Daily market summary

What an amazing run today; everything is up (except for dollar). I believe there are big part of short squeeze going on. QE2 starts to work right away: investors' confidence is up. Let's hope it can last long.

Liz Claiborne Inc.(LIZ) earning report

I didn't know this stock until a friend mentioned. It reported earning this morning and had a great run so far. Here is the release. http://www.lizclaiborneinc.com/web/guest/pressreleases Liz Claiborne, Inc., incorporated in January 1976, designs and markets a global portfolio of retail-based brands, including JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX. It is apparently a financially stressed company and the trading on this stock is volatile. 

Looks like investors (maybe I should say traders) like the narrowed lost. Based on the release you can see the adjusted loss is around -0.04 (Non-GAAP measure again) which is indeed much less than before.( see from the ER EPS graph). Even from the GAAP number you still can tell the profitability improvement (quarterly earning summary). The sales is picking up as well which shows the reversing downward trend. Investors certainly hope that continues. Well, considering the holiday season, they might get what they want on LIZ.

Quarterly earning summary

Financial ratio analysis (Margin looks good, efficiency is alright, but the liquidity and leverage ratios are still bad)

However, LIZ's equity keeps shrinking as it lost money for past two years. I would assume they will have higher borrowing cost which will negatively impact the profit. In order to dig deeper on the stock, some sort of monthly retail report might be worth the money.

Financial Ratio Analysis - peer comparison

Without peer comparison the financial ratio analysis can not be complete. What I'm showing you here are five companies' ratios side by side. The five companies are Amazon, Ebay, Walmart, Costco, and Overstock. Pay attention to Amazon and Walmart. As I mentioned in previous post, these two firms really show similar profitability and efficiency performance.  I really found this framework helpful to compare competitors. (Note: don't just assume the best company will have the best price action in the future)

Blackboard Inc.(BBBB) earning report

http://www.blackboard.com/Company/Media-Center/Press-Releases.aspx?releaseid=1491354

BBBB is a good business but current economic situation could keep negatively impact its business. Most of universities are cutting budget so the growth won't be high for a while. Currently the stock is priced as a high growth stock if you simply look at its PE ratio (67). A great company like Amazon just has that level of PE but with a much bigger potential as I see it.

The new quarter report is just alright since everything is inline with forecast. No wonder there is not much action in after-hours. Here are analysts' opinion and key ratio trend summary for those of you interested in BBBB.

Skilled Healthcare Group, Inc. (SKH), latest earning report -- Stats & Financial ratios

ER stats for SKH. It seems the momentum is still going today. Be careful. I'm not recommending stock here because I believe people should make their own decisions based on their own analysis. In addition, to invest in low price stocks you have to be ready to take big loss and you have to watch the fundamentals very closely.

Analysts' view (EPS & Revenue beat, and better management outlook guidance)

 ratio analysis: note here the data is GAAP standard.

Notice here both the analyst estimate and actual EPS results are in Non-GAAP term. What does that mean? GAAP is US standard for financial statement reporting so US firms (To be exact, firms listed in US) have to report GAAP data. Some firms want to show something else not reflected/disguised in GAAP so they will report Non-GAAP data. SKH is doing this to demonstrate their core operating results without the legal charges (non-recurring) etc. If you believe the company’s fundamentals are not influenced by the non-recurring items you should be fine to judge the performance by NON-GAAP numbers. Similarly in the report, EBIDA and such (management’s performance metrics here) are mentioned and explained. You might want to read that. It's a good measure for free cash flow of a company. All else being equal, good free cash flow is definitely a good thing.  

Skilled Healthcare Group, Inc. (SKH), latest earning report

Release is here: http://finance.yahoo.com/news/Skilled-Healthcare-Group-prnews-1535240150.html?x=0&.v=1. It has 21% run today after the better number and outlook.

You probably never heard of this one before. It’s in the healthcare sector, long term care industry. This is one stock I’m having for a long shot. Right now it’s in the low price category (<$5) and it’s really volatile. The reason I picked this one is due to the dramatic sell-off a while ago. I wished I had picked it up right after the sell-off. 

The sell-off is due to lawsuit payment: over 600 million which was eventually reduced to ~54 million. What is the lawsuit about? Simply put, SKH didn’t have enough nurses to take care of the patients/residents they accommodate. It’s actually an industry norm as I see since I had some first hand experience with nursing home companies. There are always not enough personnel as facility managers have to watch their labor cost very closely. They will let nurses go home early if resident census goes down. This is happening on a daily basis. Most of the nurses are working on hourly salary and they don’t get paid as well as those in hospitals; then the turnover ratios are scarily high—over 70%. For a nurse to stay in a nursing home facility he/she does have to gain pride in what he/she does. Good management is the key.

It is a challenging industry but also rewarding one. Most of time, Medicare, Medicaid, etc get the patients covered and the money is from Government. As long as the company has experts who know the regulation well and evaluate patients/residents well the revenue is guaranteed. Normally for a well-managed nursing home the cash flow is great. Think about the baby boomers in the States and people do get old and ill. In 20 or 30 years, the demand for nursing home service could explode.

As you read the Skilled Healthcare Group’s report, there are a few points you might want to pay special attention: medicare mix, skilled mix, occupancy rate, and also the revenue per patient day by type. These factors normally tell the health of the company. You know, you want high revenue potential patients so people on medicare is better than Medicaid. You want all the beds be filled so high occupancy rate is desirable. Skilled nursing care brings more revenue than other non-acute services so high skilled mix is good for the company. And so on. These are true for other long-term care firms too. I'll post SKH's earning stats and ratios tomorrow. 

Financial Ratio Analysis (Liquidity ratios and leverage ratios)

Liquidity ratios are about how solvent a firm’s assets can be. Naively put: If the firm is trouble, eg. Short of cash, how quickly can they sell their assets and get cash to get by. There are current ratio, quick ratio (main difference here is there is no inventory for quick ratio). Account payable is a good measure too since if you can postpone your payment to others you have more flexibility. I remember when I looked at Palm’s AP turnover I did see the change as the firm started to get stressed. You know, when a firm is in good shape, the suppliers won’t be too eager to collect their money as long as within reasonable time frame. However, when a firm is in stress, everybody want their money back as soon as possible. (same concept as a bank run, I assume) Some of the liquidity ratios are as follows:

Current ratio                             Current assets / current liabilities

Quick ratio                                (Cash + short-term investments + A/R) / current liabilities

Interest coverage ratio              (Net income + tax expense + interest expense) / interest expense

A/P turnover (times)                 Cost of good sold / average accounts payable

Leverage Ratios represent how the management utilizes capital. I always have trouble reading company’s report saying they’re raising equity while there almost no debt on the balance sheet. Small chinese companies tends to do. Don’t invest on them. Trading them can be dangerous too. Of course we all know, debt level needs to be  balanced. Many issues need to be considered: tax shield, interest coverage, etc. Two important leverage ratios are as follows:

Capital structure leverage       Average total assets / average shareholders’ equity

Long-term debt ratio               Long-term liabilities / total assets

Amazon as the example: liquidity ratios---

It’s interesting to see there is a dip for current ratio in 12/31/09 quarter. Can you guess why? Remember when I discussed the efficiency ratios, Amazon had a great quarter on 12/31/09 and its sales turnover is great and inventory turnover as well. That’s why: not much inventory left. You see, this is how the whole financial analysis framework keeps its integrity.

Leverage’s power can be easily seen from ROE vs ROA. We can simply assume ROE=ROA*Capital structure leverage. So, Amazon has 2 times asset to equity then ROE is two times of ROA. That simple.

Alright, now we should have gone over all the key ratios and let’s look at the framework once again as a whole. Again, it’s like an X-ray for a firm. When you evaluate a company you have to look at all perspectives and ratio analysis is the easiest way to dissect information. After you analyze one company you can compare with its peers eventually; then you might be able to say you have a good feeling about your company if data speaks good things about it.

Note: good financial ratios and trends don't warrant higher stock price since the market might have price in  all the future growth. Although, it does may you feel comfortable when investing a stock with sound fundamentals. In addition, if you are patient enough to get in a good stock with enough "margin of safety" it would be better.

People always wondering what is a stock really worth. Great question but a really hard one to answer. Don't just listen to others for price target since different people might have different trading/investing time frame. I do try to valuate company interested me and I encourage you do your own. However, treat it as an art project rather science one. Challenge your assumptions as new information arrives all the time.

On the other hand, ratio analysis is sort of science project as numbers reveal great informations. You still need to incorporate financial statements, news, research reports, etc to understand the ratios better and make reasonable projections. Well, with some basic accounting intuition financial ratio analysis can really help you diagnosis your company's health. This post concludes the introductory series. Hope it makes sense.