03/02/14 - 12:47 PM EST
The best part about Berkshire Hathaway CEO Warren Buffett's annual investor letters is that they always provide some kind of reality check.This year, in one sentence, he takes on one of the biggest diversion tactics of all -- one promulgated by many companies as the way they should be viewed, and then gullibly accepted by investors: EBITDA or earnings before interest, taxes, depreciation and amortization."When Wall Streeters tout EBITDA as a valuation guide, button your wallet," he wrote.Here's the windup to that comment (emphasis added by me):"I won't explain all of the adjustments - some are tiny and arcane - but serious investors should understand the disparate nature of intangible assets: Some truly deplete over time while others in no way lose value. With software, for example, amortization charges are very real expenses. ..."READ FULL POST
02/28/14 - 08:21 AM EST
ITT Education Thursday insisted that the Consumer Financial Protection Bureau's suit against the operator of for-profit schools "never should have been filed." According to the press release: "The complaint overwhelmingly focuses on issues that are unrelated to consumer finance, and attempts to cast a negative light on aspects of ITT Tech's activities that are extensively regulated by other government agencies. The core claims concern a mere six months of loans, but the Bureau knows that independent third parties provided those loans, and the loan programs ended years ago. Significantly, ITT Tech did not make any money, in interest or fees, from those third-party programs, which were designed to help students during the recent economic downturn. We are disappointed that the Bureau chose to sue rather than work with ITT Tech...."READ FULL POST
02/25/14 - 10:12 AM EST
This update to our Reality Check of two weeks ago on RealPage: Not only did the apartment-management software company miss fourth-quarter revenue and earnings, but it missed and guided down on perhaps the most important metric of all: Organic growth -- and not in a small way. At RealPage, the target was 20% to 25%. As recently as a quarter ago, the company appeared to be exceedingly confident it would easily hit it. Consider this exchange between analyst Jobin Mathew of Deutsche Bank and CFO Tim Barker - Mathew: "In the past, you've always talked about kind of your target growth model of operating between the 20% to 25% range. So looking out into 2014, without actually providing a guidance number, do you think you could step up closer to the high end of your target range?" Barker: "Yes, we like to provide consistent guidance one year out...READ FULL POST
02/24/14 - 12:42 PM EST
Here's a reality check: I've been on the wrong side on raising red flags over Netflix's metrics, which have been trumped by a stock that prices the company as a monopoly with pricing power. Last quarter's strong subscriber growth helped fuel investor confidence. Now comes the company's deal to pay Comcast for better service. It's good news for customers because faster service means less annoying buffering. But as for investors -- one small detail is missing: What are the costs? I get it: Strategically Netflix may not want to disclose prices until it has negotiated similar deals with all other cable companies and Internet service providers. Still, analyst after analyst is saying that deals like this will ultimately lower Netflix's costs. Maybe they will but... until the costs are disclosed, the ultimate impact is anybody's guess....READ FULL POST
02/21/14 - 03:11 PM EST
A just-published academic paper on multi-level marketers supports the notion that the multi-level marketing industry has a serious unresolved issue or two.Before you go dismissing this as just another academic paper, consider the authors: FTC senior economist and pyramid scheme expert, Peter van der Nat and Bill Keep, dean of the business school at The College of New Jersey. In 2002 they co-authored a highly regarded paper explaining what differentiates a legitimate multi-level marketer from a pyramid scheme.In this piece, which doesn't pick on any company in particular, Van der Nat and Keep give an exceptionally well-spelled-out history of multi-level marketers, but then dive into the deep-in-the-weeds legal decisions and "continuing concerns."Perhaps nothing in the paper is more compelling to multi-level marketing aficionados as their discussion of internal consumption. This is when distributors get compensated for sales to themselves and other distributors. A key issue in the debates on Herbalife, Nu Skin and others is how much compensation comes from internal consumption vs. genuine external sales.READ FULL POST
02/20/14 - 02:05 PM EST
All of this may seem obvious, but in the event it doesn't: As long as Tesla TSLA can forecast big production numbers, everything else is irrelevant. A lack of real earnings. Irrelevant. Concerns over the quality non-GAAP earnings. Irrelevant. Falling sales growth? Oh, please -- I-r-r-e-l-e-v-a-n-t! Here's all that matters right now: Tesla makes beautiful cars. They're as common, in my part of San Diego, as the Fiat 500. (Honestly, they're the two most diametrically opposed yet distinctive cars on the road right now). CEO and founder Elon Musk could charm his way out of a ditch. Optically, it's a wonderful American success story -- the kind of story Wall Street loves to love and, because of its well-into-the-future valuation, shorts love to hate. Reality: Even with my pal and colleague Doug Kass telling his Real Money readers today why he shorted more Tesla today, I couldn't put a red, green or yellow flag on the company in my Reality Check because: A) It has already left deep tire tracks on the backs of those who have dared to bet against it...READ FULL POST
02/20/14 - 08:46 AM EST
From the there-ought-to-be-a-law department. On Feb. 3, nine insiders at multi-level marketer Usana, including CEO David Wentz, got some good (no, make that great!) news: They had received a slug of what appear to be well-priced stock-appreciation rights. The idea behind these grants, according to the company's proxy, is "to drive long-term Company performance as well as individual Executive performance." The last time they were handed out was in July 2011. Before that, April 2010. The difference between now and then: Then, in 2011, the grant was made the day after earnings were released. In 2010 they were made the day earnings were released. This time they were made the day before earnings were released. Wouldn't you know it? This time earnings were much better than expected and the shares soared 19% on the news. (The stock-appreciation rights were priced just before the stock rose.) Last time, in 2011, earnings weren't good enough to keep the shares from sliding 11%....READ FULL POST
02/13/14 - 11:55 AM EST
Listening to Cisco's earnings call last night was painful. CEO John Chambers mentioned transition (or some derivative) 27 times. (Considerably more than any time in the past year.)And picking up on a theme that he has used in recent quarters, he talked about the "Internet of Everything" 16 times. (The record was 20 times at last year's analyst day.)To give the full context, he said:"In our view, this next wave of the Internet, the Internet of Everything, will encompass every technology transition we are seeing in the market today, with the network squarely at the center. We are building the platform for the Internet of Everything with scale and security to address the unparalleled complexity requirements. We plan to continue to disrupt the market and disrupt ourselves to deliver the value and solutions our customers require."Sounds good on paper, but the proof is in the numbers: Sales down 8%. Forecast for another down 6% to 8%. Gross margin of 53.3%. A quarter ago and year ago it was north of 60%. Don't even go to earnings.READ FULL POST
02/12/14 - 11:22 AM EST
A recurrent theme of Reality Check is keeping an eye on seemingly high-growth acquisitive companies whose growth, in reality, appears to be slowing.Which is why, when apartment-management software company RealPage reports fourth-quarter financial results, perhaps as soon as Thursday, the quality of the numbers will be front and center.For good reason: Quality, or lack thereof, appears to be getting messy.To understand why, you first need to understand what RealPage does. Its cloud software helps rental housing managers, mostly multi-family, determine pricing so they can maximize revenue -- not much different than the airlines price seats. Or as the company says in its 10-K:"Our solutions enable property owners and managers to increase revenues and reduce operating costs through higher occupancy, improved pricing methodologies, new sources of revenue from ancillary services, improved collections and more integrated and centralized processes."READ FULL POST
02/11/14 - 10:58 AM EST
I have no idea what the short interest was in Ralcorp when it was bought last year by ConAgra, but I'm beginning to think it might have been higher than average. When ConAgra bought Ralcorp a year ago, it was a big deal. Ralcorp was the largest U.S. maker of private label foods and, on the deal, its stock jumped 26%. It was also one of those activist plays, with hedge fund Corvex's Keith Meister (the guy from ADT) on the board -- pushing for the company to sell itself. Fast-forward to today: ConAgra doesn't mince words in its earnings release, with a not-so-subtle confession that Ralcorp is giving it indigestion. It starts with the first words of the headline: "ConAgra Foods Lowers Near-Term EPS Outlook" CEO Gary Rodkin then says, "We are intensely focused on improving our business. It is taking longer than expected to stabilize the performance of the Private Brands segment, which has been below plan because of pricing, sales force coverage..."READ FULL POST
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