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How To Value A Stock, Step 1: Profit (NOPAT)

Thursday, August 28th, 2014 11746800996_b38f4c37d9_m

Our first step to gauge the value of a company is to determine the true, after-tax cash flows generated by its operations. We call this Net Operating Profit After Tax (NOPAT).

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30+ Accounting Adjustments To Get The Truth About Earnings & Valuation

Tuesday, October 1st, 2013 Accounts book

Reported earnings don’t tell the whole story of a company’s profits. They are frequently manipulated by companies to manage earnings.

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Footnotes Adjustments for Earnings & Valuation Diligence

Monday, July 1st, 2013 Footnotes Adjustments for Earnings & Valuation Diligence

This article details the uniquely rigorous diligence behind each of our ratings on 3000 stocks, 7000 mutual funds and 400 ETFs. It contains reports on all the adjustments we make to convert GAAP data to economic earnings and derive true shareholder value in a discounted cash flow model.

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Non-Operating Tax Adjustment – NOPAT Adjustment

Tuesday, June 25th, 2013 NOTA

Without removing the tax impact of non-operating items, one still gets distorted picture of a company’s operating profitability.

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Income and Loss from Discontinued Operations – NOPAT Adjustment

Friday, June 21st, 2013 IFDOT

We remove all income and losses from discontinued operations in calculating operating profit because this income/loss will not recur in the future, and we are looking for the true profitability of the continuing and core operations of a company.

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Change in Total Reserves – NOPAT Adjustment

Monday, June 17th, 2013 ReservesDelta

Reported earnings don’t tell the whole story of a company’s profits. They are based on accounting rules designed for debt investors, not equity investors, and are manipulated by companies to manage earnings. Only economic earnings provide a complete and unadulterated measure of profitability.

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Non-Operating Income Hidden in Operating Earnings – NOPAT Adjustment

Monday, June 17th, 2013 NewConstructs_NOPATadj_hiddenincome

Non-operating items in operating income are unusual gains that don’t appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring income items distort GAAP numbers by artificially raising operating earnings.

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Non-Operating Expenses Hidden in Operating Earnings – NOPAT Adjustment

Wednesday, June 12th, 2013 ENOPTIO

Non-operating expenses are unusual charges that don’t appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring expenses distort GAAP numbers by lowering operating earnings.

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Asset Write-Downs Hidden In Operating Earnings – NOPAT Adjustment

Monday, June 10th, 2013 AWDIO

Asset write-downs are unusual charges that don’t appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring items distort operating earnings by overstating core-operating costs.

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Footnotes Adjustments for Earnings & Valuation Diligence

Thursday, June 6th, 2013 Footnotes Adjustments for Earnings & Valuation Diligence

This report summarizes our series of reports on how to convert GAAP data to economic earnings and derive true shareholder… Read more >>

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The Truth Behind AAPL’s Numbers

Thursday, May 23rd, 2013 AEEG2

This article provides some empirical evidence behind my putting Apple (AAPL) in the Danger Zone last week because its return on invested capital (ROIC) is outrageously high. That fact underscores why valuing this company or any other with the expectation that such a high ROIC was sustainable would be a mistake.

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Footnotes Diligence Drives CSCO Pick

Thursday, May 16th, 2013 Footnotes Diligence Drives CSCO Pick

If you bought Cisco Systems Inc (CSCO) last August when I recommended it to investors, or when I recommended it again in January, or any time between May 10, 2012 and now when the stock has had my Very Attractive rating, then today has been a good day for you.

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Definition: Price-To-EBV, or Price to Economic Book Value ratio

Monday, June 18th, 2012 PEBV_chart

The difference between the stock price and Economic Book Value (EBV) of s stock measures the difference between the market’s expectation for future profits and the no-growth value of the stock.

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Why is S&P Raising Its Outlook on Delta (DAL)?

Tuesday, June 5th, 2012 DAL_Fig2

After S&P’s recent upgrade to its outlook on Delta Airlines [s: DAL], I cannot help but to wonder how they do their analysis.

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New Constructs’ Offerings: Company valuation models

Thursday, March 22nd, 2012 New Constructs’ Offerings: Company valuation models

Our Company Valuation models are very sophisticated discounted cash flow and earnings quality models.
An enormous amount of works goes into every model. I wish I could offer a short-cut (beyond our ratings and reports) for understanding our models.

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Smoking Out the Truth: Buy MO

Tuesday, February 28th, 2012 Smoking Out the Truth: Buy MO

As discussed in “The Real Earnings Season Starts Now”, annual reports are the best source for developing investment ideas. I provided my clients with dozens of insights in 2011 that delivered impressive returns, and I continue that trend with my recommendation of MO.

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Buy LRCX: More Value Than Meets the Eye

Tuesday, September 27th, 2011 figure1_LRCX

Most of my research and publishing tends to focus on companies manipulating accounting rules to make their reported earnings look better than the real economic cash flows of their business.
It is unfortunately rare that I find a company whose economic earnings are outpacing the reported accounting results and whose stock is cheap.
One such company is Lam Research (LRCX – very attractive rating). One of September’s most attractive stocks, LRCX offers investors hidden value.

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Research In Motion, Ltd. (RIMM) – Very Attractive Risk/Reward Rating For Ask Matt Readers

Thursday, August 11th, 2011 Research In Motion, Ltd. (RIMM) – Very Attractive Risk/Reward Rating For Ask Matt Readers

Here is a free copy of our report on RIMM for read­ers of Ask Matt.
The val­u­a­tion of RIMM’s stock implies the com­pany’s after-tax cash flow (NOPAT) will permanently decline by nearly 75%.

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Nucor Corporation (NUE) — Dangerous Risk/Reward Rating for Ask Matt Readers

Thursday, July 7th, 2011 Nucor Corporation (NUE) — Dangerous Risk/Reward Rating for Ask Matt Readers

The valuation of NUE’s stock implies the company will grow its after-tax cash flow (NOPAT) by nearly 20% compounded annually for 20 years.

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RIMM’s Stock Offers A Free Option On a Comeback

Tuesday, June 14th, 2011 Figure1_RIMM

Yes, RIMM is losing market share and fast. Yes, RIMM’s Blackberry Playbook tablet is a dud. Yes, the stock has been a stinker recently. And yes, none of what I wrote at the beginning of this article would matter if the stock were not super cheap.

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