Financial Gauges

INTC: Look Ahead to June 2011 Quarterly Results

2011-06-05T09:50:00.000-07:00

This post describes our model of Intel's (NASDAQ: INTC) Income Statement for fiscal 2011's second quarter, which will end on 2 July 2011.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results the company will report. Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.

We begin by reviewing background information about Intel and the business environment in which it is currently operating.

Intel Corporation is designs and fabricates integrated circuits for computers, servers, hand-held devices, and communication products. In the 1970’s, Intel developed the x86 microprocessor architecture, which evolved into the foundation for the central processing units that run most personal computers and servers.

With a market value of approximately $120 billion on a fully diluted basis, Intel is included in the Dow Jones Industrial Average and the S&P 500. Fortune lists Intel as the most admired semiconductor company.

In fiscal 2010, Intel's Net Income rose to $11.7 billion from $4.4 billion the previous year. Revenue increased from $35.1 billion to $43.6 billion.

This month, Intel announced a 16 percent increase in the company’s quarterly cash dividend to $0.21 per share. This hike was the Intel’s second dividend increase in six months.

Intel's business is organized into nine product groups. The two largest groups, by far, are PC Client and Data Center. The PC Client Group sells microprocessors and related products for desktop, notebook, and netbook computers. It also markets wireless connectivity products. PC Client was responsible for $31.6 billion of Revenue in 2010, 72.4 percent of Intel's total Revenue.

The Data Center Group sells microprocessors and related products for servers, workstations, and storage computing equipment. It also has products for wired network connectivity. The fast-growing Data Center Group had Revenue of $8.7 billion in 2010, 20 percent of the company's total sales.

Intel has long been top seller of personal computer microprocessors and related devices, with credible competition provided by the scrappy Advanced Micro Devices (NYSE: AMD).

The popularity of smartphones and tablets poses a new, serious competitive threat to Intel. These mobile-computing devices are most often controlled by power-efficient chips designed by ARM Holdings (NASDAQ: ARMH) and its many licensees, which include Samsung, NVIDIA's (NASDAQ: NVDA), and Qualcomm (NASDAQ: QCOM). Microsoft’s (NASDAQ: MSFT) decision to make the next version of Windows compatible with ARM processors could open up the desktop CPU market to additional competitors.
Intel hopes to thwart this challenge with new “3-D” transistors that have performance and power-consumption benefits.

During the fourteen-week first quarter of fiscal 2011, Intel earned $3.16 billion ($0.56 per diluted share) on a GAAP basis, up from $0.43 per share in the same quarter of the previous year. Revenue rose from $10.3 billion to $12.85 billion.

Reported earnings exceeded our $0.46 EPS estimate due to much better than expected Revenue growth, good cost control, and a lower tax rate.

We're now ready to look ahead to Intel's results for the June 2011 quarter.

The starting point is Intel’s own guidance or "business outlook."

Intel announced that it expects Revenue of $12.8 billion, plus or minus $500 million, in the the second quarter. We typically choose a value near the top of the guidance range when setting a Revenue target for Intel. This approach accounts for the natural tendency of companies to be conservative, so they can later exceed Wall Street expectations.

For the current quarter, however, we are concerned about global weakness in the demand for personal computers. As a result, we will look for Revenue of only $12.9 billion in June quarter.

This Revenue target is 19.8 percent greater than Intel's $10.765 billion of Revenue in the June 2010 quarter.

Intel's guidance for Gross Margin is 61 percent of Revenue, plus or minus a couple percentage point. The midpoint is a reasonable expectation for the Gross Margin. When combined with our Revenue target, this percentage translates into a Cost of Goods Sold (i.e., Cost of Sales) of (1 - 0.61) * $12.9 billion = $5.0 billion.

For R&D and SG&A expenses, Intel expects a total expense of $3.9 billion. Using historical data, we've allocated $2.0 billion to R&D and $1.9 billion to SG&A.

We will assume an additional special charge of $75 million for Amortization of acquisition-related intangible assets and other acquisition costs.

These assumptions lead to a $3.89 billion estimate for Operating Income in the June quarter. This figure is 2.2 percent less than actual Operating Income of $3.98 billion in year-earlier period.

Intel advised that equity investments, interest and other non-operating income would amount to a net gain of $50 million.

For the income tax rate, we have used Intel's prediction of 29 percent. This leads to a second-quarter Net Income estimate of $2.8 billion (about $0.50 per share). In the June 2010 quarter, Net Income was $2.9 billion ($0.51 per share).

Please click here to see a full-sized, normalized depiction of the projected results next to Intel's quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.

Full disclosure: Long INTC, MSFT, and NVDA at time of writing. No position in any other security mentioned.

PEP: Financial Gauge Analysis for the December 2010 Quarter

2011-03-22T20:44:00.000-07:00

We have updated the various financial metrics we use to analyze PepsiCo's (NYSE: PEP) Cash Management, Growth, Profitability and Value. This post reports on the metrics and the associated financial gauge scores.

The metrics were calculated using data from PepsiCo's current and historical financial statements, including those in the latest 10-K.

A previous GCFR article examined in some detail PepsiCo's Income Statement for the December-ending fourth quarter of fiscal 2010. The company earned $0.85 per diluted share on a GAAP basis, down 6 percent from $0.91 in the same three months of 2009. Core earnings, which exclude certain items, increased from $0.90 to $1.05 per share. Core earnings surpassed our target by $0.01 per share.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

PepsiCo, Inc., is a leading global purveyor of beverages and snacks. The company, which currently has a market value of approximately $100 billion, is well regarded for good management, steady growth, and significant international exposure.

Businesses, such as PepsiCo, that sell consumer staples are considered defensive investments because they are relatively less affected by economic slumps. These firms also tend to pay generous dividends, and this is true for PepsiCo. The company hiked its annual dividend in 2010 by 7 percent, from $1.80 to $1.92 per share.

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INTC: Look Ahead to March 2011 Quarterly Results

2011-03-20T10:31:00.000-07:00

This post describes our model of Intel's (NASDAQ: INTC) Income Statement for fiscal 2011's first quarter, which will end on 26 March 2011.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results the company will report. Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.

We begin by reviewing background information about Intel and the business environment in which it is currently operating.

Intel Corporation is a prominent manufacturer of integrated circuits for computers, servers, hand-held devices, and communication products. The company is included in the Dow Jones Industrial Average and the S&P 500. It currently has a market value of approximately $115 billion on a fully diluted basis.

Fortune lists Intel as the most admired semiconductor company.

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CSCO: Financial Gauge Analysis for the January 2011 Quarter

2011-03-19T10:52:00.000-07:00

We have updated the various financial metrics we use to analyze Cisco Systems' (NASDAQ: CSCO) Cash Management, Growth, Profitability and Value. This post reports on the metrics and the associated financial gauge scores.

The metrics were calculated using data from Cisco's current and historical financial statements, including those in the latest 10-Q.

A previous article examined in some detail Cisco's Income Statement for the January-ending second quarter of fiscal 2011. The company earned $0.27 per diluted share on a GAAP basis, down 14 percent from $0.32 in the same three months of the previous year.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Cisco Systems, Inc., the proud plumber of the Internet, has a dominant role in markets for enterprise networking products and services.

Cisco's earnings rose 27 percent in fiscal 2010, which ended in July, from $6.13 billion to $7.77 billion. Revenue increased 11 percent, from $36.1 billion to $40.0 billion. Fiscal 2010 included a 53rd week.

The market value of the company has fallen from approximately $120 billion to under $100 million, on a fully diluted basis, in the last couple of months.

In 2011, Cisco initiated its first cash dividend, $0.06 per share per quarter, to shareholders.

Cisco categorizes its products as Routers, Switches, Advanced technologies, and other. Switches generated the most Revenue in fiscal 2010, $13.6 billion, which was 42 percent of net product sales.

Revenue from product sales was supplemented by $7.6 billion in Revenue from services in fiscal 2010. Service revenue was 19 percent of total Revenue in fiscal 2010.

The company's business segments for financial data reporting are defined by geographic region or "theaters": United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. The U.S./Canada segment provided 54.3 percent of fiscal 2010's Total Revenue.

Juniper Systems (NASDAQ: JNPR) is usually considered Cisco's most direct competitor in the enterprise market.

Cisco has long been a serial acquirer, insatiably gobbling up companies of all sizes. In 2010, Cisco's two largest acquisitions were Tandberg, for $3.3 billion, and Starent Networks, for $2.6 billion.

Cisco's Balance Sheet in January 2011 listed nearly $40 billion in Cash and Short-term Investments, which would seem to be an adequate war chest for further acquisitions. However, much of this cash is believed to be overseas.

Gartner has predicted $3.5 trillion will be spent on Information Technology in 2011, up 5.1 percent from last year. However, in a separate announcement, the well-known researcher was less sanguine about spending on Enterprise Information Technology, forecasting a modest 3.1 percent rise in 2011. Gartner commented that EIT spending growth would be "timid and at times lackluster" during the next five years.

Tepid industry spending would test Cisco's frequent assertion that its revenue can expand over the long term at a rate between 12 and 17 percent per year.

In a major diversification effort, Cisco introduced in 2009 the Unified Computing System for large data centers. Since the UCS platform includes computer servers, storage systems [from EMC (NYSE: EMC)], and networking gear, the UCS puts Cisco into direct competition with heavyweights Hewlett-Packard (NYSE: HPQ), IBM (NYSE: IBM), and others. HP responded by challenging Cisco on its home turf when it acquired 3Com.

Cisco has also branched out into home entertainment, tablet computers (the Cius), video camcorders, and smart grid technology. Cisco might be satisfied if these products merely increases the demand for enterprise network infrastructure.

Now we turn to the financial gauges. The latest quarterly results produced the following changes to the scores:

Cash Management: 9 of 25 (down from 11 in October)
Growth: 15 of 25 (down from 17)
Profitability: 17 of 25 (up from 15)
Value: 13 of 25 (up from 11)

Overall: 54 of 100 (up from 51)

Current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash Management	29 Jan 2011	30 Oct 2010	23 Jan 2010	5-Yr Avg
Current Ratio	2.8	2.8	3.5	2.7
LTD to Equity	26.6%	27.3%	36.6%	23.9%
Debt/CFO (years)	1.5	1.5	1.9	0.9
Inventory/CGS (days)	31.7	30.6	31.9	36.3
Finished Goods/Inventory	62.7%	59.1%	61.3%	61.0%
Days of Sales Outstanding (days)	38.5	36.5	32.6	34.1
Working Capital/Revenue	77.9%	78.1%	84.8%	59.8%
Cash Conversion Cycle Time (days)	51.0	47.5	44.8	48.2
Gauge Score (0 to 25)	9	11	9	13

The Cash Management gauge lost two points, falling below the 10-point threshold, primarily because of changes to the Inventory metrics.

The company's hoard of Cash and Short-term Investments totaled $40.3 billion, a record high amount, on 29 January. Working Capital -- the difference between Current Assets and Current Liabilities -- is now $33.6 billion, which is also near a record high. Neither acquisitions, nor share repurchases, have diminished this stockpile of liquid funds.

Cisco has commented that tax considerations limit its ability to repatriate the earnings of overseas subsidiaries.

In the first six months of the current fiscal year, Cisco spent $4.3 billion to repurchase 202 million of the company's shares, at an average price of $21.27 per share. These purchases, which reduce shareholders' equity, have not boosted the market price of the the shares.

More of Cisco's cash will be returned to investors when the company pays its first cash dividend.

Long-term Debt, which got as high as $15.2 billion when Cisco issued $5 billion in new debt last November, is now down to $12.2 billion. In addition, Cisco has $3.1 billion in obligations due to mature in the next year. Total debt remained steady at 1.5 years of Cash Flow from Operations.

When measured in days of Cost of Goods Sold, Cisco's Inventory edged up one day in the most recent quarter. However, the Inventory level is about the same as it was in the year-earlier quarter.

The greater proportion of Finished Goods in the Inventory might be a greater concern. The rise could be a sign sales were slower than the company expected.

Cash efficiency suffered when judged by increases in Days of Sales Outstanding and the related Cash Conversion Cycle Time.

Growth	29 Jan 2011	30 Oct 2010	23 Jan 2010	5-Yr Avg
Revenue Growth	19.2%	20.0%	-10.2%	6.3%
Revenue/Assets	53.5%	56.2%	51.6%	65.4%
Operating Profit Growth	-0.7%	1.6%	1.4%	4.1%
CFO Growth	31.7%	19.4%	-36.2%	0.2%
Net Income Growth	24.9%	38.3%	-19.0%	2.2%
Gauge Score (0 to 25)	15	17	0	9

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
The Growth gauge experienced a minor setback after two quarters of significant increases.

Revenue growth flattened out at 19 percent, nothing to sneeze at, on a trailing-year basis. More worrisome was that Revenue in the January 2011 quarter was only 6 percent greater than in the quarter that ended in January 2010.

Revenue as a percentage of total assets diminished after previous rises.

The trailing-year growth rates for Cash Flow from Operation and Net Income are robust, although the latter showed signs of moderating.

Operating income, over a longer period, is not yet showing the kind of growth rate one expects from a company with Cisco's ambitions.

Profitability	29 Jan 2011	30 Oct 2010	23 Jan 2010	5-Yr Avg
Operating Expense/Revenue	78.1%	76.3%	77.1%	75.8%
ROIC	41.4%	45.3%	40.6%	49.1%
Free Cash Flow/Invested Capital	48.8%	51.0%	45.7%	63.2%
Accrual Ratio	1.8%	10.5%	13.9%	10.2%
Gauge Score (0 to 25)	17	15	12	14

The Profitability Gauge added to its healthy 15-point score. The gauge benefited from big decline in the Accrual Ratio.

The increase in Operating Expenses per Revenue dollar (i.e., a lower Operating Margin) is a disappointment.

The Return on Invested Capital and Free Cash Flow to Invested Capital ratios both slipped slightly in the last quarter, but they remained more robust than they were one year earlier.

Value	29 Jan 2011	30 Oct 2010	23 Jan 2010	5-Yr Avg
P/E	15.4	16.4	22.2	20.2
P/E vs. S&P 500 P/E	1.0	1.1	1.2	1.2
PEG	N/A	10.3	15.9	4.1
Price/Sales	2.8	3.1	3.8	3.9
Enterprise Value/Cash Flow (EV/CFO)	8.8	10.2	13.9	11.3
Gauge Score (0 to 25)	13	11	1	9
Share Price ($)	$20.93	$22.86	$22.97	-

The Value gauge added to its score primarily because of the decline in the share price. The shares have dropped further since the quarter ended.

The Price/Earnings multiple is no longer sky high. The PEG ratio is listed as negative because we calculate

The Price-to-Sales Ratio and the EV/CFO ratio are also both relatively low for Cisco, which is a positive factor for the Value gauge.

Cisco's current share price today is near $17. At this price, the Value gauge would soar to a very appealing 19 of the 25 possible points. Nine more points would be tacked onto the Overall gauge score.

Overall	29 Jan 2011	30 Oct 2010	23 Jan 2010	5-Yr Avg
Gauge Score (0 to 100)	54	51	23	45

Two of the four category gauges improved during the January quarter, and two weakened. None of the changes were greater than two points.

Since the Value gauge is double-weighted, it was able to lift the Overall score. The score is more than double what it was one year ago.

Today's lower stock price would bring the score up to 63, a very good result. However, the lower price also reflects investor concerns about the potential for weaker growth.

Full disclosure: Long CSCO at time of writing.

BP: Financial Gauge Analysis for the December 2010 Quarter

2011-03-13T21:06:00.000-07:00

We have updated the various financial metrics we use to analyze BP's (NYSE: BP) Cash Management, Growth, Profitability and Value. This post reports on the metrics and the associated financial gauge scores.

The metrics were calculated using data from BP's current and historical financial statements, including those in the latest Form 20-F Annual Report.

A previous article examined in some detail BP's Income Statement for the December-ending fourth quarter of 2010. The company earned $1.76 per diluted ADS, up 29 percent from $1.36 in the same three months of 2009.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Headquartered in London, BP p.l.c. is a major Integrated Oil and Gas firm with worldwide interests, including Alaskan oil fields and pipelines. The former British Petroleum became a behemoth by merging with Amoco in 1998 and acquiring Arco and Burmah Castrol soon thereafter.

BP operated the Deepwater Horizon drilling rig that failed with tragic results in April 2010 in the Macondo area of the Gulf of Mexico. An estimated 5 million barrels of crude oil flowed from Mississippi Canyon 252 well into the Gulf of Mexico, where BP had been a large producer, before the well was permanently sealed in September 2010.

To cover the disaster's costs, including a $20 billion compensation claims fund, BP recorded pre-tax charges totaling $40.858 billion ($28 billion after taxes, $12.89 per share) in 2010.
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PG: Financial Gauge Analysis for the December 2010 Quarter

2011-03-08T20:44:00.000-08:00

We have updated the various financial metrics we use to analyze Procter & Gamble's (NYSE: PG) Cash Management, Growth, Profitability and Value. This post reports on the metrics and the associated financial gauge scores.

The metrics were calculated using data from P&G's current and historical financial statements, including those in the latest 10-Q.

A previous article examined in some detail P&G's Income Statement for the December-ending second quarter of fiscal 2011. The company earned $1.11 per diluted share on a GAAP basis, down 26 percent from $1.49 in the same three months of the previous year.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Procter & Gamble creates and markets many well-known Household and Personal products to customers around the world. The company, based in Cincinnati, traces its roots back to 1837.

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COP: Financial Gauge Analysis for the December 2010 Quarter

2011-03-06T20:58:00.000-08:00

We have updated the various financial metrics we use to analyze ConocoPhillips's (NYSE: COP) Cash Management, Growth, Profitability and Value. This post reports on the metrics and the associated financial gauge scores.

The metrics were calculated using data from Conoco's current and historical financial statements, including those in the new 10-K for fiscal 2010.

A previous article examined in some detail ConocoPhillips's Income Statement for the December-ending fourth quarter of 2010. The company earned $1.39 per diluted share on a GAAP basis, up 63 percent from $0.86 in the same three months of 2009.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

ConocoPhillips is one of the largest Integrated Oil and Gas companies, which produce, refine, transport, and market energy products. ConocoPhillips was formed in 2002 when Conoco, Inc., merged with Phillips Petroleum. It added Burlington Resources, with its extensive natural gas operations, in March 2006 (when gas prices were much higher than they are now).
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PRGN: Income Statement Analysis for the December 2010 Quarter

2011-03-02T20:48:00.000-08:00

Paragon Shipping, Inc., (NYSE: PRGN) earned $0.04 per diluted share on a GAAP basis in the December-ending fourth quarter of 2010, down more than 80 percent from $0.26 in the same three months of the previous year.

Adjusted earnings, a non-GAAP measure that excludes various non-cash items, sank from $0.17 to $0.08 per share in the fourth quarter.

This post reviews Paragon Shipping's Income Statement for the quarter. We did not issue any advance estimates of the results. The principal sources for the analysis were the earnings announcement and the accompanying slide presentation.

In a second article, we will provide updated figures for the financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Paragon Shipping owns and charters ships that carry dry bulk cargoes and, now, containers. The company is headquartered in Greece and has been operating since December 2006. Paragon generally seeks to secure one-to-five year, fixed-rate charters for its vessels; this strategy dampens the effect of industry volatility on the company. Paragon has already secured charters for 98 percent of its fleet capacity in 2011.

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EIX: Income Statement Analysis for the December 2010 Quarter

2011-02-28T18:40:00.000-08:00

Edison International (NYSE: EIX) earned $0.51 per diluted share on a GAAP basis in the December-ending fourth quarter of 2010, down 22 percent from $0.65 in the same three months of the previous year.

"Core" earnings, a non-GAAP measure that excludes special items, fell from $0.59 to $0.58 per share. The latest quarter included a $0.07 per share non-core write-off charge, whereas the year-earlier quarter had a $0.06 per share non-core benefit.

This post examines Edison's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates. Reported and core earnings both missed our EPS estimate of $0.63.

The principal sources for this income statement analysis were the earnings announcement, the formal 10-K, the conference call presentation, and the call transcript. The latter is made available by Seeking Alpha.

In a second article, we will report Edison's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Edison International is the parent of Southern California Edison and Edison Mission Group. SCE, which traces its roots back to 1886, operates a regulated electric utility serving a population of about 13 million people in central, coastal and southern California. SCE contributed more than 80 percent of Edison's revenue in 2009.

Edison Mission Energy owns, or has interests in, various independent power-generation facilities.

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INTC: Financial Gauge Analysis for the December 2010 Quarter

2011-02-27T13:45:00.000-08:00

We have updated the various financial metrics we use to analyze Intel's (NASDAQ: INTC) Cash Management, Growth, Profitability and Value. This post reports on the metrics and the associated financial gauge scores.

The metrics were calculated using data from Intel's current and historical financial statements, including those in the new 10-K for fiscal 2010.

When Intel reported its results for the fourth quarter of fiscal 2010, the company announced earnings of $3.388 billion ($0.59 per diluted share). Later, after a flaw was discovered in a new chipset, Intel added a $300+ million charge ($208 million after tax) to its Cost of Goods Sold. This change reduced fourth-quarter earnings to $3.180 billion ($0.56 per share).

A previous GCFR article examined in some detail Intel's Income Statement for the December quarter, using the originally reported data. The retroactive reinstatement of U.S. R&D tax credits helped boost earnings above our estimate.

Before getting into the details, we will take one step back to introduce the subject of today's analysis.

Intel is the most prominent manufacturer of integrated circuits for computers, servers, hand-held devices, and communication products. The company is included in the Dow Jones Industrial Average and the S&P 500. It has a market value of about $125 billion.

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