this is anchoring on the high PE…another battle to be fought later
Hi Mykie,
As opposed to some MF’ers, given a choice between a low PE company and a high PE company, growing at comparable rates, I’d go for the low PE company every time. Which is why my big four positions are SYNA, UBNT, CELG and BOFI. All reasonable PE’s. I have to admit that my next one, Z, is a folly, but this kind of stock is a distinct minority in my portfolio.
Saul
Mykie, Are you saying that their two big customers are also stockholders, or are you just worried because they are so concentrated (45%) on two Chinese customers? You mentioned that FoxCom is a stockholder. Are they also a customer?
Mykie, The reason I asked is that I thought having your big customers also be stockholders might be an advantage, as they would be interested in you doing well.
Saul
Mykie, The reason I asked is that I thought having your big customers also be stockholders might be an advantage, as they would be interested in you doing well.
Hi Saul,
I’m going to get back to the annual report this weekend and clarify those relationships.
Today I found in the last 2 years, since July 2012 until July 2014 there have been no insider buys and $36m worth of insider sales, with the CEO being the biggest seller by far. They all seemed to stop selling in May of this year at around $21/share. Maybe all those sales caused the stock to drop or caused stock owners to lose confidence. Quien sabe?
http://www.secform4.com/insider-trading/1122342.htm
More later
Mykie
This next 2 paragraphs are as of Dec 2013:
Two customers accounted for 46.0% and 18.0% of the Company’s accounts receivable at December 31, 2013 and 2012, respectively.
One customer accounted for 35.3% and another customer accounted for 10.0% of revenues in the year ended December 31, 2013 and 2012, respectively.
The above was what made me nervous…a few customers holding a large % of their receivables.
The 1Q, 2014 results continued that concern with the 1st 4 customers accounting for 72.6% of their revenue, up from 1Q, 2013, and I assume a similar % of the receivables.
More info from the 2013 10K:
For the year ended December 31, 2013, the utilization of our factories was higher due to the increased volume shipments of our products, which contributed to higher gross margins. However, our average selling prices are declining, which we believe may negatively impact our gross profit and may offset any benefits from improved absorption.
Additionally, during 1Q 2014, their cash went down a bit due to lower net profits even though they had fantastic revenue growth 1Q '14 versus 1Q '13.
So I now have no reserves about the company other than:
The normal concerns over not enough customers per total revenue/AR. (They really should tell us how big their customer base is so we can see if it’s growing fast enough to dilute the density of the top 10. So far that is not happening since that 35.3% or revenue customer from Dec 2013 in March is a 40.6% customer).
Declining net profit margin - and free cash -(at least in 1Q).
Sorry for the confusion. Foxconn or Hon Hai seem to be only minor suppliers of raw material now and still 17% owners. They used to buy from AFOP but as of 1Q that has gone down to zero.
Mykie
PS I’d check closely the next earnings announcement (August ??) and if the net income is reduced further, I’d say there’s a trend in progress which was predicted by the company. How much that would impact their stock price is beyond me to figure out.
PSS DISCLAIMER: this may sound like I know what I am doing but this is only the 2nd report I have read (AFOP’s 2013 10K being the 1st) so read my post with a discerning eye.
Saul (or anyone),
I saw your posted trailing earnings for AFOP and they were different from what I have. Can you please post your quarterly EPS so I can check my mistake.
EPS = (1850+280)/8906
http://investor.afop.com/releasedetail.cfm?ReleaseID=758575
EPS = (4282+411)/9207
http://investor.afop.com/releasedetail.cfm?releaseid=779756
Your data
TTM
06 2012 30.0
09 2012 32.5
12 2012 37.5
03 2013 43.0
06 2013 61.5
09 2013 83.5
12 2013 102.0
03 2014 120.0
My data
EPS TTM
03 2013 0.239 0.56 EPS = (1850+280)/8906
06 2013 0.250 0.73 EPS = (4282+411)/9207
09 2013 0.330 0.94
12 2013 0.280 1.10
03 2014 0.340 1.20
Thanks.
LegoAbs
I saw your posted trailing earnings for AFOP and they were different from what I have. Can you please post your quarterly EPS so I can check my mistake.
Hi Lego Abs, You probably didn’t make any mistake. It’s just that I use adjusted earnings, (Non-GAAP earnings, cash earnings, or “real earnings”). I’ve explained this many times before.
For example: In their last earnings press release, http://finance.yahoo.com/news/afop-reports-record-quarterly-…
fifth paragraph was:
Non-GAAP net income for the quarter ended March 31, 2014 was $6,391,000, or $0.35 per share, compared to non-GAAP net income of $2,130,000, or $0.12 per share, for the first quarter of 2013, and non-GAAP net income of $5,383,000, or $0.29 per share, for the fourth quarter of 2013.
I used all three of these values
12 cents for first Q of 2013
29 cents for fourth Q of 2013
35 cents for first Q of 2014
In earlier quarters, if they didn’t give Non-Gaap results explicitly, I added back the stock based compensation to Net Income to get Adjusted Earnings.
Note that Adjusted earnings aren’t always bigger than GAAP earnings. As they point out, GAAP earnings for fourth quarter 2013 were 38 cents, which was artificially high because of a large tax benefit. Adjusted earnings, or “real earnings” as we noted above, were 29 cents for that quarter.
Saul
I was wondering about how to do that. Saul you coached me about adjusted earnings a few weeks ago and it’s been very helpful. I’ve been looking at all of my positions in a new light.
I have discovered what most of you must already know, there is quite a bit of diversity in what companies report. Probably 2/3 of the companies I follow report Adjusted Diluted EPS, which is great and easy. A few will only do adjusted earnings but not EPS and requires dividing by the number of shares, which is pretty easy.
Some were hiding - for instance UA didn’t have this info in the press releases but did have them by quarter in a spreadsheet on their web site.
But there are others (mostly non-tech companies) that make no reference to adjusted earnings at all that I can find. Examples:
COST, CMG, MA, MIDD, NFLX, SBUX, WFM, NKE. And AFOP before last quarter.
(I find even more odd the practice of reporting on uneven ‘quarters’ of 12/13/17/18 weeks (COST), so strange, but that’s another story. I sold COST due to the earnings but may have sold just because I can’t understand why someone present their financials that way.)
I looked on the internet for how to create your own adjusted earnings when the company doesn’t report them, and didn’t find anything particularly helpful. So just adding stock based comp is enough in your opinion? That seems pretty straightforward. I wonder if the companies I list above have enough stock based comp to make the breakout worthwhile for them. I will find out.
Will adding stock based comp address the tax benefit example you list above? Thanks again for all the guidance (Saul in particular but really everyone)! I feel like I’m learning a ton every day on this board.
Hi Utah Chris,
But there are others (mostly non-tech companies) that make no reference to adjusted earnings at all that I can find.
Companies that give a lot of stock based compensation tend to be early, but rapidly growing, tech companies. They lure top employees with the hope that their stock holdings will increase rapidly in value. Staid, old-line companies like Costco have plenty of cash to pay salaries, and probably give out very little proportionately in stock based compensation. The difference between quarterly earnings with and without stock based compensation might be as little as changing from 75 cents to 76 cents in a quarter, since it’s against a much larger base of earnings. So they just don’t bother with it.
When the company has a warrant repricing or a huge one time item, like a tax benefit, or the sale of a building, or a big non-cash amortization of intangibles, they tend to point it out to you. I’d back out any of those. Companies that give you adjusted earnings have usually already backed them out for you.
Hope that helps.
Saul
Yep a bunch as always Saul, thanks again. -Chris