From ducati998
ducati999
Member posted 03-10-2004 04:46 AM
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Fundamental analysis is always best done by yourself,much the same as trading a black box system will get you in trouble,so will trading or investing on a third parties fundamental analysis.
I have pinched this from another forum that I play on,only to demonstrate how the same factual information is perceived,interpretated and subsequently acted upon,in quite different ways,and to demonstrate some principals of Fundamental analysis.
Get a strong scotch,best cigar,and read on.
Cheers d998
SDI Analysis
Sharesguru.com Forum
BAPHOMET
Joined: 01 Dec 2003
Posts: 3
Posted: Fri Sep 10, 2004 10:25 am Post subject: SDI Analysis
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Apologies for the very long post – but if you closely follow SDI some of the following analysis may be of interest to you. I’m not sure how the figures will appear as I am pasting them from an excel spreadsheet. Unfortunately there is not enough space to paste the half-yearly breakdowns.
...............................................................FY 2004.......FY 2003
...................................................................$000............$000
P & L Analysis
Sales Revenue...........................................42,451.........36,699
Cost of Sales.............................................13,905.........12,527
Gross Profit...............................................28,546.........24,172
Gross Margin (% of Sales)...........................67.2%..........65.9%
Other Revenue............................................2,135...........1,986
Selling & Administration..............................16,844.........16,304
Research & Development.............................1,109...........1,110
Borrowing Costs............................................475..............246
Other Expenses..........................................1,395..............654
Profit before Tax........................................10,858...........7,844
Tax Expense...............................................2,830...........2,393
NPAT..........................................................8,028...........5,451
NPAT Margin (% of Sales)............................18.9%..........14.9%
Shares on Issue.................................23,411,962.....23,389,017
EPS (Basic).................................................34.3...............23.3
Sales increased 15.7% for the year, however sales in the 2nd half only rose 11.5% on the previous corresponding period (pcp). As reported by management, this was affected by the AUD appreciation.
Cost of sales rose at a slower place than sales growth, causing the gross margin to expand from 65.9% to 67.2%. Gross margin improved in both halves on their pcp, implying that the growth from new products continue to deliver high margins.
Surprisingly, the Selling & Administration costs only rose by 3.3%. 1st half Selling & Administration costs rose by 6.4% on pcp, but in the 2nd half it was virtually identical to the pcp. Hopefully this was not an attempt to reduce expenses to meet their EPS target.
Normalised NPAT
Reported NPAT.............................................8,028.........5,451
- Government Grants.......................................897...........696
+ Tax effect of Government Grants...................269...........209
- Profit (Loss) from non-recurring items................0.............29
+ Tax effect of non-recurring items......................0...............9
Normalised NPAT 1 (Neutral).........................7,400.........4,944
+ Amortisation of Intangibles...........................739............621
Normalised NPAT 2 (Optimistic).....................8,139..........5,565
- Capitalised R & D and Intangibles...............3,378.............767
Normalised NPAT 3 (Pessimistic)...................4,761..........4,798
3 'normalised' versions of NPAT have been calculated. The government grants should be excluded as they are non-recurring - from memory they will expire in a year or two. This reduces NPAT a bit, however Normalised NPAT 1 (neutral) actually increases by a greater percentage than reported NPAT when this is taken into account. Now to the dodgy bits which I believe have caused the greatest concern for SDI, which are intangibles (intellectual property and capitalised research & development). Total R & D expenditure for 2004 was over $4.4 million, representing 10.6% of sales. A few years ago SDI was explaining the merits of investing 3.5% of sales into R & D. This percentage steadily rose to around 5.0% of sales in 2003, to 6.0% in the first half of 2004, and rocketed to 14.7% of sales in the 2nd half of 2004. This is all well and good, as in the past the management have delivered outstanding results from this endeavour. However the worry is in how they have accounted for these costs. Only $1.1 million of the $4.4 million in total R & D was expensed to the P & L - $3.3 million was capitalised in the balance sheet. What this means is that the $3.3 million in costs has not been expensed against NPAT. Of further concern is that around $2.8 million was capitalised in the 2nd half of 2004 alone (compared to $500,000 or less in the 3 previous halves). This is a dramatic increase on previous corresponding periods, and the conservative voice shouting in my head hopes that this was not an attempt to overcapitalise R & D to increase reported profits and reach the EPS targets. Some consolation can be gained from the fact that SDI has a conservative policy of amortising capitalised R & D over a maximum of 5 years (this amortisation charge is a non-cash expense that effectively writes the asset down to nil after 5 years). Capitalised intangibles has long been a controversial topic for analysts. Some companies even capitalise huge amounts of software expenditure which boosts reported profits and later incur large write-offs on these so-called 'capital investments'. For SDI, part of this capitalisation may be attributable to intellectual property (i.e. patents, trademarks & licences etc) in addition to their capitalised R & D. In their defence, their past record of delivering growth from their new developments would give them the benefit of the doubt - but the figure is still proportionately large and somewhat suspicious in that they only just make their EPS target. Anyway, for the more cynical investors a further 2 normalised NPAT amounts isolate these capitalisation effects from NPAT. Normalised NPAT 2 is an optimistic scenario where the amortisation of previously capitalised intangibles (i.e. a non-cash charge) is excluded from NPAT. This figure approximates the reported NPAT. Normalised NPAT 3 is a pessimistic scenario where capitalised intangibles is deducted from normalised NPAT. This figure amounts to $4,761,000, which is roughly equivalent to the 2003 figure and represents a 41% reduction on reported NPAT. Personally I don't suggest this is an accurate reflection of the underlying NPAT of SDI. I do attribute substantial value to the capitalised intangibles - SDI's past track record is testament to this. However it is important to bear such a figure in mind when analysing the company, particularly because of the impact of the new international accounting standards which come into effect next year. These standards have more stringent rules on capitalising R & D expenses - SDI may have to write down significant amounts of capitalised R & D against reported NPAT next year. The extent of this write-down is difficult for an analyst to predict - and adding over $3.3 million to capitalised intangibles this year only increases the uncertainty over reported NPAT next year. Lets just hope that the EPS target for next year is a target AFTER these capitalisation write-downs occur. I believe that if SDI makes this target after having written-down a substantial amount of capitalised intangibles, the market will react very favourably. Note that SDI will also have to expense their options under the new accounting standards.
Profitability Analysis
Sales Revenue...........................................42,451........36,699
Sales Growth (pcp)......................................15.7%..........7.2%
Gross Profit...............................................28,546.........24,172
Gross Margin..............................................67.2%..........65.9%
EBIT.........................................................11,331..........8,082
EBIT Margin................................................26.7%.........22.0%
EBIT Growth (pcp).......................................40.2%.........36.7%
NPAT..........................................................8,028...........5,451
NPAT Margin...............................................18.9%..........14.9%
NPAT Growth (pcp)......................................47.3%..........36.0%
EPS..............................................................34.3.............23.3
EPS Growth (pcp)........................................47.1%...........35.5%
Equity........................................................28,119.........22,030
ROE (NPAT/Equity)........................................28.6%.........24.7%
Total Assets................................................45,672.........33,369
Cash............................................................1,249...........1,553
ROA (EBIT/Total Assets-Cash).......................25.5%..........25.4%
NPAT and the NPAT margin both posted higher gains than 2003, albeit from a much lower base. The analysis of EBIT provides the better picture of the company's operations. EBIT growth improved from 36.7% in 2003 to 40.2% in 2004. EBIT growth in both halves was virtually identical which is encouraging (implies sustainability). The EBIT margin improved by 4.7% to 26.7% in 2004, meaning that profits are growing from 2 sources - sales growth and margin growth. No doubt that the margin growth is being helped by the economies of scale from increasing sales.
Return on Equity (ROE) continues to climb and rose 3.9% to 28.6% in 2004, which is outstanding and would definitely rank SDI in the top tier of Australian Companies. This was aided by the increased use of debt finance to support growth, which is sensible because it is much cheaper than equity finance and SDI has the balance sheet to support this.
Return on Assets (ROA) remained steady at 25.5% - another outstanding result. This partly explains why so much goodwill is built into the company, and also explains why it is sensible to use debt (when required) to fund growth. Why use equity which would have a cost of capital of over 10% when debt finance for SDI is much cheaper, particularly when measured after tax. SDI certainly has the capacity to increase gearing, as will be discussed later. The Financial Gearing Profitability Ratio (see below) for SDI was $2,286,000. This ratio indicates by how much a company is increasing profits (EBIT) through the use of borrowings. A negative amount would mean that a company is reducing profits via borrowings. Put simply, if the ROA is higher than the cost of debt, the company benefits from gearing. Obviously an ROA of 25.5% is way higher than SDI's cost of debt.
Financial Gearing Profitability Ratio
Financial Gearing Profitability Ratio = (Gross Debt x ROA) - Borrowing Costs
Gross Debt................................................10,826..........4,798
ROA...........................................................25.5%.........25.4%
Borrowing Costs.............................................475.............246
Financial Gearing Profitability Ratio ($).........$2,286...........$973
Du Pont ROE
Method 1: ROE = NPAT Margin x Asset Turnover x Asset Leverage
.........................= (NPAT/Sales) x (Sales/Assets) x (Assets/Equity)
NPAT Margin................................................18.9%.........14.9%
Asset Turnover...............................................0.9..............1.1
Asset Leverage...............................................1.6..............1.5
ROE............................................................28.6%.........24.7%
Du Pont ROE
Method 2: ROE = (EBIT Margin - Interest Burden - Tax Burden) x Asset Turnover x Asset Leverage
.........................= ([EBIT/Sales] - [Interest/Sales] - [Tax/Sales]) X (Sales/Assets) x (Assets/Equity)
EBIT Margin................................................26.7%.........22.0%
Interest Burden............................................1.1%...........0.6%
Tax Burden..................................................6.7%...........6.5%
Asset Turnover..............................................0.9..............1.1
Asset Leverage..............................................1.6..............1.5
ROE...........................................................28.6%.........24.7%
The first analysis of Du Pont ROE breaks down the ROE figure into 3 components. Using this breakdown, it can be seen that ROE can be increased in 3 ways - by increasing the NPAT margin, by increasing the asset turnover, or by increasing the asset leverage (gearing). SDI increased 2 components and fell on one component, however the net impact was a 3.7% increase in ROE to 28.6% which is superb. The second analysis of Du Pont ROE breaks it down into 5 components and paints the better picture. Companies don't really operate on an NPAT margin (NPAT is distorted by the level of gearing and taxes). The EBIT margin is more accurate and reflective of the company's operating performance. The EBIT margin grew strongly by 4.7% to 26.7% in 2004. Importantly, these increases were reflected in each half by beating their previous corresponding periods. Their interest burden increased due to higher debt levels (which as previously mentioned was a good use of capital). The tax burden is not really controllable at an operational level and is simply a derivate of their profitability.
Financing Analysis
Gross Debt.................................................10,826........4,798
Cash...........................................................1,249.........1,553
Net Debt......................................................9,577.........3,245
Gearing (Net Debt/Net Debt + Equity)............25.4%.......12.8%
Borrowing Costs.............................................475...........246
Interest Revenue...............................................2...............8
Net Interest....................................................473...........238
Net Interest Cover (EBIT/Net Interest).............24.0..........34.0
EBIT as % of Net Debt.................................118.3%.....249.1%
NPAT as % of Net Debt..................................83.8%.....168.0%
Net debt increased substantially for reasons that will be described later in the cash flow analysis. At this stage it is of not much concern because SDI has the capacity to handle this debt. The gearing ratio (Net Debt/Net Debt + Equity) increased markedly to 25.4%. Some analysts would argue that it should be increased further to reduce the WACC of SDI - anyway it has been shown that the increased use of debt finance has been beneficial and the key point to take from this is that SDI is still very conservatively geared, and has the capacity to further increase debt if the need arises.
Net interest cover has fallen, but is still at an extremely high level of 24.0 times. Interest payments are no problem whatsoever at this stage, and SDI has the ability to raise more debt if necessary. In fact SDI's EBIT in 2004 was greater than their total net debt.
Working Capital Analysis
Inventory.......................................................9,391.......6,346
Inventory (% of Sales)....................................22.1%......17.3%
Inventory Turnover (Cost of Sales/Inventory)....1.5..........2.0
Debtors.......................................................13,433.......10,694
Debtors (% of Sales).....................................31.6%........29.1%
Debtors (Days)................................................115...........106
Creditors.......................................................2,620........2,465
Creditors (% of Sales).....................................6.2%.........6.7%
Creditors (Days)................................................23.............25
Working Capital (Inv.+ Debtors - Creditors)....20,204......14,575
Working Capital (% of Sales).............................47.6%.......39.7%
Working Capital Increment Per Period................5,629........2,793
Working Capital is one of the 3 culprits responsible for SDI's cash drain. In my opinion they disappointed me here. The build up in inventory as a percentage of sales (17.3% in 2003 to 22.1% in 2004) is acceptable given the build up in inventory required for their new products and sales growth. Creditors remained at similar levels, but the problem is with their debtors (receivables). Debtors as a percentage of sales now stands at 31.6% - this is incredibly high (i.e. undesirable) and means that on average it takes 115 days to collect cash from their sales - that’s nearly 4 months! I'm not sure if this is a phenomenon particular to their industry or because of the structure of their distribution network, but when I worked for an importer/exporter only our biggest accounts had a 90-day account, which represented less than half of the business. An average of 115 days for the whole business is massive and is a real concern. If I go to their AGM this would be one of my first queries. Anyway, the working capital for 2004 amounted to $5,629,000. For those not too familiar with working capital, the increase in working capital from year to year is effectively a cash outflow that has to be financed by debt or equity.
Cash Flow Analysis
NPAT.............................................................8,028..........5,451
+ Tax Expense..............................................2,830..........2,393
+ Net Interest.................................................473.............238
EBIT...........................................................11,331..........8,082
+ Depreciation.............................................1,029.............835
+ Amortisation of Intangibles............................739............621
EBITDA (Accrual Trading Profit)....................13,099..........9,538
- Working Capital Increment..........................5,629..........2,793
Cash Trading Profit........................................7,470..........6,745
- Net Capital Expenditure...............................4,912..........2,630
- Capitalised R & D and Intangibles.................3,378.............767
Operating Cash Flows......................................-820..........3,348
- Net Interest.....................................................473.............238
- Tax Paid.......................................................3,112...........2,062
- Dividends.....................................................1,989...........1,403
+ Proceeds from Share Issue...............................32.................0
Net Cash Flow (approx. change in net debt)....-6,362.............-355
Once EBIT is adjusted for non-cash expenses (i.e. depreciation and amortisation), we are left with EBITDA or the accrual trading profit of the business which amounts to $13,099,000 for 2004. The $13 million can be interpreted as how much operating profit was generated by the company independent of its financing structure, depreciation & amortisation policy, and taxation burden. After deducting for the investment in working capital, the cash trading profit falls to $7,470,000. Basically, this $7.5 million can be interpreted as how much cash was generated from the company's trading activities. Now lets consider the following 2 culprits on SDI's cash drain. Net capex of $4.9 million was almost double that of 2003. A lot of this capital expenditure in 2004 was for the new land and factory space purchased to increase capacity for future production and growth. The final culprit of the cash depletion is the capitalised intangibles which I talked about previously. The net result is that the operating cash flows for SDI in 2004 was approximately negative $820,000, down from the 2003 result of positive $3,348,000. This is not necessarily bad; it just means that SDI has spent all their money from their operations on working capital and capital expenditure. The concepts to be taken from this analysis is the determination of how much additional capital is required, and also how much capacity their is to pay dividends after allowing for tax and interest.
From the operating cash flows, the 3 stakeholders in the company need to be reimbursed: the lenders (interest), the government (taxes), and the shareholders (dividends). If there isn't enough money to pay for these 3 groups, then debt or equity must be raised to pay them. As can be seen, the operating cash flows are negative in 2004, and therefore SDI had to increase debt to pay each stakeholder. This explains why SDI did not increase their final dividend - the SDI dividend has been funded by raising debt. The net cash flow is calculated by deducting net interest, tax paid, and dividends from the operating cash flows. This amount comes to negative $6,362,000 which should approximately equal the change in net debt. SDI's actual change in net debt was $6,332,000 - there are slight differences because of the omission of small accruals in the working capital calculations. So that explains what occurred with SDI's cash flows. This is why companies can post good profits, pay small dividends, yet have to increase their debt levels. In SDI's case, it is acceptable because the profits have been reinvested into the business. For other companies, it can be the first indication of potential problems.
R & D Analysis
Expensed Research & Development................1,109.........1,110
Capitalised R & D (& identifiable intangibles)....3,378............767
Total R & D and Intangibles expenditure..........4,487.........1,877
Total R & D and Intangibles (% of Sales).........10.6%..........5.1%
Capitalised R & D (% of EBIT)........................29.8%..........9.5%
Capitalised R & D (% of NPAT).......................42.1%.........14.1%
As previously mentioned, total expenditure on R & D and Intangibles, in both percentage and nominal terms, has grown massively. I won't repeat my concerns of the problems with capitalised R & D, however the large increase in total R & D expenditure is a sign that the company is actively investing for future growth (if a company had problems this would be one of the first items they would cut back on!). I will mention a final point on intangibles which is important. SDI is a company that is growing organically as it develops it's own products. Consequently, it cannot recognise any internally-generated goodwill. A similar company that is growing via acquisition is able to recognise goodwill and other identifiable intangibles because accounting standards allow for the recognition of acquired goodwill. Therefore both companies may have a similar substance, but their reported financial results will be substantially different. The effect is that reported NPAT and equity for the organically growing company (i.e. SDI) will be substantially understated when compared to a company that is growing via acquisitions.
Forex Analysis
Net Forex Gains (Losses).................................569..........1088
Net Forex Gains (Losses) as % of EBIT.............5.0%........13.5%
Net Forex Gains (Losses) as % of NPAT............7.1%........20.0%
Some may argue for the inclusion of foreign exchange gains/losses to be adjusted in normalised NPAT, but I choose not to unless the net amount is an abnormally large percentage of earnings. Forex gains/losses are a recurring item, and it must be remembered that Forex gains or losses are usually alleviated by the effect on AUD sales revenue, and also by the effect on foreign currency debt when translated into Aussie dollars. One point to note is that SDI still has a significant amount of in-the-money forward foreign exchange contracts remaining. The impact of this is that some of their foreign currency receivables are being recognised at exchange rates significantly below the AUD spot rates (which increases the amount of AUD receivable being reported). Given SDI's profit outlook this isn't of much concern.
Valuation Analysis........................Current ($)
Share Price (09/09/04)..........................................$8.20
Shares on Issue...........................................23,411,962
Market Capitalisation (Equity Value)..........$191,978,088
Market Capitalisation (Equity Value)..........$191,978,088
NPAT............................................................$8,028,000
P/E Ratio (Historical)...............................................23.9
Market Capitalisation (Equity Value)..........$191,978,088
+ Quasi-Equity...........................................................$0
+ Outside Equity Interests.........................................$0
+ Total Debt..............................................$10,826,000
- Cash..........................................................$1,249,000
- Surplus Assets.........................................................$0
= Enterprise Value....................................$201,555,088
Enterprise Value.......................................$201,555,088
EBIT............................................................$11,331,000
EBIT Multiple (Historical)..........................................17.8
Conclusion: I have a large investment in SDI and I don't expect to be increasing or decreasing my stake in the near-term. I am eagerly awaiting the annual report to see how much of the capitalised intangibles is split between intellectual property (patents, licenses, trademarks etc.) and research & development. The break-up will provide a useful guide as to how much is at risk of write-downs under the international accounting standards regime. At current prices, SDI is priced for moderate growth, but I am comfortable with the valuation multiples given their growth outlook. In my opinion, there is more upside risk than downside risk. Keep in mind that my figures and interpretations are worth what you paid for them. CHEERS!
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G
Joined: 05 Nov 2003
Posts: 417
Location: Australia, NSW
Posted: Fri Sep 10, 2004 1:09 pm Post subject:
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Yes I told myself, I am not going to voice my thoughts on stock in “correction” (downtrend) phase.
And yes I broke my promise.
Personally I am bit worried that from $12.30 high in January 2004 “paper loss” will be roughly 35% if price hits $8
To my liking I prefer P/E ratio less than 12 and Div yield around 5%
SDI has almost 24 and 1.05% respectively.
So lets pray for your sake, that your substantial investment “chained” to SDI investment does not get eroded any further.
I wrote “chained” because I saw this statement in your post: (Quote) “I have a large investment in SDI and I don't expect to be increasing or decreasing my stake in the near-term”. (End of Quote).
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Bergholt
Joined: 14 Jan 2004
Posts: 279
Location: Melbourne
Posted: Fri Sep 10, 2004 2:59 pm Post subject:
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G'day Baphomet,
I don't follow SDI. As G said, it looks a little too expensive for me to buy into at this stage - haven't really studied it though.
But can I just say, thanks for that excellent analysis, Baphomet. There's plenty I can learn from what you posted, despite not following the company, so thanks for that.
Bergholt.
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ducati998
Joined: 17 Jul 2003
Posts: 99
Location: auckland
Posted: Fri Sep 10, 2004 10:08 pm Post subject:
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Baphomet,...what an enjoyable read.The following I have lifted from your post,as you expressed some trepidation regarding your analysis.I have added comments,but I have not studied this company,and the only information I have consulted is your post.Therefore my comments may be well out...........
Working Capital is one of the 3 culprits responsible for SDI's cash drain. In my opinion they disappointed me here. The build up in inventory as a percentage of sales (17.3% in 2003 to 22.1% in 2004) is acceptable given the build up in inventory required for their new products and sales growth. Creditors remained at similar levels, but the problem is with their debtors (receivables). Debtors as a percentage of sales now stands at 31.6% - this is incredibly high (i.e. undesirable) and means that on average it takes 115 days to collect cash from their sales - that’s nearly 4 months! I'm not sure if this is a phenomenon particular to their industry or because of the structure of their distribution network, but when I worked for an importer/exporter only our biggest accounts had a 90-day account, which represented less than half of the business. An average of 115 days for the whole business is massive and is a real concern. If I go to their AGM this would be one of my first queries. Anyway, the working capital for 2004 amounted to $5,629,000. For those not too familiar with working capital, the increase in working capital from year to year is effectively a cash outflow that has to be financed by debt or equity.
Adding working capital to cashflow analysis frequently reveals problems that may not be apparent from observing the trend of EBITDA or net income + depreciation.
In fact,reported earnings often exceed true economic profits specifically as a function of gambits involving inventories or accounts receivable.
However aside from seasonal variances,working capital required to run a business represents a fairly constant % of a companies sales.
Therefore if inventories or receivables increases materially as a % of sales,you should strongly suspect that the earnings are overstated.
If you monitor a cashflow measure that includes working capital as well as net income and depreciation then you may well detect that something is amiss earlier.
working capital requirements = accounts receivable+inventory- accounts payable.
Inventory increases,causing working capital requirements to increase.According to FASB definition,a rise in working capital requirements reduces operating cashflow.This would constitute a danger signal,even though net-income-plus-depreciation advances steadily.
A surge in accounts receivable ,similarly would reduce operating cashflow.The buildup in receivables could signal either of 2 types of underlying problems.
1...Management may be trying to prop up sales by liberalising credit terms to its existing customers .....specifically the company may be carrying financially unsound companies by extending further time to settle their accounts.
This will soak up more cash and force the company to absorb financing costs previously carried by their customers.
2...Alternatively a buildup in receivables may result from extension of credit to new,less creditworthy customers that pay bills more slowly.
To reflect the greater propensity of such customers to fail on their obligations I would look for an increase in bad debt provisions
This would decrease current-period income
To be sure management may seek to mask problems related to inventory or receivables by pumping up the 3'rd component of working capital,"accounts payable"
If management take longer to pay its own bills ,the resulting rise in payables may offset the increase on the asset side.
I concur with your discomfort regarding the % in receivables component of working capital,and would be following very closely future developments.
If in attendance at the AGM a very relevant question.The answer must be relevant and explanatory.....any fudging or evasion and I would be considering consequences.
cheers d998
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egilmore
Joined: 02 May 2003
Posts: 1776
Location: Sydney
Posted: Sat Sep 11, 2004 12:19 am Post subject:
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Incredibly top professional FA by Baphomet .
I must admit that I was not aware to the fact that SDI DID NOT EXPENSE the majority of their R&D , which ultimately has increased their NPAT n EPS for all the periods under review .
There is however , a legitimate debate over this delicate issue .
If the company deems certain aspects of the R&D as non productive in the reported period , capitalisation can be fairly acceptable . Expenseing it when profits ( or losses ... ) will start emerging from their sales .
I , for one , still like companies who treat their R&D as an expense ALWAYS . TNE is such a company for instance .
Another point is that in the preliminary report R&D can be hidden under the big banner of intangibles and one has to wait another 2-3 months until the full annual report is available .
Baphomet , the 115 days on receivables is pretty high , but not extra ordinary in export . I've had pretty extensive personal experience in a similar biz in my past . In many cases a credit of up to 180 days from bill of lading day ( not even ex factory date ! ) was allowed by several producers , in order to entice their overseas distributors to commit exclusively for their products . In the case of SDI , I think they airfrieght rather than seaship , and the 115 days do not scare me a bit . Afterall SDI is a very small player in overseas markets and it needs extra sweeteners to compete .
You have not mentioned SDI involvement in owning the infrastructure of their USA distribution . In the past I found that aspect as money draing and factually non profitable . This can be also an issue because it might be that SDI Australia bills SDI USA and the remittances to down under keep lagging behind as a source of interim financing if the US activity .
I do not know this is a fact . I just speculate on this issue because of my own past experience with a comparable habitat .
I have enjoyed immensely your post ...cheers eG
Cheers eG
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Grange
Joined: 06 May 2003
Posts: 18
Location: Canberra
Posted: Sat Sep 11, 2004 9:41 pm Post subject:
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Baphomet
An excellent analysis. With such quality one can't complain about the length.
Thanks
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Cheers
Grange
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Monkey Magic
Joined: 12 Jan 2004
Posts: 196
Location: Bowen, North QLD
Posted: Sat Sep 18, 2004 4:51 pm Post subject:
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Baphomet,
Top topic posting mate. Been watching this for a little while now but still a little too pricey for me. A few things:
I think in the annual report that the new factory is supposed to help the "just in time" production. This might be a sign that Jeffery is fixing the build up of recievables or trying to increase asset turnover.
The capitalising of R&D is a bit dodgy esp, as it helped to just push over the 34c mark to trigger the rewards for executives. If it was done to hide problems, then that is bad however if it was just to put a bit more money in the execs pockets it probably is the lesser of the two evils. Still doesn't bode too well as Jeff's putting his interests infront of shareholders.
Most dentists that i know have 30 days to pay bills but i suppose with dealers of dealers this may expand out a bit.
I know SDI were giving out a lot of samples to dentists for there new composite products but i never got round to using mine. Most tend to wait until research comes out backing the product or word of mouth. It does take a while for new products to be accepted.
SDI do have the amalgam market held pretty well here in AUS, well regarded. Their newer products need some selling. If i remember i'll have a look for some articles testing the new SDI stuff and let you know if you're interested.
Josh
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"Only two things are infinite, the universe and human stupidity, and I'm not sure about the former." Albert Einstein
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G
Joined: 05 Nov 2003
Posts: 417
Location: Australia, NSW
Posted: Sat Sep 25, 2004 7:29 am Post subject:
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Does anybody see this as a "rally" and opportunity to reduce exposure at better price?
Kind of X-my-ass in September (and I am not swearing it stands for eXit my assets - ha ha).
Or it is confirmation of “inevitable recovery”?
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gp
Joined: 25 May 2004
Posts: 1
Location: glen waverley
Posted: Mon Sep 27, 2004 6:53 pm Post subject:
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Hello SDI followers
Developments with SDI
India toothsome to SDI
Author: Eli Greenblat
Date: 27/09/2004
Words: 560
Publication: Financial Review
Section: Companies
Specialist dental products maker SDI is considering establishing a subsidiary in India, taking advantage of the country's mushrooming middle class and its escalating demand for the company's suite of tooth-whitening systems, alloys and dental equipment.
It comes as a vanguard of Australian pharmaceutical and healthcare companies increasingly turns to India as both a supplier of raw materials and a new market for health products.
Last week The Australian Financial Review reported that Sigma was investigating Indian makers of active pharmaceutical ingredients to supply it with raw materials for its Australian manufacturing operations, while Mayne Group recently announced a deal with Ahmedabad-based Intas Pharmaceuticals to manufacture one of its major cytotoxic drugs.
SDI, based in Melbourne with a market capitalisation of $210 million, is also likely to soon announce a 5-for-1 share split in an attempt to arrest erratic trading in its stock which has seen the shares trade wildly over the last six months.
Formerly called Southern Dental Industries, SDI is one of Australia's most successful small companies. Its range of dental products are sold all over the world and it has penetrated the United States market. Its shares have rocketed from a low of 10y nine years ago to a high of $12.20 in 2003, delivering a return to shareholders of 12,100 per cent. In 2003 SDI was the third-best-performing small-cap on the market, climbing 200 per cent.
Senior SDI management have been considering a major tilt at the Indian market for some time, and a recent trip by two executives to the country for a dentist convention was used as a chance to further explore the market's potential.
The two senior SDI executives who travelled to India were the children of SDI's chief executive and major shareholder, Jeffery Cheetham.
SDI has two distributors in the sub-continent, in Delhi and Mumbai, but is eager to launch a wholly owned subsidiary in the country to gain greater control of its operations there.
SDI recently established its own subsidiary in Japan, taking advantage of a dental market that is second in size to the United States. Its extensive network of distributors, subsidiaries and customers in South America, North America, Europe and Asia has fuelled stunning earnings growth.
Last month SDI posted a 15.3 per cent increase in sales to $44.6million for 2003-04, while net profit jumped 47.3 per cent to $8.03million. The company has harnessed similar earnings growth over the past few years.
But the share price has been knocked about violently over the last few months, wildly gyrating between a low of $7.70 and a high of $9.
This has pushed the board to consider a 5-for-1 share split, hoping greater liquidity in the stock will smooth out trading activity. SDI will soon issue its annual report and notice of meeting for its AGM and it is expected the notice will include a resolution asking shareholders to support a split.
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egilmore
Joined: 02 May 2003
Posts: 1776
Location: Sydney
Posted: Mon Sep 27, 2004 7:16 pm Post subject:
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Posted: Fri Nov 28, 2003 10:10 am Post subject:
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Hi South ,
SDI keeps "slaying" my procrustination habit . I'm in mourning mate .
Reason is that I knew it was going to $11+ and did nothing on it .
Currently running on 60% possible increase in EPS from 22c to perhaps 39c ! minimum 34c as a hurdle to management options . @11.00 is getting there ( almost ) . Management knows the GEPS expected for 2005 . We don't . If it keeps exploding in such GEPS rate it is destined to glory.
I am going to call them to ask to SPLIT the stock considerably .
SDI current illiquidity coupled with high PER made me sell it sub $4.00 and is a constant problem that detered me of holding ...cheers eG
Quote:
This has pushed the board to consider a 5-for-1 share split, hoping greater liquidity in the stock will smooth out trading activity.
Can I get royalties for my suggestion to them ?
cheers eG
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wink
Joined: 21 Jul 2003
Posts: 89
Location: Hobart
Posted: Mon Sep 27, 2004 8:45 pm Post subject:
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EG, buy the shares and consider the divs as royalty, one that grows at 30%+, as soon you won't have an excuse for procrastination. he he wink
And Baphomet, many thanks for such a compehensive and professional analysis, it is greatly appreciated.
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ducati998
Joined: 17 Jul 2003
Posts: 99
Location: auckland
Posted: Tue Sep 28, 2004 11:31 am Post subject:
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I"m surprised at the lack of concern displayed at the analysis,as it shows some real areas of concern.
1...15% increase in revenue results in a 45% increase in net profit.
That is a substanstial increase and if legitimate then a very impressive result.........
2....A 11% increase in Cost of sales and an 18% increase in Gross Profits shed no confirmation on the sustainability of the net profit growth.
3....Debt has increased by 93%,and other expenses by 113%....no confirmation here,just warning signs.
4...Selling & Admin 3% increase,so no help here to net profit
5...Capitalised R&D increases by 340%.....well there is your reason for net profit increase.
6....Inventory increases by 47%....this is a large increase and bodes trouble in the future,dependant upon the breakdown between raw materials,work in progress,finished product.
If finished product,then a slowdown in Revenues is on the cards.
7....Receivables are up 25%,another bad sign,I would be interested to know the %change in the provisions for bad debt reserves.
At a P/E of 20+,an earnings suprise has the potential to do some damage to the share price.
Taking into consideration the red flags I would conclude that the quality of earnings constitutes a sell.
cheers d998
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egilmore
Joined: 02 May 2003
Posts: 1776
Location: Sydney
Posted: Tue Sep 28, 2004 11:52 am Post subject:
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Wink , My main concern is the R&D capitalization ( Part of only ) .
I do not like such a practice though it is very legit as long as new products have not as yet transformed into sales n profits .
You realize that under normal expensing the PER of 20 would have spiked immensely . It is a stock that I constantly follow but do not hold now ...cheers eG
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wink
Joined: 21 Jul 2003
Posts: 89
Location: Hobart
Posted: Tue Sep 28, 2004 2:55 pm Post subject:
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Thanks ducati, you make very valid points. This business has high sales margins and this is impressive. The capitalisation of R&D and the growth of it, is as you pointed out is of concern, the market appears to have taken note as the share price has retraced this last six months. I confess my accounting skills are at the amateur level, so I am very grateful for the experience of you, baphomet, EG and others who are prepared to share their knowledge and improve my education.
EG, the dig was an attempt at humour; at least that is how I intended it.
In an earlier post on SDI, I expressed the same regret as EG, of having watched this stock for 18 months with stellar share price growth and not believing it could be sustained, then finally biting the bullet 14 months ago and picking up a parcel. My capital gain stands at 40% at this stage. The growth potential for this stock remains impressive, but as ducati, EG and baphomet, have pointed out there are warning signs that need monitoring. The business appears to be gearing up for a major upside, so my risk management is to spread my portfolio over thirty or so stocks and monitor them closely. If I get burnt on this one I will put it down to education expenses, if it continues over the next three years as it has over the last three, I will be very pleased. Cheers wink
Last edited by wink on Tue Sep 28, 2004 4:06 pm; edited 1 time in total
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ducati998
Joined: 17 Jul 2003
Posts: 99
Location: auckland
Posted: Tue Sep 28, 2004 4:04 pm Post subject:
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wink,
When you start to look further,you start to find further signs that all is not quite what it should be.
Receivables are growing faster than Sales. (25% ~ 15%) This is a concern in that it MAY indicate improper/aggressive revenue recognition.
Inventory growing faster than Cost of Sales (47% ~ 11%).Again a real red flag as this signals that inventory is building. While sales growth of 15% lags far behind,and just cofirms the inventory red flag,and may indicate a failure to writedown obsolete inventory.
When SG&A grows more slowly than Sales ( 3% ~ 15%) this can be evidence of capitalizing operating costs. Obviously it is apparent that R&D have been improperly capitalized....but what else?
I would take a close look at all the RESERVE ACCOUNTS and check what accounting measures have been employed.
And here we come to the crux of investing/trading.
You have 40% capital appreciation in your purchase price.
The financial statements are ringing warning bells
The psychology offers an interesting twist.......do you heed the warning signs and get out......or do you continue to believe/hope that nothing is wrong and that this growth stock will continue to outperform,the warning signs will be rectified by continued sales growth,and you will gain more profit.
Just a thought on what would happen if there was a negative earnings surprise in the near future......In the US,miss by a penny or so,you can lose 15% in minutes,more and well.......
How quickly could you get out?
At what discount?
cheers d998
Last edited by ducati998 on Tue Sep 28, 2004 5:22 pm; edited 1 time in total
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wink
Joined: 21 Jul 2003
Posts: 89
Location: Hobart
Posted: Tue Sep 28, 2004 4:34 pm Post subject:
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Thanks ducati, if they are gearing up for greater sales due to expansion into Japan and India as per previous article posted by gp, then would inventory not be run up in anticipation of greater sales effort. The growth of receivables greater than sales, I have to accept your caution on this.
As to the spychology, I'm prepared to take the risk as the company has achieved impressive results for some time. The total shareholder return over 5 and 10 years is 102% and 44% per annum respectively, I'm prepared to go with that. If you know any industrial companies with better figures than this, please let me know. cheers wink
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egilmore
Joined: 02 May 2003
Posts: 1776
Location: Sydney
Posted: Tue Sep 28, 2004 8:51 pm Post subject:
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Wink , SDI has had an impressive GEPS and other ratios growth over the last 5 years . This should be a good sign for SDI management going forward . SDI in my books warrants a small portion of one's LT portfolio .If your entry was 40% ago goodonya .We exited SDI at 3.80 from 3.00 on a relatively large parcel , and I have since regreted not having left a small parcel there , a lesson I am determined to learn from for the future ...cheers eG
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wink
Joined: 21 Jul 2003
Posts: 89
Location: Hobart
Posted: Wed Sep 29, 2004 8:12 am Post subject:
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G’day EG, to put SDI into perspective from my view, when I invested in SDI 14months ago, I had just made the decision to change my investment method from having 75% of my portfolio in managed funds and directly investing the remaining 25% myself, to going 100% self managed direct investment. My experience of the managed funds industry over ten years was disappointing, firstly from a return point of view and secondly from a tax management point. In the three-year period leading to this decision the share market and managed fund industry returns were very disappointing. SDI’s performance at the time was by comparison outstanding, I appreciate that historical performance is not necessarily indicative of future performance, but in this instance I will back my judgement of the management, and continue to monitor their performance. As stated previously I am indebted to people such as yourself and many of the generous posters to this forum for my continuing education. Cheers wink
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ducati998
Joined: 17 Jul 2003
Posts: 99
Location: auckland
Posted: Wed Sep 29, 2004 9:17 am Post subject:
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wink,
As SDI already have exposure in Japan and India,it is highly unlikely that this inventory buildup has anything to do with stockpiling for a flood of orders.
Also as Baphomet previously mentioned stock options are also currently a non-expensed item.
When you allow for the dilutive effects,a further hit on earnings.
As the CEO is the largest stockholder it is in his interests to have a high shareprice........unfortunately the cynical view would regard the current earnings as inflated through accounting chicanary.
An analysis of previous years financial statements would be in order to establish if this practice has been used to inflate previous income statements,or whether it is a recent development.
To quote Monkey Magic
"I think in the annual report that the new factory is supposed to help the "just in time" production. This might be a sign that Jeffery is fixing the build up of recievables or trying to increase asset turnover. "
If this is the case then the buildup in inventory is an even bigger problem,as if you take as an example DELL,who run "just in time production" you will see that they have negative working capital.
In this examle as stated receivables would drop way down as customers pre-pay........the strategy obviously is not currently working if MM information is correct
"The capitalising of R&D is a bit dodgy esp, as it helped to just push over the 34c mark to trigger the rewards for executives. If it was done to hide problems, then that is bad however if it was just to put a bit more money in the execs pockets it probably is the lesser of the two evils. Still doesn't bode too well as Jeff's putting his interests infront of shareholders."
If this is true,then management has some serious issues regarding ethical considerations,and really starts questions flowing regarding the sustainability of current earnings.
And just to finish off with a little qualitative analysis,and by no means statistically relevant,however being in the medical profession myself I can second the sentiments of avoiding untested and potentially problematic new products on patients.
"I know SDI were giving out a lot of samples to dentists for there new composite products but i never got round to using mine. Most tend to wait until research comes out backing the product or word of mouth. It does take a while for new products to be accepted. "
cheers d998
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wink
Joined: 21 Jul 2003
Posts: 89
Location: Hobart
Posted: Wed Sep 29, 2004 12:44 pm Post subject:
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G'day ducati, I appreciate you may be concerned about the legitimacy of the companies reporting of accounts, your questioning of this has encouraged me to do some more home work. As stated my accounting skills are minimal, but I am reasonably assured that the points you have raised though of concern, would not cause me to divest this investment at this stage. Baphomet has given a detailed analysis and stated his intention, I am of the same view.
I'm relying on the companies stated growth path and track record for further outstanding returns. Thanks wink
From the company report 25/08/2004
SDI has been selling, albeit in small quantities, to Japan for over 15 years. In 2004 the decision was made to establish a sales office and warehouse in that country in order to grow our sales at a faster rate. The facility is located in Tokyo and all documentation (medical device registrations and import licences) have been granted and SDI Japan will commence sales and marketing operations in August / September 2004.
The Company expects that SDI Japan will make significant contributions to the group in the future.
Full year report
http://imagesignal.comsec.com.au/asxdata/20040825/pdf/00454959.pdf
Substantial manufacturing space (approximately one acre of land and factories) was purchased during the year to facilitate the growth in production for both existing and new products. Greater production efficiencies will result from this streamlining of the Company’s production processes.
Production facilities at Bayswater have been further automated which will achieve efficiencies and further embrace the company’s “just in time” policy. With the successful introduction of 'Riva SC' and the strong sales growth forecast for 2004/05, additional production equipment has been purchased to produce Riva SC capsules at high speed and to manufacture the components in large quantities.
R & D expenditure of $4.4M significantly increased for the year due to the development of Riva, Radii, Rok, and Ice, plus the development of other new products to be released in the near future. There are approximately seven new products under development at this stage, some of which will be released at the International Dental Show held in Cologne, Germany in April 2005. SDI now employs over 15 qualified scientists fully engaged in the research and development of dental materials. The new laboratories are working well, giving the R & D team the resources to focus on developing world-class dental materials.
New product development continues to be one of the main focus points of SDI.
The Company recognizes that to continue the growth to a medium term sales target of $100.0M,
new products and technologies must continually be introduced to SDI's markets. SDI expects to release a new series of products during 2005
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The company is targeting $100.0M in sales, medium term, presently $42.5M
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Monkey Magic
Joined: 12 Jan 2004
Posts: 196
Location: Bowen, North QLD
Posted: Fri Oct 01, 2004 5:04 pm Post subject:
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One other thing i forgot to mention, I didn't really like their idea of copying other manufacturer's products. You tend to miss first product status.
I know for one that if i try one material and it works well i'm reluctant to use another unless it has really strong data backing it. I think most other dentists are the same. Product price doesn't really matter too much as we get charged heaps as it is. Just look at the bloody profit margins they achive.
Josh
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"Only two things are infinite, the universe and human stupidity, and I'm not sure about the former." Albert Einstein
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wink
Joined: 21 Jul 2003
Posts: 89
Location: Hobart
Posted: Fri Oct 01, 2004 10:17 pm Post subject:
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Monkey Magic, I'm not sure what you are stating here, are you concerned about copyright infringement? I think it depends on whether you are a share holder or not, but if your company can make a washing powder that washes whiter and brighter, you would be a happy share holder. The market is all about competition for products not who was first, unless of cause there is a copyright problem. SDI have a host of new products on the market and a number in the pipe line, I have heard positive comments by other dentists on their products, obviously there is room for choice. You seem to have chosen that the shares are too expensive for you valuation. As a holder I hope they get a lot more expensive.
It's official, todays announcement of a 5 for 1 share split, to be voted at the AGM
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ducati998
Joined: 17 Jul 2003
Posts: 99
Location: auckland
Posted: Sat Oct 02, 2004 3:25 am Post subject:
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Wink,
I think that you may have miscontrued Monkey Magics point.
The point I believe he was making is that within the medical profession,new products must have gold standard research behind them.If they fulfil this primary criteria,then the first to market has a large advantage as products will then build a personal confidence (reputation)
This combination of research,and personal confidence is a difficult barrier to overcome,as competing on price is a very distant 3'rd place.
If therefore SDI are introducing in essence copycat products to the market,the penetration required to increase market share will be much harder to aquire for these products,and margins may also get squeezed.
Valuation is a very important parametre to watch,and currently it would appear far from being fairly valued,they are in point of fact overvalued by comparison to the overall market.Possibly irrelevant in the longer term,but then again with an earnings surprise,possibly yet to be rerated.
cheers d998
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wink
Joined: 21 Jul 2003
Posts: 89
Location: Hobart
Posted: Sat Oct 02, 2004 10:04 am Post subject:
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Point taken, ducati and josh, I’m not a dentist and haven’t used SDI products, I appreciate, in this profession, reliability and safety are paramount. However medical history is littered with professional conservatism where new products and technology were not accepted, sometimes with overwhelming evidence in the new technologies’ superiority.
The claim they are copying others products is one the company may well dispute and would be against the spirit of the research grants they have been winning. It’s a debate I’m not qualified to pursue due to my limited knowledge.
I am therefore relying on SDI’s reports of good acceptance of their products by the professional market, the fact they attend and market at international forums and the historic sales increases for their products. Their historic GEP ratio is impressive
[This message has been edited by ducati999 (edited 03-10-2004).]
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bagwan
unregistered posted 03-10-2004 09:42 AM
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Hi
>Valuation is a very important parametre to watch<
Excellent set of posts duc.
cheers
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mds2
Member posted 03-10-2004 04:45 PM
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Duc,
That was quite an accessable read (didn`t need to dive for the scotch) well worth saving to disk.
Thanks,
Michael
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ducati999
Member posted 03-10-2004 05:47 PM
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Glad you enjoyed it chaps.
cheers d998
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ducati999
Member posted 04-10-2004 04:12 AM
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Just an update on how the discussion continues.
Sharesguru
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wink
Joined: 21 Jul 2003
Posts: 90
Location: Hobart
Posted: Sun Oct 03, 2004 1:10 pm Post subject:
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Well josh, we'll have to wait and see how the company performs. I'm on board so to speak and will keep a watch on the financial ratios cautioned by Baphomet and ducati. As I stated earlier, I waited too long to get on board and missed some great gains. I think the company is continuing on it's impressive growth path and hope to be rewarded. I respect we all have different risk profiles and you must maintain your standards. As an update, at todays price $9.40, my cap gain is now 70%. from my buy price 15 months ago, the figure I gave earlier for my cap gain was my average accumulation cap gain, I accumulated some more recently.
Good luck wink
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ducati998
Joined: 17 Jul 2003
Posts: 100
Location: auckland
Posted: Mon Oct 04, 2004 4:07 am Post subject:
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Wink,
Just returning briefly to Inventories.You indicated an opinion that accounted for the inventory buildup as a stockpiling exercise by management,for expansion into Japan/India
Analyzing the Inventory from a different angle we see that the 47% increase in Inventory resulted from;
An inventory turn falling from 1.97 to 1.48
Which in turn represents an average of inventory being held for 26 days increasing to 35 days
So we have a situation that shows the inventory build is due to falling sales and an increase in time on the shelves.
Now when you compare that to the other figures;ie 15% increase in sales,you must start to question the methods of accounting used to achieve the figures.
A good starting point might be with competitors,and comparing like with like to see what variations and consistencies are bourne out.
cheers d998
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Ren-A
Member posted 05-10-2004 09:50 AM
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G'day again all,
Just a few answers to questions raised.
The CI software has a couple of interesting features. Using a set of filters such as ROE and debt, you can filter around 1600 shares to come up with a short list of shares that meet your investment criteria. CI has also produced its own list, which include SDI (on this, more later). You can also filter by industries (eg banks).
You can refine your short list further by using the CI graphs and Quick Analysis to assess ten factors that that have been shown to be strongly correlated to share price. For example, you look at whether ROE and ROC have been > 10% and stable or increasing over the past 3-5 years.
Finally, and this is where I think it's most like Buffett and most different from other tools, it provides a "what if" analysis that allows you to assess changes to key criteria. For example, if you think EPS is going to be more or less than historic rates, you can see the impact in two ways. First, the tool gives you the total return over the timeframe you have selected. In other words, it is caclulating the future ROI from that business (and hence share price). Secondly - and this is where it gets quite clever - it tells you what share price you need to start from, in order to achieve a desired rate of return. In other words, what your "buy" price should be at or below to have high certainty of achieving your total return.
Ducati gave the example of SDI, and several replied within that thread spoke of how well-valued it is. This is what CI helps you to do - it may be a great company but the share price may make it too expensive at the moment: by investing when the share price is too high, it may not achieve your desired returns. Interestingly, SDI is on CI's watch list, but is considered one of the most overvalued at the moment - ie, not a buy despite great fundamentals.
This is how it overlays discipline on your buy/sell decisions, which is also one of the frustrating aspects. When the market gets ahead of itself, buying opps become less frequent, and you can sit on your hands for months before a buy comes up. But when it does, the results are good.
If you're interested, have a look at the free demo and decide for yourself.
http://www.conscious-investor.com/signup/demo.asp
Regarding the seminar cost, as far as I can see they only do a couple of these intro seminars a year, and they are genuinely aimed at getting subscribers, not an up-sell to a more expensive seminar.
Cheers for now
Ren-A
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S1
Member posted 11-10-2004 03:23 AM
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There's just one problem with FA and it is this ... you will rarely get the true picture of a companies performance simply by reading the P&L and Balance sheet...you will however see from those documents what the current management wish you to see at that time .... if you really want to know what is happening with that company you are going to have to have intimate knowledge of it and you are going to have to get into the TB and see how the figures were compiled .... all of which is available to the Buffets' of this world and certainly not available to the ordinary investor .... creative accounting both legal and illegal creates so much room for 'wiggle' that there is just not another way to get at the 'true' picture .... I guess the response to this statement might be to bring out the Auditors role ... all I can say to that is Pleaseeeee don't take the pi....s ... this isn't from reading books on how to analyse company accounts ... I'll be please to discuss the finer issues of creative accounting which in itself might make a good thread....
Cheers
Steve
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ducati999
Member posted 11-10-2004 04:00 AM
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Steve,
I disagree.
You can get a very accurate picture of a companies performance from the Financial statements.They will alert you to problems long before any other method.
Why do you think T/A has references to the "Smart Money"...the smart money is F/A,and for my provocative statement of the day,.....an intelligent investor,through quality analysis,can GUARANTEE a profit every trade.
In essence there are 2 broad areas that are open to manipulation.They are 1....Income manipulation, 2...Expenses manipulation.
Here are some examples;
1..recording revenue too soon,or of questionable quality
2...recording bogus revenue
3...boosting income with 1 time gains
4...shifting current expenses to a later/earlier period
5...failing to record or improperly reducing liabilities
6...shifting current revenue to a later period
7...shifting future expenses to the current period as a special charge
Simply "READING" is not enough,you must "ANALYZE",and through analysis what management is trying to hide (assuming a problem) will come to light.
In the cases of outright "FRAUD" actually it becomes a little easier in some instances to spot as the level of obfuscation is so high that suspicions are aroused immediately.
Buffett,reads reports,in many cases now he has superior access,but that was not always the case.In any case there are many Fundamental managers that have excellent returns over many years (20+)
Auditors,are a very poor way to get a picture of a companies investment grade.
The example above is an excellent example of a company that is MANIPULATING EARNINGS.
As such,you have a very early warning of trouble ahead.
The gentleman WINK sees only the pot of gold that is a further 12000% increase in price,he refuses to accept that this company,once a legitimate growth company has run into business reality,which is incresed competition.....however as the CEO,is the major shareholder,wants continued shareprice growth....the books are being cooked.
My feeling is that at some point,a negative earnings surprise will be announced,and then the shareprice will TANK.
At the high of $12 odd,it has already traded down to $9 odd .....why
Because,the "Smart" money saw that things were not what they should be and have started to exit.
cheers d998
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S1
Member posted 11-10-2004 05:30 AM
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Duc,
I don't read financial statements and to be frank I don't waste my time analysing them anymore either ... you missed my point which is by the time management have lost their ability to 'wiggle'with creative accounting and the picture becomes plain and clear then it is too late to capitalise ... fundamental problems , or indeed fundamental opportunties by the time they feed through to reported accounts the time lag has made them redundant to the ordinary investor... they should already be in the price which has been driven by the people who really do own / manage the company....
I don't doubt FA can create positive outcomes anymore than TA can for the ordinary investor/trader,but I seriously doubt either event has much to do with truly understanding the peformance of the instrument......but I'm happy to agree to disagree
At the risk of being a pillo..ck don't forget the third area...valuation of assets
Cheers
Steve
[This message has been edited by S1 (edited 11-10-2004).]
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ducati999
Member posted 11-10-2004 07:51 AM
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steve,
I think we will have to agree to disagree.
"missed my point which is by the time management have lost their ability to 'wiggle'with creative accounting and the picture becomes plain and clear then it is too late to capitalise ."
Barring outright fraud,"creative accounting" can be detected through astute analysis. In the case of outright fraud,there are enough clues to warn you off well in advance.
"by the time they feed through to reported accounts the time lag has made them redundant to the ordinary investor... they should already be in the price which has been driven by the people who really do own / manage the company...."
Yes you would think so wouldn't you,however that does not happen in reality.
Your statement is an advert for "Efficient Market Theory"...and has been shown to be so totally opposite to the truth of the markets.
Unfortunately,Technical Analysis is EMT brought to life and it's adherents and practitioners partake in blissful ignorance.
"Valuation of Assets",I include assets and liabilities as flow through adjustments on the balance sheet from income and expenses.
You may well be referring to "assets" such as land/buildings that are carried at COST,as being "Undervalued",in which case I would concur.
cheers d998
