Category Archives: nasdaq

Gamable EPS And Share Buybacks

EPS (Earnings per Share) is a corporate metric that is often pursued by the corporate managers and executives to increase their own payouts, and confused by investors for a signal of company health. As is well known (and we show this in our Risk & Resilience course), EPS is a “gamable” metric – in other words, it can be easily manipulated by companies, often at the expense of actual balance sheet quality. And I have written about this problem here on the blog for ages now. So, here is a fresh chart from the Deutsche Bank Research (via @bySamRo) detailing share buybacks’ (repurchases) contribution to EPS growth: In basic terms, there is no organic EPS growth (from net income) over the last 7 quarters, on average, and there is negative EPS growth from organic sources over the last 4 consecutive quarters. As noted in my lecture on the subject of “EPS gaming”, there are some market-structure reasons for this development (basically, rise of tech-based services in the economy): Click to enlarge Source of Data: McKinsey Click to enlarge Source: McKinsey However, as the chart above shows, share buybacks simply do not add any value to the total returns to shareholders (TRS), and that is before we consider a shift in current buybacks trends toward debt-funded repurchases. So, in a sense, current buybacks are rising leverage risks without increasing TRS. Which is brutally ugly for companies’ balance sheets, and given debt covenants, is also bad news for future capex funding capacity.

The 5 Big-Cap Internet Stocks With The Strongest Fundamentals

The companies with the best fundamentals among large-cap Internet stocks are Facebook ( FB ), Amazon.com ( AMZN ), Netflix ( NFLX ), Alphabet ( GOOGL ) and Priceline ( PCLN ), says RBC Capital Markets. Internet trends for these top five in their respective sectors — online advertising, retail and travel — remain very consistent, with strong revenue growth year over year, RBC said in a research report. Online advertising seems to be flowing en mass to Google-owner Alphabet and Facebook, with the two now accounting for close to 55% of global online advertising revenue, up from 50% three years ago, says the report from RBC analyst Mark Mahaney. And Amazon continues to show dramatically greater-than-average growth in the online retail sector. “We believe online retail demand trends have remained solid, particularly highlighted by Amazon’s retail sales acceleration,” Mahaney wrote. But, he said, “there’s little ad oxygen for the likes of Yahoo ( YHOO ).” Online travel remains a duopoly of Priceline and Expedia ( EXPE ), while it’s increasingly hard to see anyone catching up to Netflix in terms of video-streaming subscribers, he wrote. Netflix Though shares of Netflix have continued to decline following Q1’s weak international subscriber guidance and domestic price change worries, “We view the fundamental global subscriber growth story as intact,” Mahaney said. Mahaney has a price target on Netflix of 140. Netflix rose 1.4% to 89.12 in the stock market today . The stock is down 20% since reporting first-quarter earnings on April 18, and it’s on the IBD Swing Trader list as a potential short-sale opportunity. Priceline He has a price target on Priceline of 1,600, as growth and profitability trends remain intact. Priceline stock rose 0.4% to 1283.47 on Monday. Priceline is down 6% since reporting Q1 earnings on May 4. Alphabet On Alphabet, Mahaney’s price target is 1,000, as it remains one of the best portfolio plays on the biggest Internet trends. Alphabet stock climbed 0.75% to 730.30 Monday. The stock is down 7% since reporting Q1 earnings on April 21. Facebook On Facebook, the price target is 165, with Mahaney saying the social media company is firing on all cylinders. Facebook stock fell about 1% to 118.67, but it’s up 8% since reporting Q1 earnings on April 27. Facebook is holding above a buy point at 117.09. Amazon The price target on Amazon is 800. Amazon stock edged up 0.1% to 710.68. Still, it’s up 16% since reporting Q1 earnings on April 28. It also is on Swing Trader, but as a long possibility.