I know SNCR is a Saul stock. BTW, I had argued with Saul about ELLI long ago because of the same reason, but in the end ELLI continued to go up.
Having said that…
SNCR’s trailing 12M adj EPS is $2.24. However the trailing 12M GAAP EPS is only $1.16
The current stock price is $36.
Adj EPS PE is 16 vs GAAP PE of 31.
GAAP earnings for 2016 are expected to be equal to 2015 earnings, whereas adj earnings expected to rise by 8% (per analyst estimates which can obviously either be too pessimistic or too optimistic)
I think there is a reason why we have the accounting standards. Otherwise it would be the wild wild west. People would invent their own metric (not they dont already do it under the guise of non-GAAP).
Companies can start to pay all the executives in stock (if they accept it) and suggest that we had no operating expense related to manpower as this is adjusted in the sharecount. But no, the impact of stock comp is not in single year, but for every single year of the company’s existence in the future. So I want non cash compensation to be accounted for (GAAP requires it but adj numbers don’t include them)
For the latest quarter, all the adjustments are in their press release dated May 5, 2016. They paid 6 MM in stock comp, and 12MM in acquisition costs that they conveniently added back to their GAAP loss of 7 million to swing to 23MM profits. If you incur a cost associated with acquisation (cost is not the same as capital payment to acquire an asset), how is that adjusted? Is it because it is one time? If the nature of these are one time, then there should not be consistently major difference between their GAAP and adj incomes. There are plenty of companies where GAAP and adj net incomes are close or exactly same.
In 2014, they had 38MM GAAP net income but 76MM adjusted GAAP income. If these adjustments are part of every years accounting, they are not one time.
And remember, the free shares they think they paid out (if they didnt think its free they would not add those expenses back to present an adjusted figure), those shares will cost us for ever. Every new dollar earned will be shared by additional shares issued in 2014.
To illustrate this further use this hypothetical example:
At T0, shares outstanding is 1000
For period ending T1 (T0 to T1), they earned GAAP net income of 50
GAAP EPS = 0.05. Share worth 20x or $1.
Alternative 1, they decided to pay 10 in stock comp. That’s 10 shares.
New adjusted report:
At T1 , shares outstanding is 1010
Net Income adjusted (i.e add back 10 of stock comp) = 60
Adj EPS = 0.0594
Alternative 2, they decided to pay 30 in stock comp. That’s 30 shares
New adjusted report:
At T1 , shares outstanding is 1030
Net Income adjusted (i.e add back 30 of stock comp) = 80
Adj EPS = 0.0776
As you can see, the magic keeps working. The more you pay in stock, the more you add to your adj. EPS.
What’s the downside? You have more shares in the future to claim the share of your profits.
If the following year, they make 60 in GAAP net income (and no stock comp gimmick)
In scenario A, with 1000 shares outstanding, you have EPS = 6 cents
In scenario B, with 1010 shares outstanding, you have EPS = 5.9 cents
In scenario c, with 1030 shares outstanding, you have EPS = 5.8 cents
5.8c instead of 6c is 3.33% worse. All else equal, the company is now worth 3.33% less because of the fact that the management decided to pay with cash in the first scenario. And this cost is incurred for life.
So please don’t ignore stock based comp or base your analysis or purchases on adjusted figures.
Now, if you are a stock flipper, then it does not matter. Your goal is to buy now and flip it later to someone else who is willing to pay more. Since everyone ignores the GAAP, this works. Just like things worked for you in 2003-2006 when people were buying overpriced houses to someone else at even higher prices. But fundamentally, it is a flawed strategy. It works for the same reason as some people make money in a Ponzi scheme.
We dont care about GAAP. But when the valuation drops significantly, and a private equity or another public company wants to take over the business, they will look at the GAAP earnings. Because paying executives with company stock is not something you can do forever, and those share are not worth nothing.