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David Trainer

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  • Off-Balance Sheet Debt [View article]
    Thanks for your comment.
    I think you are over-complicating matters.
    Adding operating leases back to the balance sheet has been standard operating procedure for the rigorous types for many years.

    With respect to the asset that gets added back with the liability, it is simply the same value as the liability added back to the asset side of the balance sheet. Ergo, the asset you record on the balance sheet is just a mirror image of the liability. No trouble at all.

    The point is, as with many of our adjustments, that investors are FAR better off making these adjustments even if they are perfect b/c the adjustment gets them FAR closer to the true earnings and ROIC of the business than making no adjustment at all.

    "Better to be vaguely right than precisely wrong."

    As a former accountant and member of FASB's Investor Advisory Committee, I can tell you that footnote data is absolutely critical to diligent analysis of earnings and stock valuation. There is enormous amounts of useful data in the footnotes. And I am not really sure how one could read too much into them.
    Jul 10 12:02 PM | 2 Likes Like |Link to Comment
  • Off-Balance Sheet Debt [View article]
    True, in the case of liquidation operating leases have a significantly different impact than debt, but most equity investors are investing in a company based on the assumption that the company will continue its operations. Including operating leases as debt and invested capital make it easier to compare the operations of companies that lease their assets and companies that take on debt to purchase assets.

    I don't think investors should make no distinction between operating leases and debt: a diligent investor should understand the different types of liabilities a company has and their implications. That's why New Constructs' models clearly show the amount of adjusted debt attributable to operating leases. Here's an example from our model for WAG:
    Jul 9 05:17 PM | 2 Likes Like |Link to Comment
  • Off-Balance Sheet Debt [View article]

    That's exactly my point. Current FASB rules don't require companies to account for operating leases on the balance sheet. However, companies use leased assets to generate revenues, so they should be accounted for in invested capital, and future lease payments, like debt, have a senior claim on cash flows to stockholders. Treating operating leases as debt helps investors get a truer sense of the companies operations.
    Jul 9 03:52 PM | 2 Likes Like |Link to Comment
  • Panera Bread: Excellent Management [View article]

    The main reason Panera has no reported debt is because it leases its cafes, fresh dough facilities, and trucks. So while it doesn't have any debt, it has over $1.2 billion in contractually obligated operating leases. Discounting these obligations to their present value, PNRA has the equivalent of $961 million in debt (over 100% of net assets) that's not recorded on the balance sheet.

    Here's my model containing those numbers and my calculations:

    This doesn't make PNRA necessarily a bad investment, but it's something that does need to be considered when analyzing the company. FASB is currently considering a proposal to require companies to account for operating leases on the balance sheet. If this proposal is implemented, those operating leases are going to be recorded as debt in the not too distant future.
    Jul 1 10:10 AM | 2 Likes Like |Link to Comment
  • Danger Zone For This Week: REITs [View article]

    My point is that the recent drop in REIT prices is just the start of what I think could be a much larger regression. I realize saying that interest rate hikes are going to hurt REITs isn't a particular novel argument, but I think my fundamental analysis of the valuation of REITs vs. their current profitability adds something to the discussion.
    Jun 26 11:33 AM | 2 Likes Like |Link to Comment
  • Reviewing The Sears Risk Of Insolvency Using The Altman Z-Score [View article]
    My models bring me to the same conclusion.
    I wonder how your score would change when you take into account the off-balance sheet liabilities, which I detail here:

    BTW - the MSF Investments guy made a zillion comments on my SHLD article too. He seems to be working full time to get his message on SHLD out. Maybe he is Eddie Lampert?
    May 27 10:52 AM | 2 Likes Like |Link to Comment
  • Danger Zone For This Week: [View article]

    I mention both Amazon's cloud services and its TV content in the article. The issue is that cloud services are also essentially undifferentiated, meaning Amazon will still have to compete on price in a market with many companies, and the little buzz that Amazon's TV shows have generated has been largely negative.

    As for the Amazon's tablets and ereaders, that's another product that faces stiff competition that Amazon has to rely on low prices to attract customers, to the point where Amazon actually sells Kindles at a loss and counts on ebook sales from them to make any money at all.

    Like I say in the article, Amazon is a good company. It will continue to grow and remain profitable. The issue is that its valuation implies it will grow bigger than Walmart. These peripheral services may help grow Amazon's profitability some, but to justify its stock price it needs massive growth in its core retailing business that I just don't see being feasible.
    May 22 10:29 AM | 2 Likes Like |Link to Comment
  • Footnotes Diligence Drives Cisco Pick [View article]
    New Constructs does not do target prices (imply more precision that I think is possible in this business.

    I would say that at its current level of ROIC, the stock has to get over $40/share to start looking expensive.
    May 17 03:39 PM | 2 Likes Like |Link to Comment
  • Danger Zone For This Week: Apple [View article]
    Honestly, the author of that Fortune article reveals a lack of sophistication when he says he has to look up ROIC and cannot understand my model, which is 100% transparent.

    You will find "ROIC" in nearly every respected book on finance. Wiley gave me a chapter on the topic (and a bit more) in The Valuation Handbook:
    May 15 05:33 PM | 2 Likes Like |Link to Comment
  • Danger Zone For This Week: Apple [View article]
    Thank you for your comment.

    Sorry to hear about your droid experience. I had a bad one too. It is not the old droids that compete with AAPL, it is the current ones and the future one.

    IN increasing number of Galaxy 4 owners think it is better than the iPhone. In fact, the guy at the Verizon store advised me to buy the latest Galaxy over the iPhone last winter when I went to purchase a new phone.
    May 15 11:52 AM | 2 Likes Like |Link to Comment
  • Danger Zone For This Week: Apple [View article]
    Cash per share for AAPL is $126.36.
    The link below shows my calculations and data values behind $283 share price implied by he 70% ROIC and behind the $240 share price implied by 50% ROIC.
    The link is to a file showing my model, which I think is the most transparent way to explain my calculations.
    This link takes you to the “Investing 101″ section of my site, which provides definitions for ROIC, NOPAT and Economic Book Value.

    Once you see how my model works, you can perform your own scenarios on valuation based on whatever margins, ROIC, or revenues levels you want.
    Specifically, a 20% ROIC implies a 3% NOPAT margin, which would yield $5.1bn in NOPAT on $170bn in rev. That level of NOPAT implies a share price of about $192/share.

    Thanks for the great question.
    May 15 11:45 AM | 2 Likes Like |Link to Comment
  • Danger Zone For This Week: Apple [View article]
    Thanks Mike.
    I want to be transparent about my thought process. Plus, if I did not mention the prior call, I would be vilified for it.
    May 15 11:33 AM | 2 Likes Like |Link to Comment
  • Danger Zone 4/23/2013: Sears Holdings [View article]
    How is your valuation of the real estate different from what the company discloses under the $7.9 billion?

    As for the brands, if they were so valuable, don't you think they'd generate more revenue?

    How does issuing bonds affect the value of the debt in this situation?
    True, someone with a beter balance sheet could refi -but who would want to do that and why - esp considering my analysis?
    Apr 23 05:07 PM | 2 Likes Like |Link to Comment
  • Express Scripts: Strong EPS And Cash Flow, But Some Questions Too [View article]
    Thanks for the link to my article.

    I agree with your comment on ROE and ROA. They are low b/c of a bloated balance sheet owing to acquisition-driven growth strategies. The issue there is more about the denominator than the numerator.
    Apr 5 10:45 AM | 2 Likes Like |Link to Comment
  • Danger Zone 4/2/13: Express Scripts, Inc. [View article]

    I tend to be somewhat skeptical of earnings forecasts, especially when they're dealing with synergies coming out of acquisitions. The large number of Medco employees that ESRX has already laid off suggests that there might not be as much synergy between the two companies as initially planned.

    My bigger issue, though, is that the market seems to be exclusively paying attention to the positives that you mention without factoring in the negatives on the balance sheet. There is upside and downside to this company, but all the upside is already reflected in the market price, leaving only the downside for investors.
    Apr 2 03:14 PM | 2 Likes Like |Link to Comment