The Latest from Valens Research
Monday, August 29, 2016


  • equities

    Sausages are like financial statements… as with ADM, ABT, BC, and MDLZ

    Sausages are like financial statements… If you saw how they are made, you’d have a growing distaste for them both!

    While often attributed to Otto Von Bismarck, the famous quote is more likely stated first by John Godfrey Saxe, when he said in the 1860’s “Laws, like sausages, cease to inspire respect in proportion as we know how they are made.”

    Regardless of who said it, the concept remains as relevant to the laws of accounting and financial reporting — as it ever was to laws made by any government.

  • equities

    How distorted can Forward P/E multiples get?

    Boeing’s (NYSE:BA) Forward P/E is 25x, not 14x;

    Wallgreens Boots Alliance’s (NASDAQ:WBA) is 27x, not 17x;

    Caterpillar’s (NYSE:CAT) is 37x, not 24x; and

    United Continental Holdings’ (NYSE:UAL) is 25x, not 7x.

    In each of the companies just mentioned, the distortions and inconsistencies in GAAP accounting are significant. The difference in P/E’s is potentially decision-changing.

    Once adjusted with a consistent standardization of financial reporting rules, electives, and estimates, one sees a totally different picture of corporate performance and valuation.

  • equities

    Adjusted Valuations Indicate Facebook As A Superior Investment

    FB

    Under GAAP, the as-reported financial statements and financial ratios of FB do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of FB are primarily driven by the inclusion of the firm’s immense goodwill ($18.0bn) and excess cash ($4.0bn), which inflates its asset base, and by incorrectly expensing its R&D investments ($4.8bn).

  • credit

    X Steels Itself For Safer Credit Ahead With Its Cash Profile, With Similar Muted Expectations from the Market

    x logo

    Moody’s is materially overstating United States Steel’s credit risk with their highly speculative, high yield B3 credit rating.

    Moreover, credit markets are grossly overstating the firm’s credit risk with a CDS of 684bps and a cash bond YTW of 7.835%.

    Our safer view of the firm’s credit risk is grounded on their stable cash flows over operating obligations, healthy liquidity profile, and robust recovery rate.

  • equities

    Valens Equities Weekly Insight and Inflections for August 24, 2016

    2016 08 24

    Each week, the Valens Securities team highlights our most interesting insights from across our tools and our analysis, including individual company industry and macro insights.

    Top Highlight: Cirrus Logic, Inc. (CRUS)

    Other Highlights: JNPR, KSU, MNTA

    Other Recent Analyses: AAPL, ABT, ALV, AMZN, AWK, LSE:CPG, CVS, MA, MTG, OC, RCL, RDN, SCI, TEL, TXT, URI, UTX, X, ZG

  • equities

    Management’s Concerns Contradict The Market’s High Hopes For Acuity Brands

    AYI

    AYI has historically seen improving ROA’, ranging from 10%-12% levels in 2001-2006, before increasing to 20.4% in 2008, and declining to 15.4% in 2010. Since then, ROA’ has increased steadily, reaching 27.2% in 2015. Meanwhile, Asset’ growth has been volatile, positive in eleven of the past fifteen years, and ranging from -16% to 15%.

  • credit

    Valens Credit Weekly Insights for August 24, 2016

    Each week the Valens Credit team highlights our most interesting insights from across our tools and our analysis. This week interesting insights include:

    Highlighted Top Ideas
    LEN – Lennar Corporation
    URI – United Rentals, Inc.
    X – United States Steel Corporation

    Other Recent Analyses
    KBH – KB Home
    TXT – Textron Inc.

  • equities

    Microsoft’s Confidence In The Cloud Signals Equity Upside Potential

    MSFT

    MSFT has historically seen stable Adjusted ROA (ROA’) performance, ranging between 25%-46% levels from 2000-2015. However, ROA’ has declined in recent years, from 35.5% in 2011 to 25.2% in 2015. Adjusted Asset (Asset’) growth, while aggressive in the firm’s early years (averaging around 24% from 2000-2003), has tapered off significantly. Asset’ growth has remained in a low range of 1%-10% since, with the exception of -9.6% in 2007 when the company completed a material share buyback, and 22.9% in 2009 when the company made a number of acquisitions, including BigPark, DATAllegro, and Zoomix.

  • equities

    Management’s Concerns Contradict The Market’s High Hopes For Chevron Corporation

    CVX

    CVX has historically seen volatile ROA’, declining from 7% in 2000 to 0.7% in 2002, before rebounding to 6.1% in 2003. ROA’ ranged from 6%-9% levels from 2003-2008, before dropping to 4.3% in 2009. While ROA’ recovered steadily to 7.3% in 2011, it subsequently began declining again in 2012, falling all the way to 0% in 2015 as weakness in oil prices negatively impacted profitability. Meanwhile, the firm’s Asset’ growth has been volatile, positive in thirteen of the past sixteen years, and ranging from -3% to 30%, excluding 59.4% growth in 2000 related to the firm’s merger with Texaco.

  • equities

    Valens Equities Weekly Insights and Inflections for August 17, 2016

    Each week, the Valens Securities team highlights our most interesting insights from across our tools and our analysis, including individual company industry and macro insights.

    Top Highlight: National Oilwell Varco, Inc. (NOV)

    Other Highlights: AYI, CVX, SWX:ROG

    Other Recent Analyses: ALK, APH, BIIB, CCI, CTXS, DFS, FB, GNTX, GOOGL, HON, HXL, JNJ, KMI, LULU, PAYX, PFE, PHM, SAVE, STLD, VFC, SGX:Z74

  • credit

    Valens Credit Weekly Insights for August 17, 2016

    Each week the Valens Credit team highlights our most interesting insights from across our tools and our analysis. This week interesting insights include:

    Highlighted Top Ideas
    AMD – Advanced Micro Devices, Inc.
    CCI – Crown Castle International Corp.
    GME – GameStop Corp.

    Other Recent Analyses
    BBY – Best Buy Co., Inc.
    DAL – Delta Air Lines, Inc.

  • credit

    Best Buy’s Credit Risk Overstated

    bby logo

    Moody’s is overstating Best Buy’s credit risk with their lower medium investment grade Baa1 credit rating.

    Credit markets are also overstating credit risk with a CDS of 194bps and cash bond YTW of 3.110%.

    However, fundamental analysis highlights the firm’s strong cash flows, substantial liquidity and robust recovery rate.

    These factors drive our two notch higher IG3 (A2) credit rating and 100+bps safer Intrinsic market spreads.

  • events

    CFA Singapore: 2-Day Strategic Valuation Masterclass

    CFA SG Logo Square

    November 17 (Thursday) & 18 (Friday), 2016

    9:00 AM to 5:00 PM SGT (on each day)

    Venue: TBD

  • credit

    J.C. Penney Still Overstated By Markets And Ratings

    jcp logo

    Moody’s is materially overstating J.C. Penney’s credit risk with their extremely speculative Caa2 credit rating.

    Moreover, cash bond markets are grossly overstating credit risk with a CDS of 622bps and a cash bond YTW of 6.815%.

    We rate the company as a much safer HY1 (Ba2), given their sizable market capitalization, capex flexibility and cash flows over operating obligations.

    Additionally, these factors drive our Intrinsic CDS of 234bps and Intrinsic YTW of 3.425%.

  • equities

    Adjusted Valuations Reveal Activision Blizzard’s Economic Reality And True Value

    ATVI

    Under GAAP, the as-reported financial statements and financial ratios of ATVI do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of ATVI are primarily driven by the inclusion of the firm’s goodwill ($7.1bn), which inflates their asset base, and by incorrectly expensing their R&D investments ($646mn).

  • events

    The Dark Side of Financial Statements And the Impact on Equity, Credit, and Macro Investing

    DePaul Logo Square

    Friday, September 9, 2016

    9:00am – 12:00pm CST

    Location: DePaul University, Chicago, Illinois

  • events

    The Dark Side of Financial Statement Analysis

    "I thought that was an excellent presentation - very thoughtful, in depth, and practical. Thank you for sharing this information with us, as this will undoubtedly help in our analysis." —Jason B. Miller

    VR  - Valens Research Logo 300x300

    Saturday, September 3, 2016

    11:00 AM to 4:00 PM PHT

    Caylum Trading Institute Training Room

    Philippine Stock Exchange Center, Ortigas

  • equities

    Valens Equities Weekly Insights and Inflections for August 10, 2016

    Each week, the Valens Securities team highlights our most interesting insights from across our tools and our analysis, including individual company industry and macroinsights.

    Top Highlight: Microsoft Corporation (MSFT)

    Other Highlights: AVGO, COO, FDX

    Other Recent Analyses: SWX:ADEN, CVX, GE, GWW, LNN, LUV, MDT, MON, PEP, PH, RCL, ROP, SLB, SRE, SWKS, SWX, TOO, V

  • credit

    Valens Credit Weekly Insights for August 10, 2016

    Each week the Valens Credit team highlights our most interesting insights from across our tools and our analysis. This week interesting insights include:

    Highlighted Top Ideas
    DF – Dean Foods Company
    JCP – J. C. Penney Company, Inc.
    NAV – Navistar International Corporation

    Other Recent Analyses
    SPLS – Staples, Inc.
    AGN – Allergan plc

  • credit

    Parker Drilling Company’s Capex Flexibility And Robust Recovery Rate Warrant Better Market Spreads

    pkd logo

    Credit markets are exaggerating Parker Drilling’s credit risk by over 400bps.

    Moreover, Moody’s is overstating PKD with their highly speculative, high-yield B3 credit rating.

    Our fundamental analysis highlights that PKD has cash flows over operating obligations, a robust recovery rate, and capex flexibility.

    These factors drive our much safer near cross-over HY1 (equivalent to Moody’s Ba2) credit rating.