GEARSGEARSGlobal Equity Analytics & Research Service, L.L.C.Global Equity Analytics & Research Service, L.L.C.

Share PriceShare Priceis highly is highly

correlated correlated with with

ComparableComparable FundamentalsFundamentals

Share PriceShare Priceis highly is highly

correlated correlated with with

ComparableComparable FundamentalsFundamentals

Share Price

is 75% correlated with sales

growth.

Share Price is

74% correlated with the

operating margin.

(EBITDA)

Acquisitions cause

frequent distortions

in theas-reported accounting

record.

How to distinguishFundamentals Change from Structural Change

in Corporate Financial Statements

How to distinguishFundamentals Change from Structural Change

in Corporate Financial Statements

Measures change in the total company including M&AMeasures change in the total company including M&A

Measures change in fundamentals

- produces comparable

delta for each period

Measures change in fundamentals

- produces comparable

delta for each period

ComparableRevenue(for prior period):

As reportedRevenue:

$ in thousands$ in thousands

$525$525

$3262$3262

$2737$2737Measures change in the structure of the companyMeasures change in the structure of the company

$3312$3312

1999 Q21999 Q2

$3779$3779

$3330$3330

1999 Q31999 Q3

$3992$3992

$3927$3927

2000 Q12000 Q1

$4315$4315

$6516$6516

2000 Q22000 Q2

$7041$7041

$3386$3386

1999 Q41999 Q4

$4051$4051

Building the Strictly Comparable Dynamic DuPont Model

Building the Strictly Comparable Dynamic DuPont Model

2001 Q2 – comparable delta for 2001 Q1 = annual comparable DuPont Model for trailing year 2001 Q12001 Q2 – comparable delta for 2001 Q1 = annual comparable DuPont Model for trailing year 2001 Q1

2001 Q3 – comparable delta for 2001 Q2 = annual comparable DuPont Model for trailing year 2001 Q22001 Q3 – comparable delta for 2001 Q2 = annual comparable DuPont Model for trailing year 2001 Q2

2001 Q4 – comparable delta for 2001 Q3 = annual comparable DuPont Model for trailing year 2001 Q32001 Q4 – comparable delta for 2001 Q3 = annual comparable DuPont Model for trailing year 2001 Q3

2001 Q4 DuPont Model from most Recent Annual Financial Statement2001 Q4 DuPont Model from most Recent Annual Financial Statement

2001 Q4 + comparable delta for 2002 Q1 = annual comparable DuPont Model for trailing year 2002 Q12001 Q4 + comparable delta for 2002 Q1 = annual comparable DuPont Model for trailing year 2002 Q1

2002 Q1 + comparable delta for 2002 Q2 = annual comparable DuPont Model for trailing year 2002 Q22002 Q1 + comparable delta for 2002 Q2 = annual comparable DuPont Model for trailing year 2002 Q2

GEARS comparable

data produces an

accurate measure of

changing fundamentals

and higher correlation with share

price.

GEARS comparable

data produces an

accurate measure of

changing fundamentals

and higher correlation with share

price.

GEARSGEARS

Number of Russell 1000 Companies withNumber of Russell 1000 Companies withLong-Term Share Price Correlation of Long-Term Share Price Correlation of 60%60% or Greater or Greater

Accounting Data – As ReportedAccounting Data – As Reported Accounting Data - ComparableAccounting Data - Comparable

Gross M

argin

Gross M

argin

EBITD Marg

in

EBITD Marg

in

Revenue Gro

wth

Revenue Gro

wthTaxesTaxes

Inventory Turns

Inventory Turns

Receivables

Receivables

Free Cash Flow

Free Cash Flow

In every fundamental

metric, correlation improves

with comparable

data.

218218

385385

188188

375375

8888

226226

7777

366366

9393

196196

105105

273273

168168

346346

Like the new lens on the Hubble Telescope, the picture becomes clearer.

Like the new lens on the Hubble Telescope, the picture becomes clearer.

Accounting Data-As ReportedAccounting Data-As Reported

477477

Accounting Data-ComparableAccounting Data-Comparable

765765

00

100100

200200

300300

400400

500500

600600

700700

800800

900900

10001000

GEARSGEARS

Number of Russell 1000 CompaniesNumber of Russell 1000 CompaniesWith Long-term Share Price Correlation of With Long-term Share Price Correlation of __________________________

With at Least One DuPont Model Variable With at Least One DuPont Model Variable 60%60% oror Greater Greater

Number of Russell 1000 CompaniesNumber of Russell 1000 CompaniesWith Long-term Share Price Correlation of With Long-term Share Price Correlation of __________________________

With at Least One DuPont Model Variable With at Least One DuPont Model Variable

Accounting Data-As ReportedAccounting Data-As Reported Accounting Data-ComparableAccounting Data-Comparable00

100100

200200

300300

400400

500500

600600

700700

800800

900900

10001000

173173

531531

GEARSGEARSLike the

new lens on the Hubble Telescope, the picture becomes clearer.

Like the new lens on the Hubble Telescope, the picture becomes clearer.

80%80% oror Greater Greater

PfizerFundamentals Fundamentals PeakPeak

•• Gross Margin Gross Margin highhigh

•• Lower Sales Lower Sales GrowthGrowth

•• Higher Higher ReceivablesReceivables

•• SG&A SG&A Expenses Expenses low & uplow & up

•• EBITDA EBITDA Margin downMargin down

•• Free Cash Free Cash Flow Margin Flow Margin downdown

•• Gross Margin Gross Margin highhigh

•• Lower Sales Lower Sales GrowthGrowth

•• Higher Higher ReceivablesReceivables

•• SG&A SG&A Expenses Expenses low & uplow & up

•• EBITDA EBITDA Margin downMargin down

•• Free Cash Free Cash Flow Margin Flow Margin downdown

Pfizer

First evidence of:First evidence of:

•• Gross Margin Gross Margin upup

•• Inventories Inventories downdown

•• Sales Growth Sales Growth low & uplow & up

•• Receivables Receivables downdown

•• SG&A SG&A Expenses Expenses highhigh

Fundamentals Fundamentals TroughTrough

•• Gross Margin Gross Margin highhigh

•• Lower Sales Lower Sales GrowthGrowth

•• Higher Higher ReceivablesReceivables

•• SG&A SG&A Expenses Expenses low & uplow & up

•• EBITDA EBITDA Margin downMargin down

•• Free Cash Free Cash Flow Margin Flow Margin downdown

•• Gross Margin Gross Margin highhigh

•• Lower Sales Lower Sales GrowthGrowth

•• Higher Higher ReceivablesReceivables

•• SG&A SG&A Expenses Expenses low & uplow & up

•• EBITDA EBITDA Margin downMargin down

•• Free Cash Free Cash Flow Margin Flow Margin downdown

PfizerCurrentCurrent

FundamentalsFundamentalsPeakPeak

IntelIntelFirst evidence of:First evidence of:

•• Gross Margin Gross Margin low & uplow & up

•• Inventories Inventories downdown

•• Sales Growth Sales Growth low & uplow & up

•• Receivables Receivables downdown

•• SG&A SG&A Expenses Expenses highhigh

•• EBITDA EBITDA Margin low & Margin low & upup

Fundamentals Fundamentals TroughTrough

Intel

First evidence of:First evidence of:

•• Gross Margin Gross Margin high & downhigh & down

•• Inventories upInventories up

•• Sales Growth Sales Growth high & downhigh & down

•• SG&A SG&A Expenses lowExpenses low

•• EBITDA EBITDA Margin high & Margin high & downdown

First evidence of:First evidence of:

•• Gross Margin Gross Margin high & downhigh & down

•• Inventories upInventories up

•• Sales Growth Sales Growth high & downhigh & down

•• SG&A SG&A Expenses lowExpenses low

•• EBITDA EBITDA Margin high & Margin high & downdown

FundamentalsFundamentals PeakPeak

Intel

•• Gross Gross margin upmargin up

•• Higher sales Higher sales growthgrowth

•• High SG&A High SG&A expensesexpenses

•• EBITDA EBITDA margin upmargin up

•• Free cash Free cash flow margin flow margin upup

CurrentCurrentFundamentalsFundamentals

TroughTrough

Intel

•• Strong top Strong top lineline

•• SG&A SG&A expenses expenses downdown

•• Net CapX Net CapX downdown

Investing Investing Cycle Cycle PeakPeak

Intel

•• Strong top Strong top lineline

•• SG&A SG&A expenses expenses highhigh

•• Net CapX Net CapX downdown

Investing Investing Cycle Cycle PeakPeak

Worldcom

•• Strong top Strong top lineline

•• SG&A SG&A expenses expenses downdown

•• Net CapX Net CapX downdown

Investing Investing Cycle PeakCycle Peak

•• Sales Sales growth low growth low & down& down

•• Receivables Receivables upup

•• SG&A SG&A expenses expenses low & uplow & up

•• EBITDA EBITDA margin margin downdown

WorldcomInvesting Investing Cycle PeakCycle Peak

Investing cycle peakInvesting cycle peak

•• sales growth sales growth downdown

•• Receivables Receivables upup

•• Gross margin Gross margin fallingfalling

•• Lower SG&A Lower SG&A producing producing stronger stronger bottom linebottom line

ScheringDeteriorating Deteriorating

earnings earnings qualityquality

Schering

•• Gross margin Gross margin downdown

•• Low Sales Low Sales growthgrowth

•• Higher Higher receivablesreceivables

•• SG&A SG&A expenses low expenses low & up& up

•• EBITDA EBITDA Margin downMargin down

•• Free cash Free cash flow margin flow margin downdown

CurrentCurrentFalling Falling

Earnings Earnings GrowthGrowth

•• Sales growth Sales growth low and low and downdown

•• Falling gross Falling gross marginmargin

•• Lower SG&A Lower SG&A producing producing stronger stronger bottom linebottom line

MicrosoftCurrentCurrent

Deteriorating Deteriorating earnings earnings qualityquality

Dow Jones Index

Reliable and comparable micro data allows for

reliable and comparable macro data.

Reliable and comparable micro data allows for

reliable and comparable macro data.

Sales growth tells a timing story.

Dow Jones Index

Margins tell a

direction story.

Dow Jones Index

Index Share Price Correlation Index Share Price Correlation WithWith Macro Fundamental Factors Macro Fundamental Factors

Dow Jones US Total Market IndexDow Jones US Total Market Index

00

1010

2020

3030

4040

5050

6060

7070

8080

9090

100100

5454

8686

Gross MarginGross Margin

6262

7878

EBITD MarginEBITD Margin

2626

5555

Revenue GrowthRevenue Growth

Last twenty years-as reportedLast twenty years-as reported

Last twenty years-comparable since first quarter 1999 Last twenty years-comparable since first quarter 1999

Using comparable data makes the macro

picture clearer.

GEARSGEARS Products in DevelopmentProducts in Development

Consistently Defined, strictly comparable, time-Consistently Defined, strictly comparable, time-series composite variables are customized to power:series composite variables are customized to power: Consistently Defined, strictly comparable, time-Consistently Defined, strictly comparable, time-series composite variables are customized to power:series composite variables are customized to power:

•• The DuPont ModelThe DuPont Model•• Earnings Quality ModelsEarnings Quality Models•• Discounted Cash Flow ModelsDiscounted Cash Flow Models•• Investment Valued Added ModelsInvestment Valued Added Models•• Financial Condition ModelsFinancial Condition Models

Data-to-Text document creation softwareData-to-Text document creation software

Macro Corporate accounting data and associated Macro Corporate accounting data and associated analysis in textanalysis in text

Analyst’s Forecasting SpreadsheetAnalyst’s Forecasting Spreadsheet GEARSGEARS 5 years of consistently defined, strictly comparable, quarterly data points

For DuPont Model VariablesFor DuPont Model Variables•• Revenue GrowthRevenue Growth•• Gross MarginGross Margin•• SG&A ExpensesSG&A Expenses•• Interest ExpenseInterest Expense•• TaxesTaxes•• Asset TurnoverAsset Turnover•• Assets/EquityAssets/Equity•• Return On Common EquityReturn On Common Equity•• Earnings per shareEarnings per share•• ReceivablesReceivables•• InventoriesInventories

•• Correlations with share priceCorrelations with share price•• Inter variable correlationsInter variable correlations•• Summary StatisticsSummary Statistics

•• Pattern based ForecastPattern based Forecast

•• The macro interpolates the The macro interpolates the interveningintervening quarters and calculates quarterly ROE, quarters and calculates quarterly ROE, EPS and long term growth rates.EPS and long term growth rates.

GEARSGEARS Forecasting MacroForecasting Macro

•• Allows an analyst to make two-point Allows an analyst to make two-point estimates for revenue growth and estimates for revenue growth and EBITDA margins.EBITDA margins.

GEARSGEARSGlobal Equity Analytics & Research Service, L.L.C.Global Equity Analytics & Research Service, L.L.C.