Writing Annual Reports
Posted by Eddy Elfenbein on June 22nd, 2006 at 10:59 am

A University of Michigan study looks at why annual reports are hard to read (via Tyler Cowen):

Apparently there’s a simple reason why annual reports are hard to read: managers, in many cases, are trying to hide something.
The study, Annual Report Readability, Earnings and Stock Returns, found that the annual reports of underperforming companies are harder to read than those of companies that are performing well.
Feng Li, an assistant professor of accounting at the university, measured annual report “readability” using a sample of more than 55,000 company reporting years. He examined syllables per word and words per sentence in reports filed with the Securities and Exchange Commission.
He used two readability measures.
First, the “Fog Index” indicated the number of years of formal education a reader of average intelligence would need to read the text once and understand it. Fog = (words per sentence + per cent of complex words) x 0.4. Complex words were defined as words of three syllables or more.
Second, the Kincaid Index rated the reports on a US primary school level.
According to the study, annual reports of companies with lower earnings were more difficult to read. Similarly, companies that had volatile earnings were more likely to produce abstruse reports.

Of course, there’s always this:

Bed Bath & Beyond Taking a Bath
Posted by Eddy Elfenbein on June 22nd, 2006 at 10:45 am

Shares of Bed Bath and Beyond (BBBY) are getting hammered this morning (down about -5.5%). The stock has been cut by Bear Stearns. The company’s earnings report was inline with expectations, and the guidance for this quarter was also inline. Still, the stock made fresh 52-week lows this morning.
Here’s a sample negative view from an analyst:

In a note to clients entitled “Q1 Could Have Been Better,” UBS analyst Brian Nagel said costs weighed on the retailer.
“Given (same-store) sales growth at the upper end of plan we would have expected stronger earnings growth at Bed Bath & Beyond in the first quarter,” Nagel said. “Recent expense pressures seem unique to Bed Bath & Beyond and are not indicative of higher costs in retail.”
While net earnings had a slight gain, operating profits dipped to $148.8 million from $150.9 million. Costs escalated to $805.9 million from $723.6 million, led by a 19% rise in sales, general and administrative expenses.
Further, the company’s cash assets were cut to nearly a third of their former levels a year ago.

Seeking Alpha has a transcript of the conference call.
The good news for us this morning is that Varian Medical (VAR) is up strongly on an analyst upgrade from Oppenheimer.

Bed Bath & Beyond Earned 35 Cents a Sahre
Posted by Eddy Elfenbein on June 21st, 2006 at 4:21 pm

The company matched Wall Street’s expectations. Sales came in at $1.396 billion, which was also in line with forecasts. The stock is down 19 cents a share in after-hours trading.

The First Day of Summer Rally
Posted by Eddy Elfenbein on June 21st, 2006 at 2:47 pm

We’re having a very good day today so far, although I could do without the leadership coming from the “hard asset” sectors like energy and basic materials. The S&P 500 is now above last Thursday’s high point. The Dow was just at 11,111, which must be some sort of sign.
The Buy List is being led today by Harley-Davidson (HDI), Expeditors (EXPD) and Fiserv (FISV). FactSet (FDS) is holding on to its big gain from yesterday. I’m waiting on Bed Bath & Beyond’s (BBBY) earnings after the close. Of Wall Street’s 25 estimates, the high is 36 cents per share, the low is 35 cents per share. Just to be different, I predict—no, guarantee—37 cents per share. When earnings came out three months ago, the stock was over $40 a share. Today, it’s down to $37.
Morgan Stanley (MS) is up after a strong earnings report. The brokerage has been the sick man of Wall Street. It’s trailed the rest of the industry in a furious rally for the major Wall Street brokers. David Weidner at MarketWatch notes that some smaller houses are moving in to take business from some of the big boys.
Volatility continues to rise. Today looks to be the S&P 500’s 12th swing of 1% or more in the past seven weeks. In the six months prior to that, there were just eight such days.

We’ve Pulled Even With the Market
Posted by Eddy Elfenbein on June 21st, 2006 at 10:00 am

Great news! Thanks to FactSet’s (FDS) big day yesterday, our Buy List has pulled even with the S&P 500 for the year. Woo! It took the market and me nearly six months to lose a little less than 1%.
OK, I can see that you’re not terribly impressed. But let’s take a step back and look at what we can expect of the stock market (and by extension, me).
Although the market likes to jump around a lot, if you look at it from a long-term perspective, the market is far more consistent than many people realize. Over the last 80 years, stocks have averaged 10.36% a year. Oh sure, stocks will plunge 50% or more even few decades, but that just comes with the territory. But if you plan to stick it out, the market is the place to be. On average, it doubles your money every seven years. That’s better than every other asset class. All of them.
But I have to caution you: Over the last 25 years, us stock investors have been spoiled. The reason has to do with bonds. Think of it this way. The stock and bond markets are in a never-ending battle for your money. Whatever bonds do, stocks are very likely to mimic.
Stocks and bonds don’t have a perfect relationship but they will tell you a lot. One of the things you may have noticed from my site is that I don’t worry too much about the “background noise” of Wall Street. This includes most economic reports, the national debt or almost anything about the Federal Reserve. My feeling is that as long as the bond market isn’t worried, then there’s no reason to be worried. The bond market is one of the few sources that isn’t afraid to tell you the truth.
Since 1981, we’ve had a massive rally for bonds. Interest rates for long-term bonds have fallen to levels we haven’t seen in decades. And like clockwork, stocks soared. The period from 1982 to 2000 was one of the greatest bull markets in history. What’s interesting is that during that time, stocks and bonds still closely tracked each other. In fact, since 1969, stocks have beaten long-term government bonds by just 1.69% a year. That’s a pretty measly bonus you get for taking on the risk of owning stocks. Moreover, that 1.69% has been fairly consistent.
If we assume that 1.69% premium will continue, with today’s 30-year bond yield of nearly 5.2%, that translates to a long-term stock market return of (let’s call it) 7% a year. So a return for six months should only average about 3.5%.
I’m afraid that too many investors think that the 20%+ years of the 1990’s are the norm. They’re not.

How Low Can It Go?
Posted by Eddy Elfenbein on June 21st, 2006 at 6:28 am

I often hear people say that a particular stock is so cheap, “how much lower can it really go?” The answer is, it can go a lot lower. A stock can drop 99% and it’s still not at zero. It can drop another 99%, and it’s still worth something. In fact, a stock can drop 99% many, many times, and still not reach zero.
Delistings don’t make a lot of news, but they happen every week. Here’s a graph of issuers on the NASDAQ since 2003:

A Stock Market in Rwanda?
Posted by Eddy Elfenbein on June 21st, 2006 at 6:02 am

Not yet says a study. But wouldn’t be nice to see a market there soon?

Otis Spunkmeyer Files for IPO
Posted by Eddy Elfenbein on June 20th, 2006 at 11:01 am

One of my favorites is going public.

The San Leandro, California-based company said in a registration statement with the Securities and Exchange Commission that it planned to use the IPO proceeds to repay debt, to redeem Class A preferred stock and for general corporate purposes.
Otis Spunkmeyer said its principal focus was selling frozen cookie dough products to the food service channel, which represented 63 percent of its net sales in fiscal 2005.
According to restated results, the company earned $5.4 million on $336.3 million of net sales in 2005.
The filing said Merrill Lynch & Co. and JPMorgan were underwriting the offering.
The document did not reveal how many shares the company planned to sell or at what price. Those details will probably be revealed in future filings.

Looking At Bed Bath & Beyond
Posted by Eddy Elfenbein on June 20th, 2006 at 10:34 am

If you’re new to investing, Bed Bath & Beyond (BBBY) is a good stock to look at. The financials are about as straightforward as they come. No pro forma nonsense or huge “one time” charges that seem to happen every single quarter (Cendant, I’m looking at you).
Here are BBBY’s financial results for the past few years:

As always, I pass the graphics savings on to you.
A few things to point out. You’ll notice that there’s a bulge in the February quarters (the company’s fourth, which technically end in early March but it’s my damn table). That’s because of the holidays so it’s important to compare similar quarters.
Another thing you’ll notice—and something that I place a lot of emphasis on—is the company’s consistency. Here’s a chart of BBBY’s trailing four-quarter sales.

That’s what I like to see, a nice smooth line. The red is Wall Street’s estimate. Yes, someone is paid a great deal of money to draw that line out a few more points. Like a nine-year-old couldn’t find a trend here.
Now let’s look at the operating margins. This is important.

This impresses me a lot. Operating margin is one of the purest measures of how efficiently a company is managing its business. BBBY has been doing very well lately. That last little downtick concerns me a little. But as long as the margins don’t show a severe downtrend, I’m not too worried. Few things are more painful to a company than eroding margins.
Now here’s the company’s earnings-per-share:

Once again, we see a nice smooth line. But what isn’t a smooth line is the stock chart. Shares of BBBY haven’t budged in over four years. This chart pretty much sums it up:

Rising earnings and a flat stock means a plunging earnings multiple. This issue is really about risk. The stock could certainly stay flat, or even fall. Who knows…we can’t predict the future. But we can see that the company has performed very consistently, and its relative valuation is very low. That’s one of the best ways to control for risk.
Earnings are due tomorrow after the market closes.

FactSet’s Earnings
Posted by Eddy Elfenbein on June 20th, 2006 at 9:26 am

FactSet Research Systems (FDS) reported fiscal third-quarter earnings of 41 cents a share (including a penny a share from a tax benefit). This is good news. Wall Street was looking for 39 cents a share.
The company also sees revenue for this quarter coming in between $102 million and $105 million. Wall Street was expecting $98.7 million. The stock is up in pre-market trading.