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.
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