Ask me for a financial analysis of any stock

[meteoraln]

Ask me about a stock, and I'll highlight the good and bad things that I see about the financial statements. I'll point out any fraudulent/borderline accounting if I see it, and highlight things like debt levels, cash flows, etc.

I'm not here to recommend stocks or tell you whether you should buy or sell stock XXX. This is intended as a introduction to fundamental analysis and accounting and as a way to learn how to read financial statements.

Financial statements of banks, commodities, energy, biotechs, and pharmaceuticals are out of my circle of competence and I will not be able to properly dissect and explain those statements. I might give it a try if the numbers make sense to me though.

[skiracer]

Ask me about a stock, and I'll highlight the good and bad things that I see about the financial statements. I'll point out any fraudulent/borderline accounting if I see it, and highlight things like debt levels, cash flows, etc.

I'm not here to recommend stocks or tell you whether you should buy or sell stock XXX. This is intended as a introduction to fundamental analysis and accounting and as a way to learn how to read financial statements.

Financial statements of banks, commodities, biotechs, and pharmaceuticals are out of my circle of competence and I will not be able to properly dissect and explain those statements.

is your analysis based strictly on the fundamentals of a stock.

[skiracer]

what do you think of NJR and KO?

[meteoraln]

is your analysis based strictly on the fundamentals of a stock.

That is correct. I will not be giving any opinions / predictions about the current / future prospects of a company. I don't plan on addressing any of its current / future competition, products, growth.

[peanuts]

OK, here's a fun one. You'll love to see this debacle. Yes, it's bad, but I think it will give us a great opportunity to see your analysis.

ZANE

And then, on the opposite side of the fundamental spectrum, check out this one:

USLM

[meteoraln]

Njr

what do you think of NJR and KO?

NJR - I can't do too much for you for this one since it's in energy. I really don't like it's return on assets %, which was 4.4% in 2010. Return on equity is marginal, at 16.6% for 2010. This is also reflected in its shareholder equity, which went from 645m to 725m from 2007 to 2010. Even if we add back the ~200m dividends paid out, 645 to 925 over 4 years is only around 10% return on equity.

Capital expenditures are taking up around half of its operating cash, which is a bit high for my more conservative criteria. Lower cap ex means more money retained for shareholders as profits. Its 607m total debt and 1.8bn total liabilities are higher than I like to see for its 725m shareholder equity.

With all that said, NJR looks viable, as in I don't see it being in any financial trouble in the near future. However, with the market historically averaging 8%-12% per year, I don't expect that its intrinsic value can significantly outperform the market, given its low return on assets and equity.

[wooish]

How about NYB and HOV two of favorite stocks of this board.

[skiracer]

[QUOTE=meteoraln;111094]NJR - I can't do too much for you for this one since it's in energy. I really don't like it's return on assets %, which was 4.4% in 2010. Return on equity is marginal, at 16.6% for 2010. This is also reflected in its shareholder equity, which went from 645m to 725m from 2007 to 2010. Even if we add back the ~200m dividends paid out, 645 to 925 over 4 years is only around 10% return on equity.

Capital expenditures are taking up around half of its operating cash, which is a bit high for my more conservative criteria. Lower cap ex means more money retained for shareholders as profits. Its 607m total debt and 1.8bn total liabilities are higher than I like to see for its 725m shareholder equity.

With all that said, NJR looks viable, as in I don't see it being in any financial trouble in the near future. However, with the market historically averaging 8%-12% per year, I don't expect that its intrinsic value can significantly outperform the market, given its low return on assets and equity.[/QUOTE

What about the fact that it has practically doubled in the past 1 1/2 - 2 years. But I like your approach to it and your numbers are pretty much on.

How about KO?[/B]

[skiracer]

How about NYB and HOV two of favorite stocks of this board.

definitely two of my favorites at the present time. I would like to hear his take on these two. His is an interesting point of view.

[billyjoe]

There is a nice cluster of Hovnanian model homes I drive by every couple weeks. Today I noticed the grass was very unkempt and their fancy sign is no longer there. I haven't heard any news.

-------------billy

[meteoraln]

what do you think of NJR and KO?

KO - Always nice to see revenues and net income increase every year, and accounts receivables are not increasing at an alarming rate. I see a jump in goodwill from 4.2bn to 11.6bn from 2009 to 2010, and total debt increase from 12bn to 23bn. My guess is that this was due to a significant acquisition. I can't say with certainty without checking out the 10K (which I will not be doing for most of my analysis)

KO uses a much noticeably smaller portion of its cash from operating activities than the previous NJR, around 25% per year. This is well reflected in KO's better return on equity numbers and ability to pay significant dividends, as well as increases in shareholder equity. Other than that, I don't see any other numbers that raise an eyebrow.

[meteoraln]

OK, here's a fun one. You'll love to see this debacle. Yes, it's bad, but I think it will give us a great opportunity to see your analysis.

ZANE

And then, on the opposite side of the fundamental spectrum, check out this one:

USLM

ZANE - Sorry to burst your bubble, but this one actually isn't fun. It has been losing money, and cashflow has netted flat over the past 4 years. There's nothing else worth looking at for ZANE. A company must make money, otherwise, it's not worth investing in.

USLM - This one is more interesting, although probably something that I shouldn't analyze since it's has roots in commodities. The reason is because I don't properly understand the accounting for companies like this. For example, inventory for oil companies is accounted for based on the "replacement price", rather than the traditional LIFO or FIFO. Then, there are things like the right to mine/drill in an area, and assets on the balance sheet which reflect an estimated amount of commodity in the location.

With that said, let's look at the numbers. As a company that isn't expanding operations, doesn't pay dividends or repurchase stock, it's important to see the cash balance increasing, which it does. I don't see significant movements in revenues, net income, accounts receivables, which makes me think the company is not growing. This is fine, but would be nice to see it start paying dividends. Otherwise, you'll start seeing its return on equity and assets drop, as the money can probably earn a higher return elsewhere. Its return on equity and assets are ok, nothing to rave about. Company is definitely viable, but probably not a star.

[mrmarket]

Meteoraln...I love this thread. It's great to see some fundamental analysis. We have some terrific technical analysts here so this really gives us some reflection. Stick around!

[meteoraln]

What about the fact that it has practically doubled in the past 1 1/2 - 2 years. But I like your approach to it and your numbers are pretty much on.

Well, I wouldn't say NJR has doubled.... looking at the chart, it went from a low of around low 30's right after the housing crisis to a high 45, perhaps a 50% increase.

I can't really say much about the movement in the price of any stock except for this. The market price can fluctuate wildly as people's emotions and feelings change. Fear had caused the prices of many stocks to unjustly drop during the housing crisis. With 20/20 hindsight, we see that there are businesses that were minimally affected by the the crisis, although their stock price had been a roller coaster ride.

Intrinsic value however, is something that changes very slowly. The problem with looking at intrinsic value is that it is not readily available like market value. Intrinsic value is also different for everyone. The intrinsic value for a company depends on what you feel is a reasonable rate of return.

Let's say there's a company that earns 3 dollars per year consistently for the past 50 years. How much should you buy it for? Given that you can put 100 in some type of bank account to earn 3 dollars per year in interest, there's no reason why you should buy this company for more than 100 dollars. If you were to pay 100, then it means you are happy receiving a 3% return. For someone who wants a 20% return, they cannot purchase this business for more than $15. In such a scenario, $15 would be the intrinsic value of the company. The market price would be what he is able to purchase it at. In the event that the market value is lower than the intrinsic value, you can be confident making a purchase knowing that you will be receiving a good rate of return.

[peanuts]

Excellent thread. Thanks for posting, and I look forward to more.