From Our Founder: Earnings Season

I've found that earnings season is one of the least understood areas of finance... unless you happen to work in the investment analysis business. Most people haven't been acquainted with the importance of the quarterly earnings seasons nor their impact on stock market performance. Thus, I'd like to take a few moments to discuss this interesting topic.

U.S. companies with publicly-traded stock report revenue, earnings (or losses) and a range of other financial figures for each fiscal quarter. Thus, there are four earnings seasons each year, and each season typically begins 2–3 weeks after the end of a calendar quarter (though a few firms report earnings off-sequence). An earnings season will last around a month, but most of the activity occurs during the two middle weeks of the season. A public conference call by each firm's management team typically accompanies an earnings report. Equity analysts use these conference calls to ask questions... and attempt to earn some notoriety. I always say that you'll hear the smartest and the stupidest questions on these calls! (My favorite dumb inquiry: "How do I model your [insert financial metric here]?")
 

Wall Street analysts must pause summer vacations in the Hamptons for 2Q (second quarter) earnings season

By the time you read this newsletter, most of our earnings analyses will have been published. That also means the stock market will have had time to re-price shares based on earnings. Every season brings volatility to the market, and a stock portfolio's annual returns are heavily impacted by quarterly reports. That's why you should care about earnings announcements! It's also why we comb through all of the earnings information released by companies we follow. We condense details from a 25–40 page SEC document, a slideshow presentation and a conference call into an actionable analysis of the company's results before presenting our own forecast. Click here to see an example of a Forward View earnings analysis from the first quarter of 2015.

I hope you have enjoyed this article and have a better understanding of earnings seasons. They're busy periods for me, but earnings seasons also separate the good analysts from the chaff. Forward View will always be focused on timely and useful earnings report research products because we're centered on client success 24/7.

SPAM: A 21st-Century Business Problem

After being repeatedly spammed with messages related to my clients' websites, I composed the following response to one spammed supposedly named "Fred":

Fred,
You’re starting to annoy me, and that’s surely not a good thing. I’ve unsubscribed from your emails, and yet you’re still sending me the same garbage. I have never, and will never, click your link because your “generosity” is undoubtedly insincere. Your website will either infect my computer with a virus, or you’ll end up trying to charge me for something. So, here’s the deal:

  1. You’re going to stop sending me any email immediately.
  2. You’ll delete my address from your system. Now.
  3. You’ll delete my address from your archives, too.
  4. I won’t report you to the FCC/FTC/FBI. (Probably.)

If you fail any of the first three steps above, this will happen:

  1. I will report you to the FCC/FTC/FBI.
  2. I will keep pushing the case, including through my contacts in Washington DC and law enforcement.
  3. Your operation will be shut down.
  4. You will pay fines.
  5. You will be left either a) despairingly hungry and homeless or b) in a cell with a hopefully irritable, delusional or exceedingly boring cellmate.
  6. I will be very happy every single day.

It’s your move. Think wisely. Don’t test Forward View Consulting.
No regards,

Nathan Yates, M.S.F.

My message was, of course, bounced from the spamming account. As a research analyst and web developer, though, I tracked down the email marketing service used by dear old Fred. I provided the marketing company with sufficient information to can this spammer, but I know that 100,000+ other Freds exist. I'm especially concerned because my clients have also received supposedly website-related "alerts" that range from gimmicky SEO services to downright digital robbery. Each website domain name registration I complete fires up the internet trolls all over again. Forward View's future client services will include helping clients to identify website-oriented scams/spam, and we'll also begin aggressively hunting the online trolls for reporting to the appropriate authorities. Don't mess with Forward View!

March News

March was a very busy month for Forward View, but I'm incredibly pleased with the results. We're moving multiple website development projects across the finish-line and have just begun a new one. Graphics designed by Kerri Costello and copywriting by Jamie Brown have been key components of these latest sites, and I'm very happy to have them both working on Forward View projects. We look forward to sharing the results of our efforts very soon!

On the finance side of the business, Forward View is pleased to announce that David Wilson will be our new contributing research analyst. David was my classmate at Southern New Hampshire University, and I'm excited to work with him again. I also enjoyed touring a Joy Global (NYSE: JOY) Center of Excellence last month and appreciated the company's invitation to see the facility. The research published following this visit has been our most popular report to date. Contact us to request a copy!

Last week, we rolled out our new research delivery system. You can now order research on the companies we cover through the Forward View website. We look forward to fulfilling your requests. We have also partnered with Seeking Alpha to provide a subscription platform. For less than $300 a year, you can access all of our research through a single portal. That's a significant savings vs. buying individual reports. The subscription service launches...today!

As always, I'm grateful to our clients and business partners for their continued support. Without them, Forward View wouldn't exist! We look forward to providing our new research offerings while we continue to support small businesses and nonprofits across America with modern web design services. -Nathan Yates

Cash Flow Valuation 101

(This blog post is drawn from two lectures prepared for Southern New Hampshire University)

If I could put time in a bottle, you know the first thing that I'd like to do? I'd use it to determine the present value of cash flows, of course! Actually, I'd use Excel, but I digress. Anyway, mastering cash flow valuation, both conceptually and mathematically, will enable you to climb the financial mountain as far as you wish. Let me briefly explain why comprehending cash flow valuation is so essential.

Financial Truth: Any asset's inherent and intrinsic value is based on the present value of its future cash flows. Period. Present value simply describes common sense: a dollar received today is worth more than a dollar received tomorrow. A rational person would prefer a buck today over a buck tomorrow, and a buck tomorrow is more desirable than a buck next year. Why? There are three reasons:

  1. Inflation gradually reduces the real purchasing power of your money.
  2. You could earn interest on the money if you have it today and invest it.
  3. Not to be morbid, but you (or I) might be dead by tomorrow. If you don't receive your dollar until tomorrow, it'd really stink if you died today! You can't take money with you.

Present value is absolutely essential to Forward View's financial modeling and to professional finance in general. If a client asks Forward View to value a bond, we use present value calculations. If equity analysis is needed, we apply present value techniques. As a matter of fact, Forward View values entire corporations using cash flow valuation math. (Consider that a share of stock represents ownership in a corporation. If Corporation X has a present value of $1 billion and has 100 million shares outstanding, how much would each share be worth?)

Now, you're probably hoping I can provide a perfect solution to enable easy mastery of cash flow valuation concepts. Well, there isn't a magic bullet. Nada, zip, zilch, zero. Sorry. I do have a few tips for you, though:

  1. Practice makes perfect.
  2. When you think you've practiced enough, practice some more.
  3. Use Excel to adjust formula inputs with ease. Learning by doing is key.
  4. There will be a lightbulb moment when everything makes sense. When you have that moment, calculate the value of one more stock, bond or project. Then, quit and celebrate!
  5. Don't ever stop practicing until your lightbulb moment. (For the record, my lightbulb moment came relatively late in my first finance class.) Timing isn't important—the brightness of your cash flow bulb is all that matters!

Don't forget that present value, and the related future value concept, are inherently logical. Comprehension of cash flow valuation will change your outlook on money, and that's essential. When you combine cash flow valuation with financial statement analysis knowledge, you're ready to be a financial analyst.

The cost of capital is a key, and related, topic for businesses. The cost of capital tells you how much a business pays for its debt and equity financing. That's important because a firm's investments and projects must yield a return greater than the cost of capital in order to be profitable. The weighted average cost of capital (WACC) is best explained by example: If 30% of a company's capital is debt costing 8% (think of interest payments) and 70% of the capital is equity costing 4% (think dividends plus other costs), the WACC would be: (30% * 8%) + (70% * 4%) = 5.2%. Simple, huh? You can also use the WACC to discount cash flows to get their present values. The Forward View valuation model uses this exact methodology, along with the incorporation of historical data and a regression analysis. The related marginal cost of capital (MCC) simply describes the cost of a company's next dollar of capital.

I wanted to share these concepts here in order to disseminate general financial knowledge and to explain more about Forward View's approach to financial analysis. Our business model is built around the application of academically-rigorous methodologies that are then applied to practical business problems. We believe that such fundamental research can uncover mispriced securities in today's markets. Furthermore, Forward View utilizes similar conceptual and quantitative strategies to value businesses and capital projects. We truly look forward to delivering analytical solutions to your firm in 2015 and beyond.

-Nathan Yates

Owner and Director of Research

Economic Engine

I've always pictured the economy as an engine, possibly because most of the men in the Yates family are mechanics. If the economy is an engine, then money is the gasoline.  An engine requires more than gas to run, though.  Our economic engine requires air in the form of reasonable regulations and laws to encourage commerce and fair transactions.  Companies form the pistons of the engine while economic development/business support agencies lubricate the motor.  What's missing?  The spark!  Entrepreneurs, engineers, scientists, business leaders and universities are the engine's spark plugs, and no power is generated without them.

Forward View is focused on adding fire to the economy's spark plugs!  Managing your company's fuel (money) is key to future business success, and we work hard to keep every piston moving and producing power.  We look forward to kicking your organization into a higher gear!

Regards,

Nathan Yates