Friday, September 19, 2014
Few companies publicly announce EFN numbers. However, today Goldman Sachs announced that Tesla will likely need to raise at least $6 billion between 2017 and 2025. Tesla has currently raised $2.3 billion toward its $5 billion gigawatt plant in Nevada. This outlay, combined with other projects that the company has announced, indicate that Tesla will need to raise significant capital over the next several years.
The Altman Z-score is designed to measure the financial strength (or lack thereof) for a company. But, as corporate financing decisions have changed, so has the Z-score. Historically, a Z-score less than 1.8 indicated possible financial distress, but Edward Altman argues that now negative Z-scores indicate financial difficulty. Currently, there are are six companies in the S&P 500 with negative Z-scores. Of course, the Z-score was designed to measure the financial strength of manufacturing companies. For non-manufacturing firms, the Double Z Prime score is more appropriate
If we assume that the stock market is efficient, where should you invest? In an efficient market, the best alternative is likely a passive index fund. For example, funds that track the S&P 500 exactly mimic the portfolio composition of the S&P 500. Stocks are bought or sold only when changes are made to the companies included in the S&P 500. As a result, there is no management decision on which stocks to buy or sell, so management costs are small and the return of the fund will almost exactly track the S&P 500. With an actively managed fund, the manager must outperform the market in order to offset the management fees, a daunting if not impossible task in an efficient market. Eugene Fama, the Nobel prize winning father of the efficient markets hypothesis, argues that a passive investment strategy is likely the best performer. And none other than famed investor Warren Buffett has directed that most of his wealth be invested in passive index funds after his death.
Tuesday, September 16, 2014
Stock buybacks for the first six months of 2014 have reached $338.3 billion, the largest amount in the first six months of a year since 2007. The top repurchasers so far this year are Apple ($32.9 billion), IBM ($19.5 billion), and ExxonMobil, Pfizer, and Cisco, each with more than $9 billion in repurchases. Even more amazing is that companies spent 31 percent of the cash flow generated in the second quarter on buybacks. We feel the textbook makes a compelling case that share repurchases are a more tax efficient method of paying dividends. However, critics argue that share repurchases are used to artificially boost stock prices and that management isn't investing as much as it could in the business, which will hurt long-term growth.
Microsoft announced that it was buying Minecraft company Mojang AB for $2.5 billion. The purchase is will likely help Microsoft in the gaming console market and the mobile market. The success of the acquisition also depends on whether the gaming industry is sustainable. In other words, Minecraft may drive some users to Microsoft products, but the ultimate success of the acquisition depends on Microsoft's ability to turn Minecraft into a franchise game.
Financial scandals always seem to draw headlines, from Enron to Parmalat. Regulations such as Sarbanes-Oxley have been enacted to help reduce the likelihood of future financial scandals. With the additional tools, the SEC has become more focused on efforts to uncover financial fraud. For example, if a company impairs an asset, the SEC will ask why a company didn't impair the asset earlier. The SEC is also making sure that as company's financial statements have year-to-year consistency, as well as whether a company's accounting is consistent with industry practices.As a result, company management must be familiar with the company's accounting procedures and internal controls. Remember, the goal of the SEC is that a company accurately disclose its financial condition and risks
Sunday, September 14, 2014
In recent years, the yield spread for low-grade or junk bonds has been relatively low. However, recent economic and Federal Reserve indicators have led junk bond investors to demand a higher yield spread. For example, Global Management LLC recently sold eight-year junk bonds with a coupon rate of 9.25 percent. When the bonds were originally marketed, the coupon rate was 8.5 to 8.75 percent. And AK Steel Holding had to increase the coupon rate in its new bonds from 7.5 percent to 7.75 percent. For BofA Merrill Lynch, the yield spread that investors require for that company's high yield debt has increased from 3.8 percent to 4.05 percent.