Thursday, July 31, 2014

Share Buybacks

In the first quarter of 2014, S&P 500 companies repurchased about $160 billion of their own shares. Companies may be motivated to repurchase shares because of slow domestic growth, which can make share repurchases an attractive alternative for corporations. Another motivation mentioned in the article  is that share repurchases may be used to readjust a company's capital structure. In the past several years, the stock market has increased in value, which has likely increased the equity weight of a company's capital structure. As a result, a company's capital structure may be too heavily tilted toward equity. A share repurchase can reduce the equity, thus restoring the capital structure to the optimal level.

A point about share repurchases addressed in the article that is particularly near and dear to us is research that finds companies are not particularly good investors. In fact, companies tend to undertake repurchases when company stock valuation is at a peak instead of when company stock is undervalued. One reason for this contradiction may be that as company performance increases, cash held by the company increases, as well as the stock price. As a result, companies have cash available when its stock price is high, which is the worst time to buy stock. 

The Value Of Stock Splits

In the textbook, we argued that stock splits appear to have no value to either shareholders or corporations. However, it appears that our analysis may be incorrect and there could well be an important advantage from stock splits that accrues to management.

Monday, July 28, 2014

Ratio Valuation Of The Clippers

Steve Ballmer's $2 billion bid for the Los Angeles Clippers shocked many people. Leaked court documents show why. Ballmer's bid was 12.1 times revenues (Price/sales ratio). For the last 25 NBA teams that were sold, only four have sold at a ratio above 4.0, and none had a ratio above 5.0. Similarly, the $2 billion bid price implies an EBITDA multiple of 12.1 times, while the league average has been 6.0 to 6.4 times EBITDA. All in all, it appears that Ballmer is willing to pay a high price for the Clippers, at least relative to revenue and EBITDA. 

Another Big Mac

Even though we discussed the most recent Big Mac Index yesterday, this article caught our eye. As you will see, the article discusses how the valuation of the dollar has changed over the past several years based on the price of Big Macs. For example, the average value of a basket of foreign currencies against the U.S dollar was about neutral in 2009. Based on the recent Big Mac Index, foreign currencies are about 15 percent undervalued against the dollar now. Several currencies have had wild fluctuations, including the euro, which was as much as 50 percent overvalued in 2008 and is now about fair value, and the yen, which has gone from fair value to 24 percent undervalued.

Saturday, July 26, 2014

The Big Mac Index

The 2014 Big Mac Index at The Economist is out and the average price of a Big Mac in the U.S. is $4.80. Norway has the most expensive Big Mac at $7.76 and the Ukraine has the cheapest Big Mac at $1.63. According to the Big Mac Index, five currencies are overvalued relative to the U.S. dollar by ay least 10 percent and 29 currencies are undervalued by at least 10 percent. Remember, the Big Mac Index is based off absolute purchasing power, which may not hold. For a video explanation of purchasing power parity, check out this video at Yahoo! Finance.

Friday, July 25, 2014

2014 Working Capital Survey

CFO just published the 2014 working capital survey by REL Consulting. The report indicates that the average days working capital decreased only .2 days over the past year. REL's analysis indicates that the 1,000 large U.S. companies included in the survey could reduce payables and receivables by $266 billion and $331 billion, respectively. While efficiency in short-term financial operations will help profitability, the lack of improvement in working capital management in recent years is likely due to the low interest rate environment. Some of the better performers in day's working capital outstanding include Murphy Oil (negative 60 days), Linn Energy (negative 50 days), Anadarko Petroleum (negative 45 days), and Dell (negative 23 days).

Friday, July 18, 2014

AbbVie Acquires Shire

U.S. pharmacuetical company AbbVie announced that Shire Plc has agreed to be acquired for about $54.7 billion. For AbbVie, the acquisition gives the company Shire's portfolio of expensive medicines, which is needed since AbbVie's Humira, the world's best-selling prescription, loses patent protection in 2016. With any acquisition, you would expect synergies, however, the most important synergy for AbbVie may be that the acquisition will allow the company to relocate to Ireland, which could reduce its tax bill from 22 percent to 13 percent.

Wednesday, July 16, 2014

Capital Expenditures Slow

Capital expenditures fell by three percent in the first quarter of 2014, to an annualized value of $1.8 trillion. With the lower capital expenditures, the financing gap (think external financing needed) was a negative $77.4 billion, the 21st consecutive negative quarter. U.S. nonfinancial companies issued $4.873 trillion in new debt during the quarter and spent about one-half of that repurchasing equity.

Wednesday, July 9, 2014

Creating Charts In Excel

While you have done a great job with your data analysis, a chart or graph is often the best way to convey the information. And while we think Excel Master does a good job introducing you to Excel's charting capabilities, for more on creating charts and graphs in Excel, check out this article from PCWorld.

Tuesday, July 8, 2014

Junk Bond Issuance Grows

The Bank of America Merrill Lynch Global High Yield Index began in 1997 and 12 years later, the value of junk bonds in the index reached $1 trillion. In the last four years, another $1 trillion has been added. During 2013, a record $477 billion in junk bonds were issued, and, so far this year, $338 billion in junk bonds have been issued. A major factor that is causing the rapid increase in junk bond issuance is the "reach-for-yield," that is, investors are looking for a yield on debt in the near zero government bond environment.  Additionally, Moody's measure of the the strength of junk bond covenants is the weakest since the company began tracking covenants in 2011.

Big Projects, Big Problems

A recent article in CFO states that schedules on capital budgeting projects are missed by an average of 55 percent and budgets are missed by 33 percent. One potential problem for capital budgeting is that most projects are evaluated by project advocates within the company, who are often biased in favor of the project. For example, a financial services company found that the initial cost projections for its projects were off by a factor of 2.37, meaning that for every dollar originally projected to begin the project, it actually cost $2.37. A second problem is that small and large projects are evaluated the same way, especially in regards to timing. For example, consider you and three friends are going to dinner together, each from a different starting location. Each of you has a 50 percent probability of arriving on time. What is the probability that you will all arrive on time for dinner? While you might think that it is 50 percent, it is actually 6.25 percent (.50 × .50 × .50 × .50)! In a large project, with intermediate tasks that are dependent on preceding tasks, it is easy to get behind schedule very quickly. 

That's The Way The Cupcake Crumbles

Cupcake company Crumbs announced that it would file a Chapter 7 liquidation. Crumbs, which was founded in 2003 and went public in 2011, had 65 stores in 12 states. The company sold cupcakes in flavors such as Cookie Dough and Girl Scout Thin Mint. For the first quarter of 2014, the company lost $3.8 million, a sharp increase from the 2013 first quarter loss of $2 million.