Saturday, February 20, 2016

BARRONs: Herb Greenberg and Donn Vickrey


Alibaba: Digging Into the Numbers

Vickrey: I like to say that I’m an accountant in recovery. I went to get a Ph.D. in accounting, and by chance I ran across the Thornton O’glove book, Quality of Earnings,in my dissertation research. Where O’glove was reading through [10-]Qs and [10-]Ks, I applied a statistical model to the data from the Qs and Ks—basically using the computers to crunch through a lot of financials—to figure out which companies were more conservative, which were less conservative, and which ones might be cooking the books.

Bob Olstein: Earnings vs.Cash Flow 

The first step to becoming an investor is to identify the right Master.  Robert Olstein of the Olstein Funds is one of  the most sophisticated investors on all of Wall Street.  Today I am sharing historical articles written about Olstein that investors should examine and learn from.



OLSTEIN: Earnings vs. Cash Flow



New York Times  7/18/1999 

"EARNINGS VS. CASH FLOW -- Mr. Olstein first examines what a company generates in cash flow from its operations. A company with excess cash flow can raise dividends and survive tough times without being forced to borrow or sell assets.
To calculate a company's cash flow, start with net income. Add back what it has taken in depreciation expenses and accounts payable. Then subtract capital expenditures, inventories and accounts receivable.
Watch out, Mr. Olstein said, if net income is much higher than cash flow. The company may be speeding or slowing its booking of income or costs, perhaps to meet analysts' earnings forecasts."



 Fortune Magazine  6/26/2000

  Eight Warnings You Want to See by Herb Greenberg
"Positive free cash flow. Olstein looks at a company's financials, specifically the 10-Qs and 10-K, and makes a beeline for the statement of cash flows. We're not talking about the stated cash flow from operations, investing activities or financings. We're talking about cash flow from operations minus capital expenditures--the amount of usable cash the company actually generates, which can be used to buy back stock, pay dividends, make acquisitions, and grow the business." 

 TheStreet.com 6/25/01
Fund Junkie by Ian MacDonald
" Our main defense against risk is only buying companies that either are currently generating excess cash flow, or will in the next three years."

Financial Advisor Magazine August 2001
Staying Alert Pays Off by Maria Brill
"To Olstein, being right means finding companies with excess cash flow that are selling at inexpensive levels because investors are tuning them out. "Cash flow is the oil that lubricates the corporate engine," he observes."

 The Washington Post 2/17/2002
"By concentrating on cash, investors can learn enough about a company to eliminate it as a possible investment. FOr example, if you want to get a quick-and-dirty reading, look not at a firm's "income statement" but at a more obscure tables of numbers called its "statement of cash flows".

New York Times 11/14/2004 
Sometimes It Takes a Sherlock by Gretchen Morgenson
""Everyone looks at conventional price-earnings ratios but that doesn't tell you anything about the deviation between cash flow and reported earnings," Mr. Olstein said."

 Financial Advisor Magazine June 2006
Forensic Accounting by Jeff Schlegel
"Olstein believes that cash--particularly free cash flow--is king because he thinks it's a truer measure of a company's underlying performance. He and his staff analysts look for companies trading at a discount to free cash flow. Lack of free cash flow is one reason why he doesn't like (a sector) ..."

 CFA Institute 12/4/2007
Free Cash Flow & Quality of Earnings by Fred H. Speece, Jr. CFA

BloombergBusinessweek 8/17/2009 
Behind Bob Olstein's Comeback by Karyn McCormack
"....buy quality companies that have "wide moats" (in other words, "hard to compete with out of the box"), have been generating free cash flow throughout the financial crisis, and have a great balance sheet to withstand any issues."

 New York Times 1/9/2010
Fair Game:Why All Earnings Are Not Equal by  Gretchen Morgenson
As the market goes higher, it becomes more important to measure the quality of corporate earnings, he said. You have to look behind the numbers.
Adjustments that investors need to make now, in Mr. Olstein's view, are a result of disparities between a company's reported earnings and its excess cash flow. Earnings are what investors focus on, but because these figures include noncash items, based on management estimates, the bottom line may not tell the whole story.
Cash flow, on the other hand, is actual money that a company generates and that its managers can use to invest in the business or pay out to shareholders.

SOME of the widest gulfs between earnings and cash flows, Mr. Olstein said, are showing up the ways companies account for capital expenditures."

 New York Times 9/11/2010
Cash is king, he says. He spends a lot of time crunching numbers in a search for strong cash flow, and his winnowing process goes something like this:
First, he scrutinizes a company's financial reports in an effort to determine whether they paint an accurate picture. In this work, he has considerable expertise: he was an auditor with the old Arthur Andersen & Company, and then, in the 1970s, was co-author of The Quality of Earnings, a financial newsletter that, in its day, was perhaps the foremost authority on spotting the gray areas of corporate accounting.
If you're analyzing a company, he says, you first have to understand what they're really earning, as opposed to what they say they're earning. 

 American Association of Individual Investors  October 2010
"the forensic analysis we undertake
to analyze a company's results and the quality of its
earnings for valuation purposes.
1. Using the company's cash fl ow statements, we begin by
reconciling the difference between free cash fl ow and
reported earnings under accrual accounting. (Accrual
accounting records revenues, expenses and income
when the transaction occurs, as opposed to when
the cash is actually received or spent.) The smaller
the difference between free cash fl ow and reported
earnings, the higher the quality of earnings."

 Barron's 4/30/2011
Depreciation, An Appreciation by Lawrence C. Strauss
"He grows more concerned when a company's reported earnings significantly exceed its cash flow,..."

 Value Investor  4/30/2012
"Describe where you look first in researching
a company's financials.
RO: We begin by reconciling the difference
between free cash flow and reported
earnings under accrual accounting. The
smaller the difference, the higher the
quality of earnings. The bigger the difference,
the more work we have to do to
understand the makeup and sustainability
of free cash flow."




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