Tom Armistead

Q3 Earnings Season: Not the Time to Get Short

Good point on PRU, MET, HIG, other insurers such as ALL would also be affected.

All these companies report two versions of Book Value - GAAP and ExlAOCI (excluding all other comprehensive income). The gap between the two has been narrowing in recent quarters and the 3rd quarter will be more of the same. Losses on CMBS and RMBS are not going to be as bad as the market was pricing in.

I'm long MET, PRU and ALL.

Where Have All the Buybacks Gone?

It is often instructive to list long term debt against the sums expended in buybacks over the past two or three years, then compare the share prices paid to current market value. All too often, the company has borrowed money it will have trouble repaying in order to pay inflated prices on buybacks. This is the hallmark of bad management, inept and selfish waste of capital.

Corrective action would be for boards, when authorizing buybacks, to state strict and rational economic criteria for the prices to be paid. A conservative multiple of EBITDA (4X?) comes to mind, or maybe tangible book, as minimum criteria.

New Stock Valuation Method: Price to Book to Price to Tangible Book

Agree with previous commentator, when book value is higher than tangible book value it is normally the result of goodwill from acquisitions. Some companies do large numbers of successful acquisitions, in which case the goodwill is a mark of success: they bought businesses and made money because they never had to recongnize impairments.

In other cases, the goodwill is an impairment waiting to happen: the acquisitions were poorly timed or they overpaid for what they bought.

I think the author is attracted to the concept of assets that are not reflected in book value. One place to look is physical assets that have been depreciated or kept at original cost: meanwhile inflation or increases in replacement cost have increased their value. Some retailers own a lot of real estate, as an example.

Another possibility is R&D expense: GAAP does not permit capitalizing R&D but in some cases R&D creates patents or customer relationships that are extremely valuable. So a company trading around tangible book value that has high R&D expense may have intangible assets that are not reflected on the books at all.