Thank you 1YPEG!

Investment Analysis Clubs Saul’s Investing Discussions
#24

Please remember everyone that the 1YPEG isn’t a magic formula that replaces everything else. It’s just a good indicator. But it doesn’t replace looking at the company and evaluating what it does, reading the conference call transcript, making sure the company isn’t weighted down with debt, and all the other factors I’ve talked about in the FAQ. It also can be distorted by one bad quarter two or three quarters back, etc. I’m concerned that everyone will get carried away with unrealistic expectations for this indicator.

Best,

Saul

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#25

When you made the calculation you divided 66.60/2.22 rather than 1.66/2.22 what did I miss? Just trying to understand these math tricks.

Hi Gerald, Here it is:

Now let’s do the calculations:
*Earnings growth: 2.22 divided by 1.66 = 1.337, so earnings were up 33.7%.
*PE is $66.60/2.22 = 30.0
*PE divided by their rate of growth is 30/33.7 which gives you a 1YPEG of 0.89

#26

Hi Saul,
I was about to post the same thing. The 1YPEG is interesting, but not new. Someone else on here had called it a TTM PEG and I have seen books/articles do that very calculation and just call it the PEG. Typically the PEG is calculated with at least some forward look at earnings, such as past 2q and forward 2q but using the past 4q is not bad.

In my mind the nice part about using the past 4q is the simplicity. It doesn’t require any estimate of future earnings which are always a bit uncertain. The disadvantage is that it is looking backwards instead of forwards which is where the market is looking.

And just as Saul has said, To all the newer investors out there reading Saul’s board I would caution you to be careful how far you take this calculation. I haven’t quite figured out the reasons that Saul’s record is so amazing but I am pretty sure it is not because of a simple calculation that anyone can do. Saul talks a very simple game but what he is apparently able to do is far from simple.

So Saul, just to be clear upfront, I think your board is amazing and would not want to anything to even slow down the conversations on this board, but I think sometimes your ability to make things sound simple can be a little dangerous to the newer readers out here. It is not simple! A lot can be learned from reading this board and I read it religiously, in fact so much that my wife thinks I am having an emotional affair with TMF :). So, to repeat, I am not trying to change anything, just caution the readers to take it slow and think things through on their own.

Just as one simple final example, and example is all it is, is your most recent quarterly update. Which,btw, congrats on your year so far, simply awesome… Anyway, in your most recent update you showed a new position in SNCR and an elimination of a position in AIOCF.
In your write up of SNCR, you state a 1YPEG of .87, while I did the same calculation for AIOCF and came up with .66, which is better.

Clearly Saul has an ability here that the average person doesn’t have, I am still pondering it but I think it has to do with very strong fundamental analysis combined with an innate sense of when the market may move against a particular stock, and perhaps the most important part of all, a confidence and decisiveness to get out as soon as he finds something better. I think most people are not able to do this without watching the stocks sold and worry that they might take off without them. This allows him to get out as soon as there is an issue and never look back. Impressive…

Still pondering, and still learning

Long AIOCF
Randy

19 Likes
#27

perhaps the most important part of all, a confidence and decisiveness to get out as soon as he finds something better. I think most people are not able to do this without watching the stocks sold and worry that they might take off without them. This allows him to get out as soon as there is an issue and never look back. Impressive…

Thanks Randy
I do think that is one of the most important things: It doesn’t matter what the stocks I’m out of do, what matters is what the ones that I’m in do. Over the years I’ve been in AMZN, AAPL, NFLX, SSYS, DDD, ISRG, ATW, and most of the other MF favorites. I truly don’t care what they are doing now. I don’t even think about it. I just pay attention to the stocks that I’m in (and a few that I might be thinking of taking a position in).
Best
Saul

By the way, I see nothing wrong with you staying in AIOCF. It was just all the movements of the value of the Canadian dollar which made it too complicated for me (not only in buying and selling the stock in Canada, but the value of their past and present earnings changing in dollars as the exchange rate changed while I was looking at the stock price in US dollars. I have enough of that with CRTO, but at least with CRTO it’s actively traded on the Nasdaq, and it’s a very compelling story).

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#28

By the way, I see nothing wrong with you staying in AIOCF. It was just all the movements of the value of the Canadian dollar which made it too complicated for me (not only in buying and selling the stock in Canada, but the value of their past and present earnings changing in dollars as the exchange rate changed while I was looking at the stock price in US dollars. I have enough of that with CRTO, but at least with CRTO it’s actively traded on the Nasdaq, and it’s a very compelling story).

Saul,

Interesting. The value of the Euro has also been dropping against the dollar. In fact, it is likely that with ECB QE the Fed’s future interest rate increases that the Euro will keep falling relative to the dollar. Yet, you have over 8% in CRTO and sold out of AIOCF.

I previously passed on CRTO, but I started revisiting it yesterday. Running the numbers on CRTO is a lot more complicated than for most stocks: they report in Euros, the don’t report adjusted EPS, they provide forward guidance in ex-TAC sales and in adjusted EBITDA. I’ve started figuring out their earnings.

Here’s what I did to get their adjusted EPS

Step 1: I take their Adjusted Net Income which they report in their press releases every quarter.

Step 2: I look up their diluted shares and divide Adj NI by the shares. This gives me the adj EPS in Euros.

Step 3: I look up the exchange rate and convert to USD. I’m still debating with myself whether I should use the current exchange rate for all their historical quarters or whether I should use a different time specific exchange rate for each quarter (i.e. look up the historical exchange for each period individually. Thoughts?

Some more thoughts on CRTO: the stock is a great buy IF the earnings will keep growing in the future. The technology of digital marketing moves very fast and they will need to keep up to maintain their growth.

CRTO has been growing fastest in the Americas and it’s likely this will continue. This alleviates concerns about future USD strengthening, especially if a large part of their operating costs are in Europe. The same is true for AIOCF: strong sales in the US should alleviate concerns about a weakening CAD.

Regarding AIOCF, my biggest concern is that their CEO is hell bend on growing the top line. I don’t know if this is an ego thing or what. I have posted on this several times in the past year. There are other companies that are growing revenues AND growing EPS at a huge clip. Who cares if a company grows sales without this growth also dropping to the bottom line. For this reason, I have limited my allocation in AIOCF. Saul has not seemed concerned about this in the past so I was surprised that he exited AIOCF. Is this another one of his premonitions that seems to happen often?

Chris

2 Likes
#29

perhaps the most important part of all, a confidence and decisiveness to get out as soon as he finds something better. I think most people are not able to do this without watching the stocks sold and worry that they might take off without them. This allows him to get out as soon as there is an issue and never look back. Impressive…

Hi Chris, I’m always concerned when a company doesn’t care about the bottom line, which is why I have stayed out of AMZN for the most part. I’m sure this is part of why I exited AIOCF (although their earnings have continued to go up, just a lot less spectacularly).

Step 3: I look up the exchange rate and convert to USD. I’m still debating with myself whether I should use the current exchange rate for all their historical quarters or whether I should use a different time specific exchange rate for each quarter (i.e. look up the historical exchange for each period individually. Thoughts?

It’s too complicated to go back and change past earnings as the exchange rate changes, so I just keep the earnings I calculated when the earnings came through. Not exact, but it’s what I do.

The reason I’ll put up with this for CRTO and not for AIOCF is that CRTO is growing earnings at over 300% and AIOCF at 20-25%. I can find 20-25% elsewhere without the headaches, but not 300%. By the way, more business in the US makes Euro earnings seem to grow even faster with the weak euro (even wilder comparisons for those looking at it in Euros).

Best,

Saul

1 Like
#30

It’s too complicated to go back and change past earnings as the exchange rate changes, so I just keep the earnings I calculated when the earnings came through. Not exact, but it’s what I do.

It’s 2 seconds to change them all when you have them in a spreadsheet. I guess I’m still noodling on which way is more informative. I suppose just leaving the number is Euros is one way. But then again this company’s regional revenue is dynamic with the Americas growing far faster than Europe. I think Americas revenue will pass Europe in the next few quarters.

Chris

#31

It’s too complicated to go back and change past earnings as the exchange rate changes, so I just keep the earnings I calculated when the earnings came through. Not exact, but it’s what I do.

Per GAAP, if a company is consolidating foreign currency into native currency, the adjustment is made as of the end of the reporting period and not constantly recalculated. But, I would think that for these purposes, seeing the historical numbers adjusted to current conversion rates would provide more comparable numbers.

E.g., imagine historical earnings of 100 at a time when the conversion rate was 1 to 1 so the USD was 100. Then, present earnings of 130, but now the conversion rate is .8 so the USD is 104. In USD it appears that earnings are flat even though they have grown 30%. Both figures are relevant, depending on perspective.

I would think it would be simple enough to have a cell in the spreadsheet for current conversion rate and base all conversions on that cell.

#32

E.g., imagine historical earnings of 100 at a time when the conversion rate was 1 to 1 so the USD was 100. Then, present earnings of 130, but now the conversion rate is .8 so the USD is 104. In USD it appears that earnings are flat even though they have grown 30%. Both figures are relevant, depending on perspective.

Reconverting them all at the current rate gives you a comparison in constant currency, but keeping the earnings in dollars at the time reported tells you what they actually were worth. If it was a year ago that they earned the equivalent of $1.00, would you reduce that now to 80 cents because the exchange rate has changed? Not only doesn’t that make sense because what they earned was based on the prices they paid at the time, and the prices they sold their services at, but it leaves you floating because it means no earnings ever mean anything, they can change tomorrow. Todays earnings though are rightly at todays exchange rate, for the same reasons.

There’s no right and wrong answer for this. That’s just the way I see it.

Saul

1 Like
#33

There’s no right and wrong answer for this.

I agree. I think there would be good reason to do it both ways. And, one is going to want to look at the pattern in euro, then dollars, and now dollars to get a complete picture.

#34

Reconverting them all at the current rate gives you a comparison in constant currency, but keeping the earnings in dollars at the time reported tells you what they actually were worth. If it was a year ago that they earned the equivalent of $1.00, would you reduce that now to 80 cents because the exchange rate has changed? Not only doesn’t that make sense because what they earned was based on the prices they paid at the time, and the prices they sold their services at, but it leaves you floating because it means no earnings ever mean anything, they can change tomorrow. Todays earnings though are rightly at todays exchange rate, for the same reasons.

There’s no right and wrong answer for this. That’s just the way I see it.

Reconverting all past quarters to the current rate is similar to just looking at it in constant Euros which is what we do for all US-based companies. We don’t convert our US-based companies into any foreign currencies. So if everything else remains equal looking in constant Euros is probably best. Now, we can argue that all things are not equal with this company because the revenue growth (and thereby earnings contribution) from different regions around the globe is changing. Here’s how it’s been changing over the past 2 years in millions of Euros Ex-TAC revenue:


Americas	EMEA	APAC	
9.6	        21.2	6.6   Q113
11.1	        21.8	7.1   Q213
11.9	        25.4	9.6   Q313
15.1	        29.1	10.7  Q413
14.7	        35.3	12.7  Q114
18.6	        35.1	13.3  Q214
23.1	        38.7	15.8  Q314
33.4	        46	16.8  Q414

So you can see how hast the Americas is growing versus Europe. APAC is also growing much faster then Europe but from a small base.

Chris

#35

Hi!

On the CRTO press release for 4Q 2014 at the Investors Relations site they give the numbers you try to get for net income and adjusted EPS for the quarter and year end, in euros:

"Net income in the fourth quarter 2014 was €18 million, representing a €14 million increase compared with €3 million in the fourth quarter 2013. Net income available to shareholders of Criteo S.A. for the fourth quarter 2014 was €17 million, or €0.275 per diluted share, compared with €3 million, or €0.055 per diluted share, in the fourth quarter 2013.

Net income for fiscal year 2014 was €35 million, representing a €34 million increase compared with €1 million fiscal year 2013. Net income available to shareholders of Criteo S.A. for fiscal year 2014 was €35 million, or €0.548 per diluted share, compared with €1 million, or €0.019 per diluted share, in fiscal year 2013.

Adjusted Net Income for the fourth quarter 2014, or our net income adjusted to eliminate the impact of share-based compensation expense, amortization of acquisition-related intangible assets, acquisition-related deferred price consideration and the tax impact of these adjustments, was €23 million, representing a €16 million increase compared with €7 million in the fourth quarter 2013.

Adjusted Net Income for fiscal year 2014 was €53 million, representing a €42 million increase compared with €11 million in fiscal year 2013."

Hope that help

María

#36

Reconverting all past quarters to the current rate is similar to just looking at it in constant Euros which is what we do for all US-based companies.

Wrong, Chris!!! Think about it. Think of a US company that makes part of it’s money in europe in euros. If they reported a certain income two years ago, we don’t go back now and reduce the income they made two years ago because the euro is lower now. We keep old reporting at whatever value the euro was then. That’s the right way to do it for CRTO as well.

Saul

PS - We are not in Europe thinking about their earnings in euros, we are in the US, changing them to dollars AT THE TIME, just the way we do with an American company that make part of its money in Euros!

1 Like
#37

And yet, Saul, with the American company, we often look at both actual and constant dollars when there is significant foreign income. The actual dollars tells us what is actually flowing back to the company, but the constant dollars tells us how much of this is due to currency fluctuation.

As in my example, actual dollars shows us only a 4% growth, but constant dollars shows us 30%. While the company only got 4% more dollars, it is still a strongly growing company.

1 Like
#38

Wrong, Chris!!! Think about it. Think of a US company that makes part of it’s money in europe in euros. If they reported a certain income two years ago, we don’t go back now and reduce the income they made two years ago because the euro is lower now. We keep old reporting at whatever value the euro was then. That’s the right way to do it for CRTO as well.

Saul

PS - We are not in Europe thinking about their earnings in euros, we are in the US, changing them to dollars AT THE TIME, just the way we do with an American company that make part of its money in Euros!

Saul, I think what’s important is understanding the growth of the underlying business without worrying about our investment gain/loss in FOREX. Figuring out the FOREX gains/losses for CRTO (not for us as investors) would be more relevant but more involved (see below). It shouldn’t matter if you are a US investor (with our investment in USD) or a European investor (with our investment in EUR). CRTO is more complicated because their business is truly global with business in Europe (48% and shrinking as a %), Americas (35% and growing as a %), and Asia (17% and holding steady as a %). Trying to make all these adjustments every quarter would be quite a task so why not just look at Euros and then do what Anirban suggests: look at number of customers, customer retention, spend per customer, etc.

Chris

#39

CRTO is growing earnings at over 300%

Saul, their Q4 press release says 2014 Adjusted EBITDA was 79 million euros and for 2015 management is guiding to between 108 million and 115 million. Even at the top range, that’s less than 50% growth.

Revenue ex-TAC was 304 million euros in 2014 and for 2015 management is guiding to between 433 and 440 million. Again, even at the top range that’s less than 50% growth.

I also assume there will be more share dilution in 2015.

Am I screwing that up? Or do you think they’re horribly sandbagging? 50% is a long ways from 300%.

Thanks!
Neil

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#40

Saul, I think what’s important is understanding the growth of the underlying business without worrying about our investment gain/loss in FOREX. Figuring out the FOREX gains/losses for CRTO (not for us as investors) would be more relevant but more involved (see below). It shouldn’t matter if you are a US investor (with our investment in USD) or a European investor (with our investment in EUR). CRTO is more complicated because their business is truly global with business in Europe (48% and shrinking as a %), Americas (35% and growing as a %), and Asia (17% and holding steady as a %). Trying to make all these adjustments every quarter would be quite a task so why not just look at Euros and then do what Anirban suggests: look at number of customers, customer retention, spend per customer, etc.

Chris, I see this as two separate issues:
First: How well the business is doing (looking in Euros for rate of internal growth, etc)
Second: How much the business is worth to me (Thinking in dollars). For an extreme example, for clarity, if I bought $100 of shares in a foreign company in a country called Pomland, with currency called poms, worth $1.00 each, and it grew earnings by 25% in its currency, but the pom devalued over the course of the year by 60%, so that the 125 poms were now worth only $50, the company was doing fine in poms, and to people in Pomland, but it would be silly of me to say “I’m thinking of constant poms so I’m happy with my investment”. You have to think in dollars if your own life is based on dollars.

Another example, for Criteo: If in 2017 the Euro was back up to $1.65, would you reprice the $0.92 earnings they made in 2014 and say “They didn’t make $0.92 earnings back in 2014, they made $1.55 in 2014, because that’s what it would have been worth now”? No way.

Say I bought a vacation house in France for 100,000 euros three years ago, when I had to pay $1.65 for 1 euro and it cost me 165,000 euros. Now it’s worth 110,000 euros, but a euro is worth $1.08 instead of $1.65. A Frenchman, thinking in constant Euros, would say the price is up 10%. I can’t go back and reprice and say "Now a euro is only worth $1.08 so I only paid $108 thousand. NO! I paid the price in the exchange rate at the time. It was $165,000. That house at 110,000 euros is only worth about $119,000 to me now. The Frenchman has the luxury of thinking in constant euros. I have to think in dollars and I can’t go back and reprice old figures in terms of what the exchange rate is now.

Hope this explains it a bit.

Saul

4 Likes
#41

CRTO is growing earnings at over 300%.
Saul, their Q4 press release says 2014 Adjusted EBITDA was 79 million euros and for 2015 management is guiding to between 108 million and 115 million. Even at the top range, that’s less than 50% growth.

Neil, Their earnings have been:

2012 - 0.09 euros
2013 - 0.20 euros
2014 - 0.85 euros

The last four quarters were
0.12
0.09
0.27
0.37

Now if they flat-lined at 0.37 all year in 2015, with no sequential growth at all, they’d make 1.48 and be up 74%. Yes, I think they are lowballing. I don’t think they will be up 300% again, obviously. But it’s hard to imagine them up less than 100% in earnings for 2015.

Saul

2 Likes
#42

Yes, Saul, we agree about evaluating the business.

Regarding the FOREX, it really come down to where the business operates, not what currency they report in. Currency exchange rates will already get reflected in the stock price. As an extreme example imagine a company that reports in EUR but operates 100% in the U.S. Such a company’s stock price will move based on how the business is doing and also automatically adjust based on the exchange rate. So if the EUR declined 10% versus the USD then the stock price in EUR would rise 10% because its business is entirely in the U.S. Therefore, you’re not really investing in EUR even though the company reports in EUR. In the case of CRTO, we are investing 48% in EMEA, 35% in the Americas, and 17% in APAC. If most of the payroll is in France then some expenses will be lower (relative to the blended revenue) when the EUR is weak and higher when the EUR is strong.

Chris

#43

Looking at the figures in euro is a way to see how the company is doing (versus actual dollars to see how one’s investment is doing). The reason I suggested that conversion to constant dollars in addition for seeing how the company is doing is that one may be more comfortable seeing things in terms of dollars if dollars is one’s everyday currency.

This would be more obvious if the investment was in a Japanese company since many who trade normally in dollars would not be used to evaluating growth in Yen. To be sure, the growth percentages are going to be the same, regardless of the currency, but one might react differently to 3X growth from 1 cent to 3 cents compared to 3X growth from $100 to $300.