A large write-down of its deferred tax assets could be devastating for Citi–over 30% of its total book value is comprised of net deferred tax assets. Our detailed analysis of the Notes to the Financial Statements also found these RED FLAGS :
1. Over $7bn in off-balance sheet debt
2. $2.2bn in under-funded Pension liabilities
3. Over $10bn in Asset write-offs
HIDDEN GEM: Our detailed discounted cash flow analysis shows that MDT’s current valuation (stock price of $31.95) implies that the company’s profits will decline by 50% and never grow again. Our economic earnings model shows profits are growing, not declining, which makes the Risk/Reward for MDT Very Attractive.
RED FLAG: Our analysis of the Financial Footnotes reveals: the company has written off over $60bn in assets over the last twelve years. That is a big number compared to the company’s market cap of roughly $2.2bn and its net assets of about $1.3bn. This results in economic earnings of -$5,346mm compared to Net Income of -$866mm during the last fiscal year. For details on what causes the difference between Economic Versus Accounting Profits, see Appendix 3 on page 10 of our free report on JDSU.
HIDDEN GEM: Our detailed valuation model shows that MCD grew its “economic” profits more than it accounting profits during its last fiscal year. Economic profits rose by $272mm while accounting profits rose by $238mm. For details on what causes the difference between Economic Versus Accounting Profits, see Appendix 3 on page 10 of our free report on MCD.
RED FLAG: The main driver of the difference between Economic and Accounting earnings is FDX’s $11.9bn of off-balance sheet debt, a big number compared to $19.7bn in Net Assets and $25.6bn of market value.
Here is our free report on Sandridge Energy for Ask Matt readers. Our analysis of the Financial Footnotes reveals a major RED FLAG: the company has written off over $3.4bn in assets in just the last two years.
HIDDEN GEM: Our detailed valuation model shows that IBM grew its “economic” profits more than it accounting profits during its last fiscal year. Economic profits rose by $1.15bn while accounting profits rose by $1.09bn.
In case you needed proof beyond the Global Research Settlement that Wall Street research cannot be trusted, Morgan Stanley delivers by admitting “inadequately disclosing conflicts of interest on the part of its research analysts.”
Accounting data was not designed for equity investors, but for debt investors. “Earnings, earnings per share and earnings growth are misleading measures of corporate performance.”(from page 66 in The Quest For Value by Bennett Stewart, Harper Collins 1991.)
Overall, the Risk/Reward of investing in Yahoo’s stock looks Very Dangerous to me. There is lots of downside risk given the Misleading Earnings and there is little upside reward given the already-rich expectations embedded in the stock price.