Allen Cooke

Deep value, value, telecom
Allen Cooke
Deep value, value, telecom
Contributor since: 2012
I emailed Microsoft for the definition of the "net deferrals" so we can see what is going on. I will put the answer up here.
Hi Tom, I believe the net number refers to the difference between the unearned revenue and the expense of the unearned revenue which is booked into assets. The company still recognizes 100% of the unearned revenue from GAAP in the quarter while adding back the net unearned revenue booked in the quarter. So the Q2 adjusted income includes some of the same income from the Q1 adjusted net income.
The definition of cloud is remote computing it could be down the hall or around the planet. Salesforce sells a product that is hosted on their computers so it is technically cloud. Sales of a MY SQL license is not cloud revenue as are many other MSFTs products listed as cloud sales they do not fall under the definition of cloud
EBITDA for 4th Q dropped from 10.1 Billion in 2014 to 8.1 billion in 2015. Cash flow before investing, dividends or stock buybacks ( EBITDA - tax) dropped from 8.1 to 7.2 billion from 2014 to 2015. The difference in 2014 and 2015 EBITDA and cash flows also reflects the tax rate change from 25% in 2014 to 15% in 2015. So just saying operational performance is declining but it is being portrayed as improving.
Any thoughts on the actual theory presented?
I find the earnings release highly misleading. Moving unearned revenue into operating income is a highly questionable practice for non GAAP presentations. It makes no sense because it deletes the cost associated with the revenue. The company also leaves in the GAAP recognition of unearned revenue from previous periods for the quarter. Having your cake and eating it too. MSFT fails to mention the 5 cent per share benefit from jurisdictional tax avoidance strategies on net income. Also if you examine the companies' inclusion of products in its' definition of cloud revenues you will see that many of the products do not fit the actual definition of cloud computing. So MSFT is hyping cloud sales as the primary component of a supposed comeback of the company. The companies Non GAAP presentation is not an apples to apples comparison and is highly misleading.
Good job thinking about this. We need to shift the debate to why these policies have basically been a failure. Unfortunately we live in a world where central bankers do not or can not understand that they may be the problem. From an environmental metaphor: the government saved the whales in 2008 but did not do anything for the plankton. The plankton (small business, 80% of the economy) form the base of the food pyramid so as they shrink the whales and sharks shrink but the government wants to continue on with this failed policy (more QE!) even though the empirical evidence shows that it is failing. The failure seems to have been obscured to some degree by the short term positive effect
of low interest rates. Unfortunately we will probably need a bad economic cycle for these guys to even question why these interventions have failed.
I agree that "Zirp" creates unnecessary investment that does not add long term economic value
J bonds are the canary in the coal mine. Stocks will probably follow
Thanks for the article. We have been looking at this area as well. Possibly this time is different!
The real problem is the supply of lower investment grade and the coupons. The supply has grown by 60% since 2010 and many of the coupons are at or below 4%. No one wants to own this stuff as it is coming down, so the current yield is going to have to cross the 8% level to be competitive. On the way to 8 it is going to have to go above this in order to attract the attention of investors. This will cause the ability to refi at current rates to drop precipitously. In 2008 and 2000 we had current yields of 6,7,8%, in this category, so the widening of the spread offered meaningful incentive. In order to be incentivized now, investors are going to need a much lower bond price. So I would expect extreme weakness in the BBB BBB- category and possibly up into the A area. Although the current yield will only rise to 8 or 9 the yield to maturity wil be in the 13- 15% area
The market can do anything but the fundamentals powering the 2009 - 2015 bull market are long gone. Many stocks are trading at multiples 2 or 3 times their value. I would value the S&P at about 1100 right now. 13 X GAAP earnings which is a generous multiple
Any thoughts on the bonds of SDRL, they are trading in the 60s and 70s. Also what is the relationship between sdrl and sdlp.
Thx for the article
Bobcat, I do not believe the fed can control availability of loans in a down economic cycle with rising default rates. We are seeing a disintegration of BB and lower debt prices which is causing the yield to rise on its' own and may likely reach into the investment grade area soon
bobcat I like this comment. I don't think there has been enough investigation into the fed purchasing of the S&P indexes, if it is happening. One point: why does the index rise in the overnight on no news or bad news? This would be the time the fed could get the most bang for their buck. Your insight may be ahead of the curve here..but we don't know because the information is not available.
The funny thing is that the banks and brokers that could not manage a mortgage portfolio of 2 or 3 trillion are now managing a $100 trillion + derivative portfolio comprised of international currencies, interest rates, stock indexes and commodities with counter parties across many jurisdictions. Due to their lobbying they don't have to disclose anything and with level 3 pricing rules they mark their own positions! So when the party ends it could end really fast. I would use Mr. Roberts advice from above and be ready
It seems that the best thesis that the market has in its' favor is that its' not going down yet. The short and medium term outlook for earnings is lower and the GAAP EPS for the S&P 500 is below 100 and is headed below 90 for next year. There is a total break down going on in high yield which usually precedes or is commensurate with a stock market drop. Adam has a point that we will probably go below an average PE ratio before normalizing. I think the twist here is the 100 trillion in worldwide debt, a lot of which can never be paid off and the 30 or 40 trillion in over inflated real estate values. Who needs stocks when BB rated (and lower rated) bonds are entering into free fall and beginning to yield over 10% across the board. As far as stock market valuations, we all recognize that the earnings are being pushed through various means. There are other valuation techniques, such as price to revenues. Using this metric the market is at an all time high. What makes it worse is the derivative exposure. On December 10th Glencore will report earnings. If its bad, the credit rating could be lowered below investment grade leading to margin calls on the $ 40 billion derivative portfolio.
It would have been a lot better if the market went down in September and further in October to brace for difficult times. As where we are right now I am reminded of the summer of 2000! "Internet stocks aren't going up any more but they are not going down."
At the current EV, the multiple would be 7 X ebitda "IF" they hit the 1.2 B in EBITDA in 17. So there's no upside based on comps. Dempster is right the thing is priced wrong. Turn arounds should trade at a discount to the comps due to the risk of not turning around, At 8 X TTM EBITDA the stock is worth $1 or 2. 8 is a good multiple right now due to the possibility of a softer season.
Good point at the current EV, the multiple would be 7 X ebitda "IF" they hit the 1.2 B in EBITDA in 17. So there's no upside based on comps. Dempster is right the thing is priced wrong. Turn arounds should trade at a discount to the comps due to the risk of not turning around, At 8 X TTM EBITDA the stock is worth $1 or 2. 8 is a good multiple right now due to the possibility of a softer season.
Hi Arie, thanks for writing the article. We have felt that CSIQ is hard to own because of what we view as the significant interference from the short community. Also what do you think the outcome of the yieldco will be?
Thx
One thing I think that most of the participants in these types of forums are missing is the fast decline in medium and lower credit quality bonds. These are usually concurrent with large market pullbacks or precede them. At this point we have had a number of large declines and an indication of $ 300- 700 billion in upcoming defaults. The liquidity is draining out quickly and this number of defaults will cause a reduction in investors bond portfolios of 1-2 trillion, which of course will overflow to the equity indexes as well. I don't think there is any possibility of avoiding another downdraft here.
It may not have been noticed last week that the government of Brazil opened up discussions with Petrobras for equity injections. (PBR has over 100 B of debt). This is not good news.
For a startling example please see (U.S. Steel): http://bit.ly/1T8rNZo
The GAAP EPS of the S&P is falling below $100.00, 2nd Q was I think $22 ( the estimate for this year is $90-95). Although there are some good points in the adjusted EPS most of them are biased to the upside. Have you ever seen one company produce adjusted EPS (down) based on currency tail winds? FactSet uses the adjusted, which in most instances, does not accurately reflect one time accounting adjustments but are used as an opportunity for companies to boost the perception of growth or meet analysts projections. Sales to price is harder to manipulate, but not impossible (good job MSFT). This ratio shows that the market is at the highest multiple in history.
Server and cloud are not roaring ahead. Cloud is growing at less than 2% annually and server unit sales are down but look O.K. due to price increases imposed on a captive customer.
Hi Adam, what I found disturbing was the amount of enthusiasm the company demonstrates when portraying its' results as "great" instead of dismal. Such as: "We are making strong progress across each of our three ambitions by delivering innovation people love,". In general MSFT lost market share in cloud, unit sale of SQL licenses are dropping and the company classifies a number of revenue items as cloud revenues which are highly dubious as being cloud revenues. All of the headline numbers in the press release are Non Gaap. The actual numbers for the quarter are terrible. Gaap operating income was down greater than 20% if you add back a 2014 accounting charge. The overall portrayal by the company is ridiculous: "Similarly we are making great progress towards our goal of $20 billion in annualized commercial cloud revenue run rate, which now exceeds $8.2 billion". Based on the sequential growth the MSFT definition of cloud revenues is growing at less than 2% annually and they are loosing market share. The company is more interested in selling its' stock. Well... the quarter went so well and things are so great. The company went straight of to the bank to borrow another $13 billion.
424B filing: http://1.usa.gov/1X6sIiQ
I believe these trade in amounts of 100k face value per bond. The bonds seem relatively cheap and you do have additional immunity from default because of the discount. These may be hard to trade for individuals and I would keep the overall exposure low or below 5 or 6% which could be impossible with the minimum face value. The easiest way to participate in the possible merger is through the shares.
I thought the BB article a little misleading because of the overwhelming positive effect of the news of the possible investment. Some of the default scenarios were debunked when the company received financing for REFI and equipment purchase from a Chinese bank. The article states that the chance of default is 7%, so not sure what point they are making. There is no doubt the company has work to do over the next 12 months as far as debt pay down and refi. Since the have about $4 b (USD) in cash and a possible 4b from the Russia fund it seems that default in 2016 is remote.
Also the company said they are buying short term bonds back on the conference call.
There are a few other things to consider. Such as the break down in high yield or lower quality bonds and the deteriorating margins and earnings of the S&P. However it also seems that there is a decent amount of M&A activity. There is also quite a high amount of debt worldwide so if the debt bubble starts to burst and rates rise on their own we would see a prolonged downturn in equities.
After the L.A. port numbers and the terrorist attack the futures should be down 30-40 points. As failed economic policies have resulted in no economic benefit the Fed has now resorted to buying S&P in the overnight in order to give the appearance of economic stability. When this fails there will be the dickens to pay.
The fed is buying S&P futures in the overnight. There is no way the futures are only down 9 points.
Absurd
Currency headwind also means you have absolutely no pricing power in said currency.
Don't forget about the absurd current commentary on these "adjusted" numbers. Beat on top and beat on the bottom!!. Doesn't anyone realize that firstly analysts always try to bring in the numbers a bit low if they have a buy rating and secondly that many of the adjusted numbers are highly suspect.
You could be underestimating the next bust! The technical set up for the next down turn looks quite severe. With the market inexplicably heading up since September 17th the stage is set for a larger short term reversal below the August lows. The short term economic news is worsening and the medium term looks terrible. Due to the extreme over-leveraging across the board you could see a collapse in the world wide debt markets due to simple over supply. Ironically demand for debt will go down as prices collapse. Consider a world with the U.S. 10 year at 7 or 11%. I don't think stocks would have anything close to their current values. There is little hope for any government or many of the corporations to organically refund any debt maturities in the next 5 or 10 years. As the 100 trillion + debt bubble deflates, demand for everything will collapse across the board and corporate profits will plummet. Friday is the product of people realizing that there is serious risk in the economy and little hope for equities to withstand the upcoming recession (at their current prices). The selloff was also exacerbated by the October rally, which lacked any fundamental substance, but took us back to the top. If we had gone down 5 or 10%, from the lows, the market would be in better condition to withstand the economic news. As it stands now we are going into a market that has the triple problem of recession, interest rates and earnings.
The earnings you see from Fact Set include the adjustments to EPS. A lot of these are not justified. The GAAP earnings for the S&P is falling below $100 at a fast rate and the adjusted are only down 3-4%
I wanted to comment that all of the government stimulus has been directed to the big companies. 90% of our economy is comprised of businesses with 99 or fewer employees. The top 10% are failing because the 80 or 90% are getting strangled with taxes, regulation and no ability to borrow. In the economic eco system these businesses are the plankton and the top 10% are the sharks and whales. So as we kill small business we strangle the entire economy. Politicians will be forced to deal with it as the economy blows up in everyone's' face. Also fustrated
The technical set up for the next down turn looks quite severe. I think that due to the extreme over-leveraging across the board you could see a collapse in the world wide debt markets due to simple over supply. Ironically demand for debt will go down as prices collapse. Consider a world with the U.S. 10 year at 7 or 11%. I don't think stocks would have anything close to their current values. There is little hope for any government or many of the corporations to organically refund any debt maturities in the next 5 or 10 years. As the 100 trillion + debt bubble bursts, demand for everything will collapse across the board and corporate profits will plummet. Friday is the product of people realizing that there is serious risk in the economy and little hope for equities to withstand the upcoming recession (at their current prices). The selloff was also exacerbated by the October rally, which lacked any fundamental substance, but took us back to the top. If we had gone down 5 or 10%, from the lows, the market would be in better condition to withstand the economic news. As it stands now we are going into a market that has the triple problem of recession, interest rates and earnings. Sorry, but I don't see any way out
the net debt is all the debt - the cash and + or - the derivative values (hedges) which are used to hedge foreign currency denominated debt. The Net debt went from 34.644 billion Reals to 37.241 reals from the 2nd to 3rd Q. This included 1.519 billion in non cash mark to market MTM derrivative hedges. This is indicated to reverse in 4th quarter. So the net debt increased by 1 billion Reals during the quarter. This is mostly due from the interest on the debt load which was 1.7 billion in 3rd Q. The plan the company has for dealing with this is: Asset sales ( 10B held as for sale as of 3rd Q), borrowing at lower rates, possible investment from LetterOne and possibly the return of some of the 12 billion in judicial deposits. There is a table on page 20 of the Oi earnings release that explains it. The total debt is 54 billion Reals and cash is about 16 b reals. So they have to do something in the next 18 months to reduce the debt! the link for the release is below also there is info in the presentation regarding this
http://bit.ly/1GZl2rp