Comments on: Research In Motion Analysis http://www.fwallstreet.com/article/8-research-in-motion-analysis/ Value Investing Blog Mon, 16 May 2011 10:55:06 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Joe Ponzio http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2894 Joe Ponzio Wed, 17 Jun 2009 01:59:53 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2894 Capital Expenditures are only "positive" (that is, <i>added</i> to cash flow, and as BPal stated) if the company was selling plants, property, and equipment - more than it was purchasing. This could happen in the case of reorganizations, restructurings, etc. In fact, if you watch GM closely, you might see this very thing as it sheds some of its less profitable factories. Keep in mind that Morningstar is a starting point for your research. Always go to the SEC's IDEA Database (IDEA Database | RIMM Filings) - because your valuation of the business means precisely zero without the predictability factor, which can only be measured by learning about the business and management (<i>i.e.</i>, reading annual reports). Capital Expenditures are only “positive” (that is, added to cash flow, and as BPal stated) if the company was selling plants, property, and equipment – more than it was purchasing. This could happen in the case of reorganizations, restructurings, etc. In fact, if you watch GM closely, you might see this very thing as it sheds some of its less profitable factories.

Keep in mind that Morningstar is a starting point for your research. Always go to the SEC’s IDEA Database (IDEA Database | RIMM Filings) – because your valuation of the business means precisely zero without the predictability factor, which can only be measured by learning about the business and management (i.e., reading annual reports).

]]> By: Graham Jervis http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2896 Graham Jervis Tue, 16 Jun 2009 17:59:03 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2896 thanks for clearing the air folks. thanks for clearing the air folks.

]]> By: Joe Ponzio http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2895 Joe Ponzio Tue, 16 Jun 2009 16:03:31 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2895 As a follow up (to Graham Jervis): Capital expenditures are monies spent by the company on plants, property, and equipment - money that is not expensed in a single year. If a company with $1 million in earnings buys a $1 million piece of machinery, you won't see earnings reduced to zero, even if the company paid cash for the machine. By looking at capital expenditures, you get a better picture of the company's actual cash needs to run the business. Without looking at capital expenditures, you might buy the above business thinking that it could earn $1 million a year for you. In reality, it is barely breaking even which means that you - as an owner - shouldn't expect much growth or income from the company. Make sense? As a follow up (to Graham Jervis): Capital expenditures are monies spent by the company on plants, property, and equipment – money that is not expensed in a single year. If a company with $1 million in earnings buys a $1 million piece of machinery, you won’t see earnings reduced to zero, even if the company paid cash for the machine.

By looking at capital expenditures, you get a better picture of the company’s actual cash needs to run the business. Without looking at capital expenditures, you might buy the above business thinking that it could earn $1 million a year for you. In reality, it is barely breaking even which means that you – as an owner – shouldn’t expect much growth or income from the company.

Make sense?

]]> By: Rona http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2890 Rona Tue, 16 Jun 2009 08:47:27 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2890 I left a msg for Morningstar and it seems now they have fixed this problem. I found this out when trying the JNJ example from Joe's book. He used $12B as FCF for 2007, which is operating cash-capex while Morningstar had much higher number when I first looked. But I think it looks fine now. I left a msg for Morningstar and it seems now they have fixed this problem. I found this out when trying the JNJ example from Joe’s book. He used $12B as FCF for 2007, which is operating cash-capex while Morningstar had much higher number when I first looked. But I think it looks fine now.

]]> By: BPal http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2889 BPal Tue, 16 Jun 2009 06:22:22 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2889 You cannot have positive capex. To rollforward PP&E you start with beginning net PP&E, add capital expenditures, subtract depreciation, and subtract disposals. You are left with ending net PP&E. It's possible that the company had proceeds from sale of assets that exceeded capex for the year and Morningstar grouped the two categories together resulting in a positive Capex number. A company would have to be selling quite a lot of assets for its proceeds from sale to exceed capex regularly. (Because of depreciation, what you get for selling an asset is usually a lot lower than the cost of new equipment). I would be worried about investing in this company if the above were the case. I would suggest digging into the filings to see what the company actually presented as capex and try to figure out what is going on. You cannot have positive capex. To rollforward PP&E you start with beginning net PP&E, add capital expenditures, subtract depreciation, and subtract disposals. You are left with ending net PP&E. It’s possible that the company had proceeds from sale of assets that exceeded capex for the year and Morningstar grouped the two categories together resulting in a positive Capex number. A company would have to be selling quite a lot of assets for its proceeds from sale to exceed capex regularly. (Because of depreciation, what you get for selling an asset is usually a lot lower than the cost of new equipment). I would be worried about investing in this company if the above were the case.

I would suggest digging into the filings to see what the company actually presented as capex and try to figure out what is going on.

]]> By: Graham Jervis http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2887 Graham Jervis Mon, 15 Jun 2009 18:56:53 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2887 If you go to Morningstar, put in the ticker ROY and then go to cash flow, you will see a positive capex, and what does Morningstar do, they subtract it from the cash from operations. i went reading in the archives and i see that Joe mentions subtracting capex, so when i see a positive capex i should add it. Need some clarity on Morningstar's approach to determining FCF, not too sure if its correct as Rona states. If you go to Morningstar, put in the ticker ROY and then go to cash flow, you will see a positive capex, and what does Morningstar do, they subtract it from the cash from operations. i went reading in the archives and i see that Joe mentions subtracting capex, so when i see a positive capex i should add it. Need some clarity on Morningstar’s approach to determining FCF, not too sure if its correct as Rona states.

]]> By: Graham Jervis http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2886 Graham Jervis Mon, 15 Jun 2009 18:24:48 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2886 Another question, how does the DCF model take into account debt? for example, the company AEP seems to have great FCF. Infact applying the Fwallstreet model excel sheet, i am getting a value for this company assuming no growth till 2018 and then growth at 5%/yr till 2028 gives a share value of $130.62. This is assuming a Discount rate of 15%. Now, Morningstar has a fair value for this at 31.00, is it that Morningstar is taking into account the 15.9 billion in long term liabilities? even though AEP has managed to grow their FCF at an average of 10.3% since 1999 up to 6.4 billion in 2008, they have managed to also grow their debt from 6.4 billion in 1999 to 15.9 billion in 2008. So, the question is, even though the DCF model is saying it is a screaming buy, i have my doubts due to the monumental debt this company has. infact, i am wondering if i should short this stock. How does DCF take into account debt? or it doesnt at all? Another question, how does the DCF model take into account debt? for example, the company AEP seems to have great FCF. Infact applying the Fwallstreet model excel sheet, i am getting a value for this company assuming no growth till 2018 and then growth at 5%/yr till 2028 gives a share value of $130.62. This is assuming a Discount rate of 15%.

Now, Morningstar has a fair value for this at 31.00, is it that Morningstar is taking into account the 15.9 billion in long term liabilities? even though AEP has managed to grow their FCF at an average of 10.3% since 1999 up to 6.4 billion in 2008, they have managed to also grow their debt from 6.4 billion in 1999 to 15.9 billion in 2008.

So, the question is, even though the DCF model is saying it is a screaming buy, i have my doubts due to the monumental debt this company has. infact, i am wondering if i should short this stock. How does DCF take into account debt? or it doesnt at all?

]]> By: Graham Jervis http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2885 Graham Jervis Mon, 15 Jun 2009 17:55:00 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2885 I have now looked at other companies, they seem to add capex to cash from operations even though its shown as negative. that means if capex is positive, then it will be subtracted? this is saying that these companies have negative capital expenditures so thats added to the FCF? I have now looked at other companies, they seem to add capex to cash from operations even though its shown as negative. that means if capex is positive, then it will be subtracted? this is saying that these companies have negative capital expenditures so thats added to the FCF?

]]> By: Graham Jervis http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2884 Graham Jervis Mon, 15 Jun 2009 17:49:22 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2884 Hi Rona, does this mean the operation capex should be subtracted instead of added? i see it as a negative and the subtracted the currency adjustments and also the change in cash. i hope Morningstar does not do this for every company. i need to double check some companies i have been looking at. Hi Rona,

does this mean the operation capex should be subtracted instead of added? i see it as a negative and the subtracted the currency adjustments and also the change in cash. i hope Morningstar does not do this for every company. i need to double check some companies i have been looking at.

]]> By: Rona http://www.fwallstreet.com/article/8-research-in-motion-analysis/#comment-2883 Rona Sun, 14 Jun 2009 08:32:43 +0000 http://www.fwallstreet.com/article/8-research-in-motion-analysis#comment-2883 I just realized it is a mistake made by Morningstar.com. Their FCF were inflated b/c they used cash from operation capex. I just realized it is a mistake made by Morningstar.com. Their FCF were inflated b/c they used cash from operation capex.

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