Don't Rush To Sell Stocks At These Levels [View article]
"I do not recall margin debt was very high or speculation in stocks was widespread in 1985."
You don't think that margin debt increased with the rising stock levels or that people were calling for overvaluation and excess speculation after stocks doubled over five years? Hindsight is 20/20 and that period doesn't look like speculation now...at the time, I'm sure many believed it was. There are bears in all market.
Don't Rush To Sell Stocks At These Levels [View article]
??? As a contributor, you should know that S.A. articles are written by different authors and there's not one voice (or a staff supporting one opinion). This article was a direct response to address the other article that you mentioned.
Don't Rush To Sell Stocks At These Levels [View article]
Buying back shares doesn't lead to share price increases, unless the shares are bought at prices which prove to be value accretive (oftentimes it's just the opposite and they are value destructive). The float is reduced, but at the cost of depleting an asset (cash) which may ultimately prove to have been more valuable than the repurchased shares.
Furthermore, acquisitions don't necessarily lead to increased share prices (again, it comes down to price) as they need to be funded with either new debt (i.e. a liability is added to match the acquired asset, so equity doesn't change) or shares (and resultant dilution).
Don't Rush To Sell Stocks At These Levels [View article]
Yes, dividend yields are low, as a result of current low dividend payout ratios (companies are keeping more of what they earn). That's another reason for optimism with respect to stock PRICES (but not returns)..
When dividend payout ratios are low, more of the return is expected to come from stock appreciation (versus dividends) as a larger share of net income is retained and contributes to higher retained earnings, increased book equity, and higher valuations (all other things equal).
Thanks for the comment, Zeldan. I'm just going to repost an earlier comment I made in response to another person who had the same concerns with you (regarding Sprint's historic accounting losses).
"...you invest based on the future and not the past. Sprint's trends are improving and reason for optimism.
Secondly, you need to better understand the underlying accounting issues with Sprint. In 2005, they made a massive acquisition of Nextel which added billions in assets to their books. Subsequently, they decided to close down that business and write-off those assets in an accelerated manner.
Now, the cash for the Nextel acquisition is already out the door, but they are still having to account for large depreciation/amortization expenses that have no impact on cash flow. If you look back at Sprint's cash flow statement over the last few years, you will see that they were generating billions in free cash flow, although net profit was negative.
This is why analysts often tend to focus on normalized free-cash flow generation over net income (particularly for special situations like Sprint), as net income can, have temporary disconnects from economic reality. It can work the other way, too. Some companies have depreciation and amortization expenses that vastly understate current and ongoing capital expenditure requirements and, thus, the income statement overly flatters their financial picture.
Once the writedown of the Nextel network/business is complete, you will see earnings/profit more in line with cash flow. Furthermore, once the "network vision" (a temporary drain, but a long-term booster on profitability) is complete should see vastly improved levels of profitability.
Don't Rush To Buy Stocks At These Levels [View article]
In the last 70 years, there have only been three bear markets of over 40% ('73, '00, and '08). Just because two of them happen to be in the last 12 years, I wouldn't assume that this is the new norm.
From Q1 '00 (around the beginning of the '00 bear market) to Q2 2012, U.S. GDP has increased by over 60%, in nominal terms, while the S&P 500 declined by 9% (also in nominal terms) over the same period. How long can such market underperfomance, relative to GDP, last (with bear market corrections more than offsetting the interim gains)? Going forward, should we expect another decade of market stagnation or the beginning of a secular bull market?
Is There Another Sprint In The Market, A Company With Massive Upside Potential? [View article]
Both LVLT and Sprint have plans for margin expansion (synergies for LVLT and network vision and other operational improvements for Sprint), but that's where the similarities end.
-- LVLT's growth is stagnant (0% y-o-y revenue growth last quarter versus 6% for Sprint). -- Visibility for LVLT's businesses is poor, while trends for Sprint are much easier to forecast. -- LVLT is valued at over 2x revenues, while Sprint is valued at less than 1x. -- LVLT is a cash burning machine, while Sprint (prior to NV), generated billions in annual FCF.
Bullish (long) Sprint and short LVLT (via puts). My bearish view on LVLT is better articulated, below.
Oftentimes, the debt covenants prevent such repurchases (particularly with respect to senior and/or secured debt covenants preventing the repurchase of subordinated debt). Also, companies with debt trading at such distressed prices often have liquidity issues which prevent such purchases.
If liquidity is not an issue and the covenants allow (or waivers are procured), then the open-market purchases, at discounted prices, would reduced the EV -- to the extent that net debt is reduced.
No, as discussed above. Market prices for existing debt are not relevant for EV -- as the discount/premium impacts debt holders, but not the company (they, and any potential acquirer, will have to pay par, regardless). Their obligations don't change with market prices, so neither does EV.
Say a company had $10 billion in debt, $10 in equity, and a EV of $20bn. I would have to pay $20bn to that company whether or not the debt was trading at 50 or 110 on the dollar.
I don't have a strong view on Clearwire. I do see Clearwire as a much more complex start-up/asset-play with greater risks, but potentially greater rewards, but I don't have a view on the attractiveness of risk/reward at current levels. I would note; however, that Sprint's fortunes are not dependent on Clearwire's success.
Enterprise value is based on the principle amount and not the market value value of the debt. That's because market discounts/premiums on debt prices don't reduce or increase the actual amount owed by the company. They are on the hook for the entire face amount, even if the debt trades at pennies on the dollar. Similarly, companies don't owe any more when there debt trades up substantially above par. They are on the hook for the entire face amount even if the debt trades at pennies on the dollar.
Sprint's debt, does indeed appear to be trading well these days, though (July issuance was trading up to over 111):
Why Sprint's New Moves Are Not Enough [View article]
"Stagnant growth"?
Sprint grew revenues by 6%, in the most recent quarter -- despite the continued drag of shutting down the Nextel business (Sprint platform revenues were up 16%). By comparison, AT&T grew revenues by 0.3%, for the same quarter.
Don't Rush To Sell Stocks At These Levels [View article]
You don't think that margin debt increased with the rising stock levels or that people were calling for overvaluation and excess speculation after stocks doubled over five years? Hindsight is 20/20 and that period doesn't look like speculation now...at the time, I'm sure many believed it was. There are bears in all market.
Don't Rush To Sell Stocks At These Levels [View article]
Don't Rush To Sell Stocks At These Levels [View article]
Furthermore, acquisitions don't necessarily lead to increased share prices (again, it comes down to price) as they need to be funded with either new debt (i.e. a liability is added to match the acquired asset, so equity doesn't change) or shares (and resultant dilution).
Don't Rush To Sell Stocks At These Levels [View article]
When dividend payout ratios are low, more of the return is expected to come from stock appreciation (versus dividends) as a larger share of net income is retained and contributes to higher retained earnings, increased book equity, and higher valuations (all other things equal).
Don't Rush To Sell Stocks At These Levels [View article]
Sprint Remains Substantially Undervalued [View article]
"...you invest based on the future and not the past. Sprint's trends are improving and reason for optimism.
Secondly, you need to better understand the underlying accounting issues with Sprint. In 2005, they made a massive acquisition of Nextel which added billions in assets to their books. Subsequently, they decided to close down that business and write-off those assets in an accelerated manner.
Now, the cash for the Nextel acquisition is already out the door, but they are still having to account for large depreciation/amortization expenses that have no impact on cash flow. If you look back at Sprint's cash flow statement over the last few years, you will see that they were generating billions in free cash flow, although net profit was negative.
This is why analysts often tend to focus on normalized free-cash flow generation over net income (particularly for special situations like Sprint), as net income can, have temporary disconnects from
economic reality. It can work the other way, too. Some companies have depreciation and amortization expenses that vastly understate current and ongoing capital expenditure requirements and, thus, the income statement overly flatters their financial picture.
Once the writedown of the Nextel network/business is complete, you will see earnings/profit more in line with cash flow. Furthermore, once the "network vision" (a temporary drain, but a long-term booster on profitability) is complete should see vastly improved levels of profitability.
Don't Rush To Buy Stocks At These Levels [View article]
From Q1 '00 (around the beginning of the '00 bear market) to Q2 2012, U.S. GDP has increased by over 60%, in nominal terms, while the S&P 500 declined by 9% (also in nominal terms) over the same period. How long can such market underperfomance, relative to GDP, last (with bear market corrections more than offsetting the interim gains)? Going forward, should we expect another decade of market stagnation or the beginning of a secular bull market?
Is There Another Sprint In The Market, A Company With Massive Upside Potential? [View article]
-- LVLT's growth is stagnant (0% y-o-y revenue growth last quarter versus 6% for Sprint).
-- Visibility for LVLT's businesses is poor, while trends for Sprint are much easier to forecast.
-- LVLT is valued at over 2x revenues, while Sprint is valued at less than 1x.
-- LVLT is a cash burning machine, while Sprint (prior to NV), generated billions in annual FCF.
Bullish (long) Sprint and short LVLT (via puts). My bearish view on LVLT is better articulated, below.
http://bit.ly/OFmPFT
Sprint Remains Substantially Undervalued [View article]
Sprint Remains Substantially Undervalued [View article]
If liquidity is not an issue and the covenants allow (or waivers are procured), then the open-market purchases, at discounted prices, would reduced the EV -- to the extent that net debt is reduced.
Sprint Remains Substantially Undervalued [View article]
Say a company had $10 billion in debt, $10 in equity, and a EV of $20bn. I would have to pay $20bn to that company whether or not the debt was trading at 50 or 110 on the dollar.
Sprint Remains Substantially Undervalued [View article]
Sprint Remains Substantially Undervalued [View article]
Sprint Remains Substantially Undervalued [View article]
They are on the hook for the entire face amount even if the debt trades at pennies on the dollar.
Sprint's debt, does indeed appear to be trading well these days, though (July issuance was trading up to over 111):
http://bloom.bg/R2J5Jo
Why Sprint's New Moves Are Not Enough [View article]
Sprint grew revenues by 6%, in the most recent quarter -- despite the continued drag of shutting down the Nextel business (Sprint platform revenues were up 16%). By comparison, AT&T grew revenues by 0.3%, for the same quarter.