Welcome to F Wall Street!

Found yr blog through Google, and I like your articles.

Just a few points about owner margins, or even GAAP profit margins:

1. Even with low owner margins (and low profit margins), a company may still have a competitive advantage – asset utilization. Take 2 companies, A with asset turnover of 5x, profit margin of 5%, and B: asset turnover of 1x, profit margin of 25%. Both companies are debt-free. For A, if all other competitors have asset turnovers that cannot match up or come close, A has a very big advantage in terms of asset utilization efficiency, and because low profit margins, less incentive for competitors/new entrants to come in, unless I can beat this company’s asset turnover. Now take B, which is generating only $1 for every dollar of assets, but with a profit margin and ROA of 25%. Much more incentive and determination for competition here, without going into qualitative measures (patents, brand name, etc).

Now assume both companies have $100 in sales. Let’s say sales fell $10 for both companies, Profit margins and assets remained the same. For A, because it has a higher asset turnover, it’s ROA won’t be impacted as much as to Company B. Now let’s say sales increased $10. Same thing here – ROA for A will be higher than ROA for B.

Example of companies that fit into A will be Walmart, and large efficient retailers. For B, more asset-intensive businesses like utilities, telecoms.

Not to say one is better than another, but just wanted point out that low net profit does not necessarily mean it’s a bad thing.

Pls keep writing!

redds79

Welcome back Chris B. It’s been far too long since I’ve been here too!

Another awesome post Joe; it has been far too long since I’ve visited this blog; I’ve forgotten how refreshingly clear you make things.

1) Topline has stayed flat ( in fact decreased marginally) for nearly four years.

2) Shareholder equity decreasing.

3) And the company is relying more on debt as a source of funding as can liabilities are on increasing compare to equity.

Even if the company is having a worthwhile Margin now, data shows that it may not be able to sustain it

and in pharma business where competition is increasing and law suits over patents are increasing and

drug making becoming complex and approvals not coming so fast is it still a good sector to be in ?

Joe / All , a lot of us do not understand the number you quite, I think it will save a number of posts and repeat efforts for some extra one time effort if you or someone who understands the number show us how the numbers are derived.

Thanks again and your thoughts please.

Regards

Ajay

If Pfizer took a 20% hit to revenue, it would likely experience a significant drop in earnings and Owner Earnings. Once it “normalized” (i.e., fired excess staff, reduced expenses, etc.) to meet the new revenue level, earnings and Owner Earnings would likely revert back to a more “normal” level of revenue as well.

Any time a business takes a hit or posts superior numbers, you have to ask yourself, “Is this a temporary condition and what will the result be in a few years?”

Make sense?

If you see in morning start, from the last 5 years 2004 – 2008 with the exception of 2006

Total Equity of Pfizer is declining.

2004 –>68278

2005 –>65627

2006 –>71358

2007 –>65010

2008 –>57556

Do you see this as a problem ?

On basis of above figures how you get the Owner earnings as positive. $10.6 billion in owner earnings last year on sales of $48.4 billion. I also did not got the point that the company will still produce $900 mn in owners earnings after taking a hit of 20% in revenue everything remaining same. How can a GAAP -ve earning results in positive owners equity.

Great Blog, thanks for educating us

Regards

Ajay

“That industry is in a state of flux right now. It’s historically earned very good returns on invested capital, but it could well be that the world will unfold differently in the future than in the past. I’m not sure I can give you a good answer on that.”

Buffett also told CNBC this:

Joe Kernen asks about recent purchases of Glaxo and Sanofi? Why? Buffett says he made the decision to buy those stocks and that with drug companies he knows less specifically about those companies than, say, a candy company. Hard to make a bet on a specific drug company based on a drug that might be in the pipeline. “If you have a group” of drug companies, you’ll “probably do OK.” Would he buy a domestic drug company? Yes, but he does like earnings coming from abroad than earnings coming from the United States. Most big drug companies in the U.S. do get a lot of their profits from overseas.

long time! you’ve stumped me on this one. you say,

“Pfizer would still be able to crank out more than $900 million in owner earnings”

but how are you coming up with the 900 million? if O.E. is 22%, then shouldn’t FCF be 8.5Mill? Where did I go wrong?

Dave miller asked a similar question, but I still don’t understand.