speaking of first, I once again need some help from readers. I will be in "jail" next week for the Muscular Dystrophy Society. I need you to help bail me out. You can go to https://www.joinmda.org/downtowndallas2010/johnm and make a donation to help kids and families who really need help in these difficult times, and also help sponsor research that will eventually cure this disease. If you follow the link, you can see a cute video – and then make your donation!
I thank you and I am sure Jerry’s kids thank you too!
Secular Bull and Bear Markets
Market analysts (of which I am a minor variety) talk all the time about secular bull and bear cycles. I argued in this column in 2002 (and later in Bull’s Eye Investing) that most market analysts use the wrong metric for analyzing bull and bear cycles.
(For the record, even though I am talking about the US
"Cycles" are defined as events that repeat in a sequence. For there to be a cycle, some condition or situation must recur over a period of time. We are able to observe a wide variety of cycles in our lives: patterns in the weather, the moon, radio waves, etc.…
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THE ONLY NEWS THAT MATTERED TODAY
by ilene - August 27th, 2010 1:37 pm
THE ONLY NEWS THAT MATTERED TODAY
Courtesy of The Pragmatic Capitalist
Bernanke is out of bullets. Anyone who can’t see that by now is not familiar with the Japanese history of QE or the most recent impacts of QE (Ben clearly didn’t save the economy with QE1 or we wouldn’t even be having this discussion). He says he will cut interest on reserves or alter the language in his speeches – total non-events in my opinion. They might get the market all excited for a few hours, but soon people will realize that none of these actions will actually fix the recession on Main Street.
Aside from all the jawboning out of the Fed, there was some actual market moving news today. Intel cut its Q3 earnings. According to the AP:
“Intel said it now expects revenue of $10.8 billion to $11.2 billion for the fiscal third quarter, which ends in September. That compares with a previous forecast of $11.2 billion to $12 billion.
On average, analysts surveyed by Thomson Reuters expected $11.5 billion.”
This is big news in my opinion. Not only are semiconductors economically sensitive, but Intel has been crushing estimates quarter after quarter for almost two years. As we mentioned the other day, we could be at a crucial turning point where the economy is slowing substantially and analysts estimates appear high. If Intel is any early indication it would seem to verify this thinking which means we are likely to see more warnings and a lot of analyst cuts in the coming months. Earnings are the linchpin holding this market together. A decline in earnings will certainly put pressure on the markets.
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Myths about stock market myths that just won’t die
by ilene - August 27th, 2010 1:25 am
Baruch actually likes stocks, embraces the HFTing-bots and thinks that now is a good time to go long. Share his George Constanza moment… except this is serious. Baruch makes a compelling argument that stocks are the best investment around, the "asset class of the future." He takes on bond apologists, Brett Arends, Felix Salmon and the myths. – Ilene
Myths about stockmarket myths that just won’t die
Courtesy of Ultimi Barbarorum
[Watch George Costanza Does The Opposite]
Baruch hasn’t stopped blogging. He’s just been busy at work. To be fair, there also hasn’t been that much he has wanted to write about.
That changes here! A recent and growing animus in the econoblogoverse to, of all things, equity markets, has woken him up. Baruch finds this fairly incredible. Equities, he is fairly convinced, are the asset class of the future. This anti-equities movement, led by jealous journalists and winking, cackling bond apologists with axes to grind, needs to be nipped in the bud, as it is dead wrong. The WSJ’s otherwise reasonable Brett Arends is Baruch’s immediate target among the evil-thinkers, for his (last week’s top read on Abnormal Returns) The Top 10 Stock Market Myths that Just Won’t Die. And that Felix Salmon is also guilty as sin in this, for many offences against shares committed over the past few years.
Myth 1: stocks don’t generally go up
Wronngggg! Try shorting for a living and see how long you last. I’ve tried it. It is *really* fricking hard. Actually this year my shorts have made me more money than my longs, but I am an investing genius, and you are probably not. To those bond apologists who claim that this “stocks for the long haul” stuff is bullshit, I urge you to actually count the number of 10 year periods since 1950 where stocks have not made you a net percentage gain. I can only see 1963-64 and 1999-2001 as periods with evident losses (check out the S&P log chart from 1950). So around 90% of the time in the past 50 years, stocks have made you money on a 10-year investment horizon.
It’s not like you lost lots of money when they did go down, either. At worst, if you had been unfortunate (or dumb) enough to invest in January 2000, by 2010 you had lost about 20%. You would have faced the same, a 20% loss, in 1964…
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The Question “Are Stocks a Screaming Buy Relative to Bonds?” Creates False Premises
by ilene - August 18th, 2010 4:49 pm
The Question "Are Stocks a Screaming Buy Relative to Bonds?" Creates False Premises
Courtesy of Mish
Josh Lipton writing for Minyanville is asking the question Are Stocks a Screaming Buy Relative to Bonds?
Dr. Ed Yardeni of Yardeni Research takes one side of the debate and says "stocks are cheap" according to a model, now dubbed the “Fed’s Stock Valuation Model”.
I am quoted in the article, taking a different view of course, but I want to add to the thoughts I expressed in the article.
First a few snips from Lipton’s article …
Certainly, by employing some basic measures to compare the relative value of stocks and bonds, equities appear attractive. Dr. Ed Yardeni of Yardeni Research made the case this morning that stocks seem cheap and bonds seem expensive according to a simple model that compares the market’s earnings yield to the US Treasury bond yield.
Yardeni first started studying this model after seeing it mentioned in the Federal Reserve Board’s Monetary Policy Report to the Congress dated July 1997. The strategist dubbed it the “Fed’s Stock Valuation Model” (FSVM), and that’s what it’s been called ever since.
During the week of August 13, Yardeni says, the forward P/E of the S&P 500 was 11.8. The forward earnings yield, which is just the reciprocal of the P/E, was 8.5%. The 10-year Treasury bond’s yield is 2.60% this morning. So its P/E, which is the reciprocal of the yield, is 38.5.
According to the FSVM, that means stocks are 64.8% undervalued relative to bonds.
James Swanson, chief investment strategist at MFS Investment Management, agrees that stocks now look cheap relative to bonds and that, as an asset class, equities boast more opportunity for investors looking ahead.
In short, the stock market is now priced for an economic future that Swanson thinks remains unlikely. “This only makes sense if the world is going into a deflationary scenario,” the strategist says. “Otherwise, this is a mispricing.”
Yes, stocks might look cheap relative to bonds, but that’s because the economic outlook remains bleak. Mike Shedlock, a well-known registered investment adviser for Sitka Pacific Capital Management, argues that the economy is already mired in deflation, a dangerous downward spiral in prices that will prove lethal for corporate profits.
"Why are Treasury yields low?" Shedlock asks. "It’s because the economy is in recession."
Furthermore, Shedlock argues that investors are ultimately best advised
…
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Is the Stock Market Cheap?
by ilene - August 3rd, 2010 4:23 pm
Is the Stock Market Cheap?
Courtesy of Doug Short
Here’s the latest update of my preferred market valuation method using the most recent Standard & Poor’s "as reported" earnings and earnings estimates and the index monthly averages of daily closes for July 2010, which is 1179.80. The ratios in parentheses use the July monthly close of 1101.60. For the latest earnings, see the accompanying table from Standard & Poor’s.
- TTM P/E ratio = 18.3 (17.1)
- P/E10 ratio = 21.7 (20.3)
Background
A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.
TTM P/E Ratio
The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor’s website, where the latest numbers are posted on the earnings page. Free registration is now required to access the data. Once you’ve downloaded the spreadsheet, see the data in column D.
The table here shows the TTM earnings based on "as reported" earnings and a combination of "as reported" earnings and Standard & Poor’s estimates for "as reported" earnings for the next few quarters. The values for the months between are linear interpolations from the quarterly numbers.
The average P/E ratio since the 1870′s has been about 15. But the disconnect between price and TTM earnings during much of 2009 was so extreme that the P/E ratio was in triple digits — as high as the 120s — in the Spring of 2009. In 1999, a few months before the top of the Tech Bubble, the conventional P/E ratio hit 34. It peaked around 47 two years after the market topped out.
As these examples illustrate, in times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of 2008 Q4 (-$23.25) is something…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(