its earning that count summary
TRANSCRIPT
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$$
Pre!ace
Wh We Ha#e to 'e at the Topo! +,r *ame
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Which Asset C"ass Is 'etter a",e Toda /
Stocks: Bonds:
S&P 500: 1355S&P earnings (TTM): $66
10-year Treasury: 3 5!"
S&P 500 earnings source is Barron#s Market data as o % r ' !00
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0
Stoc1s 'etter a",e Than 'onds2P3E 'asis
Stocks: Bonds:
!1* (1355+$66) ! * (1+3 5!)
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P+, Mis eads . ,cono/y %t .n ection Point
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4
Rea" (%56ear P3E7 The Stoc15'ond *ap Narrows
Stocks BondsS&P 500
ea 10- ear ,arnings (a2g )Bond yie d (10-year Treasury)
1355$5'
3 5!"
P+, !3* ! *
Source: .rrationa ,*u eranceco/ ,arningsPo4er co/
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e etiti2e yc es o ,nt usias/ and 7es air
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Wi"" Histor Repeat/
Pea1 Tro,gh Contraction
7ate10 r
P+, S&P 7ate10 r
P+, S&P earsS&P
%8
6+1'01 $89 !3' 1!+1'!0 89 9 (:.8 54;
'+1'!' --9 3 3 6+1'3! 49 9 -.
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55- r %2g 300 s % o2e urrent 3 5!" ie d
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I! (%56ear Re#erts) Then 'onds +!!er More a",e
Stocks BondsS&P 500
ea 10- ear ,arnings (a2g )Bond ie d (55-year a2g )
1355$5'
6 "
P+, !3* 16*
%s t e cost o /oney rises cor orate earnings and P+, /u ti es getunis ed
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We Need to 'e at Top o! +,r *ame
. /arket re2erts to eit er 4e
a2e i) e* icit ear /arket o 30 today or ii) decadeo attis S&P 4 i e earnings catc -u?e do not a2e ene it o P+, e* ansion ca 1' !-1''' 4 en it c i/ ed to * ro/ 9* and roduced a
13" %8.ntroduce ,arnings Po4er 1-!-3 Process to e youna2igate c o y in2est/ent 4aters
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esources:
Pro o ert S i er#s 4e site:
tt :++444 irrationa e*u erance co/+
To 2ie4 t e ea 10- ear P, 7ata c ick ere:
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Section I
The *rowth Trap
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Man Wa s to Ma1e Mone on Wa"" Street
Aet-net
Su/-o -t e- arts
isk ar itrage
ata yst
%cti2ist
S ort se ingTec nica ana ysis
*rowth
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*rowth Stoc17 Compan with Rising EPS
,PS to $1 ! in 1''' ro/ $0 09 in 1''0
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17/115( ?owest P3E =#a",e>Source: Dere/y 8rant a/ 8M@ @ct !009
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(&(&
Three =-> + stac"es Con!ronting *rowth In#estor
1 Poorearnings
ua ity
8%%P inco/e state/ent as our ( ) structurai/itations So Eust ecause a co/ any is ro ita e
in t e traditiona sense o t e 4ord does not /eant at it as aut entic earnings o4er
! o/ etiti2ead2antage4anes
Success u co/ anies attract i/itators T is is goodor consu/ers ad or o4ners
3 Pre/iu/ tointrinsic 2a ue
?e redict y e*tra o ation so gro4t stocks o tenget us ed eyond rea 4ort
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(:(:
Section II
+ stac"e (7 Poor EarningsB,a"it
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$%$%
The *AAP Income Statement
To create co/ ara i ity a co/ anies o o4 genera y acce tedaccounting rinci a s (8%%P)
o ert#s u es o @rder or cor orate %/erica? en you o en an annua re ort 10-F or 10-G and ook at
inancia s state/ents t at#s 8%%PMany in2estors take 8%%P at ace 2a ue> t ey t ink ,PS is < ard=
nu/ er ikeH
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H eig t o Ien4ay#s 8reen Monster (39 eet)
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$$$$
',t EPS is a So!tD N,m er
8%%P inco/e state/ent as our ( ) structura i/itations % do ar o earnings or one co/ any#s /ay not e co/ ara e toa do ar o ,PS ro/ anot er co/ any or or sa/e co/ any ro/one year to ne*t
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$-$-
*AAP P ?Fs Go,r =0> Str,ct,ra" ?imitations
1 .n2est/ent in !i9ed capita" is ignored so 4 en ca ita s endingis greater t an de reciation t e co/ any /ay e ro ita e on
8%%P asis ut s ort cas! @/its in2est/ent in wor1ing capita" so 4 en recei2a es and
in2entory gro4 aster t an aya es and accrued e* enses t eco/ any /ay e ro ita e on 8%%P asis ut s ort cas
-. Intangi "es ike &7 ad2ertising e/ oyee education are
e* ensed e2en t oug t e ene its 4i ast /ore t an oneaccounting eriod
0. Stoc1ho"dersF e ,it is ree e2en t oug o4ners a2e ano ortunity cost
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$0$0
*AAP P ?Fs Go,r =0> Str,ct,ra" ?imitations
(. In#estment in !i9ed capita" is ignored) so when capita"spending is greater than depreciation the compan ma e
pro!ita "e on *AAP asis ,t short cash.! @/its in2est/ent in wor1ing capita" so 4 en recei2a es and
in2entory gro4 aster t an aya es and accrued e* enses t eco/ any /ay e ro ita e on 8%%P asis ut s ort cas
-. Intangi "es ike &7 ad2ertising e/ oyee education are
e* ensed e2en t oug t e ene its 4i ast /ore t an oneaccounting eriod
0. Stoc1ho"dersF e ,it is ree e2en t oug o4ners a2e ano ortunity cost
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$8
Notes on Capita" Spending
Ii*ed ca ita is ui dings trucks te e one net4orks etc? en a co/ any uys i*ed ca ita it s ends t e cas today ut
or accounting ur oses de reciates out ay o2er asset#s e* ecteduse u i e 7e reciation ena es co/ anies to /atc currentsa es 4it current e* enses and uture sa es 4it uturee* enses. ca e* is greater t an de reciation a co/ any /akesin2est/ent in i*ed ca ita .n2est/ent in i*ed ca ita is a use ocas T is cas out ay as to co/e ro/ so/e4 ere> e gc ecking account i uidate ot er assets orro4ings or stocksa es ?i in2est/ent roduce ig er uture sa es cost sa2ings;Be4are o ca ita -intensi2e co/ anies T e !0" 4it ig estca ita s ending gro4t agged /arket y 1 5" a year during1'93-1''6 4 i e o4est !0" eat /arket y 1" a year (PauStur/ S/art Money Dune !005)
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T eStreet co/ (TS M)
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$
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$&$&
E9pensing In#estment in Gi9ed Capita" s,a"" Red,ces
*AAP Earnings
T eStreet co/ (TS M)($/ s) 8%%P ,* enseAet inco/e (inc $3M o de reciation)
- Ii*ed ca ita in2est/entK %dEusted net inco/e
$31
n+a$31
$31
!$!'
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$:$:
Side ar7 Are Ac ,isitions a Cape9 E ,i#a"ent/
T eStreet co/ (TS M)(/i ions) 8%%P ,* enseAet inco/e
- Ii*ed ca ita in2est/ent- !0" o !009 %c uisition ($30+5 years)K %dEusted net inco/e
$31
n+an+a
$31
$31
!6
$!3
%c uisitions are 1) a use o cas !) a su stitute or ca itas ending and 3) t eir ayo is uncertain 7e reciate dea s o2er 5years
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-%-%
*AAP P ?Fs Go,r =0> Str,ct,ra" ?imitations
1 .n2est/ent in i*ed ca ita is ignored so 4 en ca ita s ending isgreater t an de reciation t e co/ any /ay e ro ita e on
8%%P asis ut s ort cas$. +mits in#estment in wor1ing capita") so when recei#a "es
and in#entor grow !aster than pa a "es and accr,ede9penses the compan ma e pro!ita "e on *AAP asis ,tshort cash.
-. Intangi "es ike &7 ad2ertising e/ oyee education aree* ensed e2en t oug t e ene its 4i ast /ore t an oneaccounting eriod
0. Stoc1ho"dersF e ,it is ree e2en t oug o4ners a2e ano ortunity cost
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-(
Notes on Wor1ing Capita"
?orking ca ita assets inc ude recei2a es in2entoryot er current assets ( ut not cas /arketa e
securities)> 4orking ca ita ia i ities are aya esaccrued e* enses ?orking ca ita is ? % - ? J? i e it is good to a2e /ore assets t an ia i ities4 en 4orking ca ita increases ro/ one year to ne*tt is is an in2est/ent in 4orking ca ita
.n2est/ent in 4orking ca ita is use o cas t at doesnot a ear in 8%%P inco/e state/ent Sti ike i*edca ita in2est/ent it as to e inanced so/e o4
% ro ita e co/ any can su er i uidity s ueeCe i itcan#t co ect recei2a es and+or se in2entory in ti/e y
/anner
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rocs ( @L)
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----
Str,ct,ra" ?imitation $7 In#estment in Wor1ing Capita"
rocs .nc ( @L)($/i s) 1!+31+06 1!+31+09
?orking ca ita assets:
ecei2a es.n2entoryTota ? assets
?orking ca ita ia i ities:
Paya es %ccrued ,* ensesTota ? ia i ities
Aet 4orking ca ita.n2est/ent in net 4orking ca ita
$666
$15!
$31$95
$99
$153!
$ 01
$ 359$1 0
$!61$1
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-0-0
E9pensing In#estment in Wor1ing Capita" s,a""Red,ces *AAP Earnings
rocs .nc ($/i s) !009
Aet inco/e- .n2est/ent in 4orking ca itaK %dEusted net inco/e
$161$(16)
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-8-8
Sometimes WC is a So,rce o! Cash
B ue Ai e (A.J,) ($/i s) !009
Aet inco/e- .n2est/ent in 4orking ca itaK %dEusted net inco/e
$19(1 )$31
% negati2e in2est/ent in 4orking ca ita is 4onder u > it#s ike a2inga Eo t at ays you today or 4ork you 4i do in t4o 4eeks
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-4-4
Str,ct,ra" ?imitation $7 In#estment in Wor1ing Capita"
B ue Ai e (A.J,)($/i s) 1!+31+06 1!+31+09
?orking ca ita assets:
ecei2a es.n2entoryTota ? assets
?orking ca ita ia i ities:
Paya es %ccrued ,* ensesTota ? ia i ities
Aet 4orking ca ita.n2est/ent in net 4orking ca ita
$!15
$19
$699$9
$(59)
$!1
$!5
$ 610$'6
$(91)$(1 )
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- Str,ct,ra" ?imitations
1 .n2est/ent in i*ed ca ita is ignored so 4 en ca ita s ending isgreater t an de reciation t e co/ any /ay e ro ita e on
8%%P asis ut s ort cas! @/its in2est/ent in 4orking ca ita so 4 en recei2a es and
in2entory gro4 aster t an aya es and accrued e* enses t eco/ any /ay e ro ita e on 8%%P asis ut s ort cas
-. Intangi "es "i1e R ) ad#ertising) emp"o ee ed,cation are
e9pensed e#en tho,gh the ene!its wi"" "ast more than oneacco,nting period.Stock o ders# e uity is ree e2en t oug o4ners a2e ano ortunity cost
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-&
Notes on Intangi "es
.ntangi e gro4t - roducing initiati2es are &7 ad2ertising ande/ oyee education ?e ca t e/
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8oog e (8@@8)
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0%0%
epreciation Intangi "es +#er E9pected se!," ?i!es,a"" Increases *AAP Pro!its
8oog e (8@@8)($/ s) - !009 8%%P 7e reciate
Pro it e ore &7- &7K @ erating inco/e.ncrease (")
$9 !0! 1!0$5 0
$9 !01 316$5
16"
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0(0(
Str,ct,ra" ?imitation -7 Intangi "es are E9pensed
8oog e (8@@8)($/ s) !005 !006 !009&7 (8%%P) $5'' $1 !!' $! 1!0
7e reciation eriod 3 3 37e reciation $!00 $ 10 $909
ear 1ear !ear 3
Tota
$!0013!
$ 10!0013!
$90910
!00$1 316
7e reciation eriod is t e use u i e o t e asset . you de reciateo2er t ree years t en you need t ree years# 4ort o &7
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0$0$
*AAP P ?Fs Go,r =0> Str,ct,ra" ?imitations
1 .n2est/ent in i*ed ca ita is ignored so 4 en ca ita s ending isgreater t an de reciation t e co/ any /ay e ro ita e on
8%%P asis ut s ort cas! @/its in2est/ent in 4orking ca ita so 4 en recei2a es and
in2entory gro4 aster t an aya es and accrued e* enses t eco/ any /ay e ro ita e on 8%%P asis ut s ort cas
3 .ntangi es ike &7 ad2ertising e/ oyee education are
e* ensed e2en t oug t e ene its 4i ast /ore t an oneaccounting eriod0. Stoc1ho"dersF e ,it is !ree e#en tho,gh owners ha#e an
opport,nit cost.
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0-
Notes on Stoc1ho"dersF E ,it
% co/ anies inanced y co/ ination o de t ande uity
7e t co/es ro/ anks ond o ders> e uity ro/o4ners 2ia retained earnings (8%%P ro its /inusdi2idends)7e t an e* ense ut e uity is ree ? y; Aoncas
cost> a so di erent o4ners a2e di erent re uiredrates o returnBut 8%%P- ro ita e co/ any /ay destroy 2a ue i youe* ense o4ner o ortunity costs
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P ay oy (PJ%)
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P ay oy#s Stock is Ao Miss % ri
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0404
Str,ct,ra" ?imitation 07 Stoc1ho"dersF E ,it
P ay oy (PB%)($/ s) - !009 8%%P
(e uity ree)
,* ense, uity
Pre-.nterest inco/e (,B.T N in2est/ents)- .nterest - 7e t @n y ($115)- .nterest O 7e t & , uity ($! 3 * 9 1")K Pre-ta* ro it
$1!5
n+a$9
$1!n+a!0
$( )
. t e accounting treat/ent or e uity is sa/e as de t t en re-ta*ro it turns into a re-ta* oss
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0<
Estimating P"a o Fs Interest K e t E ,it =(3$>
%2g !ears
1a ita
?eig ting
! %T ost
o ca ita
1*!?td %2g ost
o a ita
7e t, uityTota
$11516
$! 3
1"5'"
100"
! "10 0"
1 !"5 '"9 1"
Preta* cost o de t K $5 /i ion+$115 /i ion K 3"> a ter-ta* cost K3" * (1-35") K ! " ost o e uity K 10-year Treasury N 500
or /ini/u/ 10"
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0:
S,mmar
Structura i/itationH %s a resu tH
1 @/its in2est/ent ini*ed ca ita o/ any /ay e ro ita e on a 8%%Pasis ut run out o cas i ca e* is /ucigger t an de reciation
! @/its in2est/ent in4orking ca ita
o/ any /ay e ro ita e on a 8%%Pasis ut run out o cas i it can#t co ect on
recei2a es or i in2entory doesn#t se3 .ntangi es aree* ensed
Pena iCes or4ard- ooking co/ aniesin2esting or ig er uture sa es earnings
, uity as a cost T e /ore e uity a ir/ e/ oys as " totaca ita t e ess intrinsica y ro ita e it is
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8%
How o We Gi9 These Str,ct,ra" ?imitations/
7o 4e re- ui d inco/e state/ent to 1) e* ense in2est/ent in I!) e* ense in2est/ent in ? 3) de reciate intangi es and )e* enses stock o ders# e uity;?e cou d ut t en 4e create ot er ro e/s> e g 4e ena iCeco/ anies t at are in2esting in I ? % so 4 o is ar iter ocost o e uity; (, 2is sti a i2e so/e t ink )Ao sing e inco/e state/ent is cure-a .nstead et#s add t estrengt s o t4o a ternate P&J#s t at a2e een de2ised in recentyears to our ana ysisH ree cas o4 and ,cono/ic a ue %dded
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8(8(
Metric Wars7 Which A"ternate P ? is 'est/
Gree Cash G"ow Economic a",e Added %dEust/ents 1 ,* enses in2est/ent in i*ed
ca ita ! ,* enses in2est/entin 4orking ca ita
3 .ntangi es de reciated o2eruse u i e Stock o ders# e uity isan e* ense
8oa Se - und; % co/ any does so4 en it roduces /ore cas
ro/ ongoing o erations t an itconsu/es
reate 2a ue; % co/ any does so4 en it roduces a return on ca itat at is greater t an its cost
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8$
Aot t is
Ben8ra a/
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8-
T is Ben8ra a/Q
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8080
'enLamin *raham =(&:05(:
8raduated R! in c ass ro/ o u/ ia in 1'1 at age !0 t en o eredteac ing Eo s in ,ng is /at e/atics and i oso y de art/ents.nstead 4ent to ?a Street Aear y ruined y s ecu ation e ore de2ising
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8484
In Honor o! *raham
Persona ity Pessi/isticco//ercia
anker
@ ti/istic 2entureca ita ist
.nco/estate/ent
e!ensi#e ( ree cas o4)
Enterprising (,cono/ic a ue
%dded)
To earn/ore
Cash Flow andSecurity Analysis
acke and Ji2nat
The Quest For ValueSte4art
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8
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8&8&
Step (a o! -7 Three Income Statements
Enron Corp year ending 7ec 31 !000 (/i ions e*ce t er-s are)
.nco/e state/ent e!ensi#e *AAP Enterprising
e2enue- @8S S8&% ot er 5 In#estment !i9ed capita" = (>5 In#estment wor1ing capita" = $>5 Intangi "es = ->5 Interest e9pense = 0>- @t er
- Ta*esTota e* ensesPro it ( oss)
$100 9 '' 36
-)888()%
$100 9 '' 36
n+an+a
03
(!15)
3$'' '3&:4
$100 9 '' 36
n+an+a
Source: o/ any re orts ,arningsPo4er co/
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8:8:
Step ( o! -7 B,a"it o! Pro!its
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4%4%
Step (c o! -7 Earnings Power Chart
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4$4$
Section III
J,st Go,r T pes o!CompaniesD
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4-4-
?ower5?e!t 'o97 Enron
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4040
pper5?e!t 'o97 Hea"thSo,th =H?SH> =down &-; !rom -%pea1 in mid5(::&>
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4848
?ower5Right 'o97 Orisp Oreme on,ts =OO > =down&&; !rom 8% pea1 in mid5$%%->
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4444
Coa" Mine Canar
e!ensi#e7 Enterprising7 'oth7
%utoCone (#'!-#'') Bet e e/ Stee (#'6-#00) % ou ea t & Beauty (#' -#0!)
entennia Tec no ogies (#'3-#'9) Boston Market (#'3-#'9) Bo/ ay o/ any (#'1-#' )
MJ 8rou (#'!-#'9) F, estaurants (#'5-#'9) Enron (#'6-#00)
,7S (#00-#0!) ro4n ork & Sea (#'5-#00) Po aroid (#'5-#00)
Iine ost (#'5-#'6) Hea"thSo,th (#'6-#01) Sun ea/ (#'3-#' )
8a T e (#'6-#0!) .kon @ ice (#'3-#' ) ?arnaco (#' -#'')
8ate4ay (#'9-#01) ite-%id (#'5-#00) Lero* (#'6-#00)
Orisp Oreme on,ts (#0!-#0 ) S er4in-?i ia/s (#'1-#00)
Jucent Tec no ogies (#'9-#00) ?or d o/ (#'9-#01)
Measure/ent S ecia ties (#' -#01)
Tyco (3+00-1!+01)
nited %ir ines (#' -#01)
Source: ,arningsPo4er co/
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4
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80/115
&%&%
*armin7 (%)%%% grows to 00)%%%
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8/20/2019 Its Earning That Count Summary
81/115
-
8/20/2019 Its Earning That Count Summary
82/115
&$&$
Pa che97 (%)%%% grows to $8
-
8/20/2019 Its Earning That Count Summary
83/115
&-&-
B,a"it S stems7 (%)%%% grows to
-
8/20/2019 Its Earning That Count Summary
84/115
&8&8
Not A"" *reat Stoc1s Are Staircase7 (%O to $%%O
-
8/20/2019 Its Earning That Count Summary
85/115
&4&4
Section
'est Stoc17 (::
-
8/20/2019 Its Earning That Count Summary
86/115
T e 4inner is: ansen Aatura
-
8/20/2019 Its Earning That Count Summary
87/115
&&
(%)%%% grows to $.4 mi""ion
-
8/20/2019 Its Earning That Count Summary
88/115
&:
A,thentic Earnings Power Earnings Power Staircase
-
8/20/2019 Its Earning That Count Summary
89/115
:%:%
Section I
P,tting It A"together7 TheEarnings Power (5$5- Process
-
8/20/2019 Its Earning That Count Summary
90/115
:(:(
Three =-> + stac"es Con!ronting *rowth In#estor
1 Poorearnings
ua ity
8%%P inco/e state/ent as our ( ) structurai/itations So Eust ecause a co/ any is ro ita e
in t e traditiona sense o t e 4ord does not /eant at it as aut entic earnings o4er
! o/ etiti2ead2antage4anes
Success u co/ anies attract i/itators T is is goodor consu/ers ad or o4ners
3 Pre/iu/ tointrinsic 2a ue ?e redict y e*tra o ation so gro4t stocks o tenget us ed eyond rea 4ort
@ur ase Study: %/erican ,ag e (%,@)
-
8/20/2019 Its Earning That Count Summary
91/115
-
8/20/2019 Its Earning That Count Summary
92/115
:-:-
High"ights
Ma - ased retai er 4it '!6 stores in S anadaT ree conce ts: %/erican ,ag e aerie and Martin N @sa
G#d in Pitts urgIounded 1'99
anked R!
-
8/20/2019 Its Earning That Count Summary
93/115
:0:0
Three =-> + stac"es Con!ronting *rowth In#estor
1 Poorearnings
ua ity
8%%P inco/e state/ent as our ( ) structurai/itations So Eust ecause a co/ any is ro ita e
in t e traditiona sense o t e 4ord does not /eant at it as aut entic earnings o4er
! o/ etiti2ead2antage4anes
Success u co/ anies attract i/itators T is is goodor consu/ers ad or o4ners
3 Pre/iu/ tointrinsic 2a ue ?e redict y e*tra o ation so gro4t stocks o tenget us ed eyond rea 4ort
-
8/20/2019 Its Earning That Count Summary
94/115
:8
Step ( o! -7 Earnings Power Staircase
-
8/20/2019 Its Earning That Count Summary
95/115
:4
Step (c o! -7 Earnings Power Staircase
-
8/20/2019 Its Earning That Count Summary
96/115
: + stac"es Con!ronting *rowth In#estor
1 Poorearnings
ua ity
8%%P inco/e state/ent as our ( ) structurai/itations So Eust ecause a co/ any is ro ita e
in t e traditiona sense o t e 4ord does not /eant at it as aut entic earnings o4er
! o/ etiti2ead2antage4anes
Success u co/ anies attract i/itators T is is goodor consu/ers ad or o4ners
3 Pre/iu/ tointrinsic 2a ue ?e redict y e*tra o ation so gro4t stocks o tenget us ed eyond rea 4ort
-
8/20/2019 Its Earning That Count Summary
97/115
:&:&
Step $ o! -7 Competiti#e Ad#antage
-
8/20/2019 Its Earning That Count Summary
98/115
::::
MorningstarFs 0 T pes o! Competiti#e Ad#antage
T pes E9amp"es1 Jo4-cost ro2ider ?a -Mart 7e (;)! ig -s4itc ing costs Payc e* Microso t
3 .ntangi es (e g atents/inds are ocations addicti2e
roduct /anage/ent
e/ oyees)
P iCer Star ucks .nternationaS eed4ay Berks ire at a4ay
% tria (P i i Morris) Best Buy
7isney Aet4ork e ect eBay icago Merc
Most o/ etiti2e %d2 nt ges ? ne o2er Ti/e ? o s
-
8/20/2019 Its Earning That Count Summary
99/115
Most o/ etiti2e %d2antages ?ane o2er Ti/e: ? o .sBui ding t e 13 - orkscre4 ersion;
-
8/20/2019 Its Earning That Count Summary
100/115
(%(%
American Eag"e Has Mi"dD Competiti#e Ad#antage/
o/ etiti2e ad2antage ,*a/ es1 Jo4-cost ro2ider no! ig -s4itc ing costs no
3 .ntangi es (e g atents/inds are ocations addicti2e
roduct management
e/ oyees)
Day Sc ottenstein is ong-ti/eoard c air> and a/i y#s
interests are a igned 4it outside
stock o ders But not t e /ostdura e co/ etiti2e ad2antage
Aet4ork e ect no
. no co/ etiti2e ad2antage kee your orecast eriod s ort
-
8/20/2019 Its Earning That Count Summary
101/115
(%(%
Three =-> + stac"es Con!ronting *rowth In#estor
1 Poorearnings
ua ity
8%%P inco/e state/ent as our ( ) structurai/itations So Eust ecause a co/ any is ro ita e
in t e traditiona sense o t e 4ord does not /eant at it as aut entic earnings o4er
! o/ etiti2ead2antage4anes
Success u co/ anies attract i/itators T is is goodor consu/ers ad or o4ners
3 Pre/iu/ tointrinsic 2a ue ?e redict y e*tra o ation so gro4t stocks o tenget us ed eyond rea 4ort
-
8/20/2019 Its Earning That Count Summary
102/115
(%
Ta1e Ana" st Gorecasts With a *rain o! Sa"t
-
8/20/2019 Its Earning That Count Summary
103/115
(%
Step - o! -7 American Eag"eFs Intrinsic a",e
Jo4 Mediu/ ig
T is ear ,arnings - " - " 50;
Ae*t ear ,arnings 9" 10" (-;,arnings ears 3 & 5 9" 11" (0.-;
,arnings ears 6-10 3" " 5 6"
,arnings Ter/ina Period 3" 3" 3"
S are ount O annua gro4t -1" -1" -1".ntrinsic 2a ue (inc net cas ) $36 $ 1 $ 9
?eig ting 0" 35" !5"
?td %2g .ntrinsic a ue 0%
-
8/20/2019 Its Earning That Count Summary
104/115
(%
a",ation7 8 Margins o! Sa!et
1 ost o e uity (discount rate) is 10"! ig gro4t K consensus> Jo4 Mediu/ gro4t is
50" 95" o ig3 8ro4t in years 6-10 is 50" o years 1-5
.ntrinsic 2a ue esti/ate 0" ased on Jo4 8ro4t35" on Mediu/ and Eust !5" on consensus
5 Buy 4 en co/ anies se s at 50"-90" o intrinsic2a ue de ending u on ua ity o earnings anddura i ity o co/ etiti2e ad2antage
-
8/20/2019 Its Earning That Count Summary
105/115
(%
American Eag"eFs Price5Intrinsic a",e =PI >
Stock rice
.ntrinsic a ueK P.
$19
$ 03"
%ut entic earnings o4er on sa e: %t $19 you get $1 o
intrinsic 2a ue or $0 3
-
8/20/2019 Its Earning That Count Summary
106/115
(%
American Eag"eFs E9pected Ret,rn
,* ected eturn K ($ 0 - $19)+$19K 13 "
UT e o4er your rice-intrinsic 2a ue (P. ) t e ig er youre* ected return (, )
UPort o io /anage/ent: ank a your co/ anies y , ro/ igto o4 7oes t e co/ any you are t inking o uying o er aig er , t an t e o4est-ranked co/ any you o4n; . not t en
4 y uy it;
-
8/20/2019 Its Earning That Count Summary
107/115
(%
Se"" iscip"ine
U ,arnings ua ity: Gua ity o ro its er/anent ydeteriorate
U Joss o co/ etiti2e ad2antage
U Stock c i/ s to intrinsic 2a ue
-
8/20/2019 Its Earning That Count Summary
108/115
(%(%
S,mmar
? y
-
8/20/2019 Its Earning That Count Summary
109/115
WhatFs 6o,r Process/
-
8/20/2019 Its Earning That Count Summary
110/115
((
A#oid *rowth TrapD 5 se M,"tip"e Margins o! Sa!et
-
8/20/2019 Its Earning That Count Summary
111/115
Bonus Material for Bryant College 7
5 se!," Writing Tips
-
8/20/2019 Its Earning That Count Summary
112/115
((((
se!," Writing Tips
1 .ts 2s it#s
-
8/20/2019 Its Earning That Count Summary
113/115
((((
It’s Earnings That Count ( Mc*raw5Hi"") $%%0>
a enges con2entiona 4isdo/ t atco/ any as
-
8/20/2019 Its Earning That Count Summary
114/115
((((
'iograph
Hewitt Heiserman Jr. conceived the Earnings Power Chart and theEarnings Power Staircase, which are featured in his book "It's Earnings
hat Count" ! c#raw$Hi%%, & (). He a%so writes a co%umn on earnings
*ower for +ea% one .com. Heiserman graduated from -en on Co%%egewith istinction in Histor , and a%so received the /acu%t 0ward for
istinguished 0chievement. Heiserman is a member of the 1ostonSecurit 0na% st Societ and the C/0 Institute. Heiserman's work onearnings 2ua%it has a**eared in heStreet.com, 1usiness3eek, C1S
arket3atch, 1usiness &. , 1etter Investing, he ot%e /oo%, Com*%ete#rowth Investor, 1arron's, and the Haverford rust Com*an 0dviser.Heiserman has s*oken to the 4ew 5ork Societ of Securit 0na% sis, the1oston Securit 0na% sts Societ , /ide%it anagement an +esearch, the1abson Investment anagement 0ssociation, the 0merican 0ssociation ofIndividua% Investors, and Com*%ete #rowth Investors on "1en #rahamand the #rowth Investor." Heiserman is a finance instructor for #erson$6ehrman #rou*. He is a trustee for a %and conservation grou*. o %earn
more, visit www.EarningsPower.com
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8/20/2019 Its Earning That Count Summary
115/115
e4itt eiser/anV,arningsPo4er co/
444 ,arningsPo4er co/
B,estions/