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Diligence Institute

Highlights From New Constructs Investment Research

Footnotes Adjustments for Earnings & Valuation Diligence

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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

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

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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

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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

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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

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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

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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

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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

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

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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

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

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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)?

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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

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

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

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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

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

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

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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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For Ask Matt readers:Caterpillar Inc. (CAT) — Dangerous Rating

For Ask Matt readers:Caterpillar Inc. (CAT) — Dangerous Rating

Caterpillar Inc. (CAT) gets our Dangerous Rating. This means CAT’s quality-of-earnings are not attractive and the stock’s valuation is very expensive. For example, the valuation of the current stock price ($112.16) implies the company will grow its profits at 16% compounded annually for 20 years. The takeaway: there are better stocks to choose from. See details in our free report.

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