Friday, April 24, 2015

The Pain Of A Strong Dollar

Earnings season is upon us and companies seem to be falling line in blaming the strong dollar for earnings weakness. And while some argue that the strong dollar excuse is invalid, in reality the strong dollar is hurting most U.S. based companies. Companies in the S&P 500 have overseas sales that average 45 percent of total sales. And things are even worse for Nike, which has sold more shoes this year than last year, but the company's revenue has declined because of the strong dollar.

The Cost Of Unethical Behavior

Finance textbooks do not generally spend a lot of time on ethics. This is because in finance, we generally argue that if the market believes that certain behavior is unethical, the company is punished financially, which means management is not maximizing the company value. This week, Deutsche Bank was fined $2.5 billion for its role in fixing LIBOR and Euribor, and Petrobas was forced to write-off $5 billion due to the corruption scandal that has entangled the company.  

Sunday, March 22, 2015

An Uber Valuation

So is Uber ($40 billion) really worth more than insurers Aetna ($38 billion), Prudential ($38 billion), or grocer Kroger ($37 billion)? Probably not, but venture capital valuations can be quite tricky. A recent article discusses some of the fuzziness associated with valuing a private company. In fact, some venture capitalists argue that the valuation of private companies is just a placeholder. Snapchat, the photo-messaging app, has a $15 billion valuation, yet the company has almost no revenues to speak of. One reason for the extraordinarily high valuation of private companies is that VCs often have deals that protect them going forward.

Bondholders Lose Protections

With the recent low interest rates, investors are searching for yields. As a result, borrowers are able to reduce protections offered to lenders. Moody's Investors Services tracks bond covenants and recently the Moody's Bond Covenant Index reached 4.51, a record high. In this index, 1 indicates the strongest covenants, while 5 indicates very weak covenants. In other words, investors are willing to give up protection in an effort to increase yields.

Wednesday, March 4, 2015

Actavis' Bond Price Jump

Actavis completed its $21 billion bond offering yesterday. The bond issue, which will be used to pay for the company's acquisition of Allergan, was the second largest corporate bond issue ever. Although you might think that it was difficult for Actavis to sell $21 billion in debt, the company received offers to purchase $90 billion in bonds. The high demand for the bonds proved to be a benefit to investors in the bonds, as the market value of the bonds increased by $334 million today in the first day of trading.

Exxon Slows Capital Spending

As we mention in the textbook, capital spending is often cyclical. For example, although the recent drop in oil price is welcome news at the gas pump, it is bad news for Exxon's capital budgeting. Exxon said that it may delay some investments if oil prices stay low. Even though Exxon's projects are long-term, a short-term decrease in the price of oil can still affect the profitability of a new project. In a filing last week, Exxon announced that its capital spending in the next several years would only be $34 billion, down from a previously announced capital budget of $37 billion.

Overseas Cash Continues To Grow

Eight of the largest U.S. tech companies increased overseas cash balances by $69 billion last year. In fact, overseas cash held by U.S. firms grew to $2.10 trillion during 2014, up 8 percent from 2013. The high U.S. tax rate is the reason for the cash holdings, although several companies took a tax hit in 2014 to repatriate earnings. For example, Duke Energy repatriated $2.7 billion in foreign earnings, but paid $373 million in taxes to do so. GE still has the largest offshore cash balance, at an astounding $119 billion.