On July 8, Pepsi Bottling Group (PBG) posted stronger than expected earnings of $.78 per share as compared to analysts expectations of $.73 per share.
Revenue for PBG declined by 7% on a Y/Y basis and operating expenses declined by 10% Y/Y. As a result of the expenses being reduced by PBG, they were able to post a $.78 per share profit. And for the past 12 months, PBG earnings have declined 67.75% TTM and have declined by 13.54% during the past five years.
A
s addressed in the previous note, the LT Debt of PBG is a cause for concern. Even though PBG has reduced their long term debt by over 1% Q/Q which now represents a LT Debt/Equity ratio of 3.19. This is a good sign that PBG is not using debt to finance their business. Debt will hinder PBG's bottom line in the future. For example, PBG has paid $1,304M in interest payments due to their debt and as a result it has reduced their earnings year till date because of these interest payments.
As the revenue stream remains weak, PBG should take a few steps to increase their earnings and to strengthen their balance sheet, and as a result it will increase the bottom line.
1. PBG should temporary suspend their dividends. As the end of 2Q of 2009, PBG has paid out $72M in dividend payments to shareholders. This will help PBG bottom line, and should be used to pay off debt.
2. PBG should continue to make cost reductions and use those cost savings to reduce their debt.
3. PBG should continue to make an aggressive effort to increase the top line (revenue), instead of the continuous trend of revenue reductions.
PBG Current Fundamentals:
ROA (TTM): 1.9
ROE (TTM): 10.9
Current Ratio (MRQ): 1.38
Quick Ratio (MRQ):1.08
LT Debt/Equity (MRQ): 3.19
Total Debt/Equity (MRQ): 3.42
As it was noted last time, does PBG's current price of $33.65 justify itself? We know that PBG is being pursued by Pepsi, and investors hope to make money off the purchase due to the current P/E ratio of 33.1. However, we believe PBG is over – priced at these current levels and should take the necessary actions to help the bottom line.
Disclosure: No position
Monday, August 3, 2009
Thursday, July 2, 2009
Is Pepsi Bottling Group's Current Price Justified?
The Pepsi Bottling Group (PBG) is within 10% of its 52 week high. PBG has met or beaten expectations for the past four quarters.
However, on April 22, PBG earnings were down 23.1% from first quarter of 2008, and for second quarter 2009, the consensus estimates for PBG are for .73 per share, which would represent a 6.5% decline Y/Y.
Investors seem to believe that PBG has a strong future with a P/E ratio of 40.8, but PBG earnings for the past twelve month have declined 63.7 for the twelve trailing months. Does this justify the price of $33.86?
Now let us look at the fundamentals of the company:
ROA (TTM): 1.5
ROE (TTM): 10.5
Current Ratio (MRQ): 1.42
Quick Ratio (MRQ): 1.10
LT Debt/Equity (MRQ): 4.64
Total Debt/Equity (MRQ): 4.91
For the Pepsi Bottling Company, the ROE and ROA is a laggard to its peer Coca Cola (KO). In regards to the Current Ratio and Quick Ratio, PBG has enough current assets to pay off their current liabilities. However, what is a cause for concern is the LT Debt/Equity ratio of 4.64.
Since Q2 2008 to Q1 2009, the long term debt for the PBG has increased by 37%. This can hurt future earnings for PBG as the interest expense will play a negative impact on their bottom line.
On July 7, PBG will be reporting their Q2 2009 results. We should pay careful attention of their revenue stream as it has shown weakness for the past three quarters, their bottom line, and to see if they continue to use debt to finance their business.
Disclosure: No Positions
However, on April 22, PBG earnings were down 23.1% from first quarter of 2008, and for second quarter 2009, the consensus estimates for PBG are for .73 per share, which would represent a 6.5% decline Y/Y.
Investors seem to believe that PBG has a strong future with a P/E ratio of 40.8, but PBG earnings for the past twelve month have declined 63.7 for the twelve trailing months. Does this justify the price of $33.86?
Now let us look at the fundamentals of the company:
ROA (TTM): 1.5
ROE (TTM): 10.5
Current Ratio (MRQ): 1.42
Quick Ratio (MRQ): 1.10
LT Debt/Equity (MRQ): 4.64
Total Debt/Equity (MRQ): 4.91
For the Pepsi Bottling Company, the ROE and ROA is a laggard to its peer Coca Cola (KO). In regards to the Current Ratio and Quick Ratio, PBG has enough current assets to pay off their current liabilities. However, what is a cause for concern is the LT Debt/Equity ratio of 4.64.
Since Q2 2008 to Q1 2009, the long term debt for the PBG has increased by 37%. This can hurt future earnings for PBG as the interest expense will play a negative impact on their bottom line.
On July 7, PBG will be reporting their Q2 2009 results. We should pay careful attention of their revenue stream as it has shown weakness for the past three quarters, their bottom line, and to see if they continue to use debt to finance their business.
Disclosure: No Positions
Thursday, June 25, 2009
JPMorgan: Number One Bank in America
It should come to no one’s surprise of the recent news that J.P. Morgan (JPM) is the number one bank in the world last year, due to their capital adequacy or their Tier 1 ratio according to The Banker magazine and reported by Reuters. Tier 1 is the most relevant measurement of bank strength.
Top Foreign Stocks (David Hunkar) listed the top U.S. banks with highest Tier 1 in the most recent quarter (based on 1st quarter reports):
Rank Bank Tier 1 Ratio
1 State Street (STT) 19.13%
2 Bank of New York Mellon (BK) 13.80%
3 BB&T (BBT) 12.10%
4 Citibank (C) 11.80%
5 JPMorgan Chase (JPM) 11.30%
6 KeyCorp (KEY) 11.16%
7 Suntrust (STI) 11.00%
8 US Bank (USB) 10.90%
9 Fifth Third Bank (FITB) 10.90%
10 Regions Financial (RF) 10.37%
11 PNC Bank (PNC) 10.20%
12 Bank Of America (BAC) 10.09%
13 Wells Fargo (WFC) 8.28%
As banks are starting to repay the TARP funds infusion that they received, we should pay careful attention to the bank’s Tier 1 ratios this upcoming earning season – as this will give us a clear picture on how banks are building their capital reserve to offset the continuing credit losses.
Top Foreign Stocks (David Hunkar) listed the top U.S. banks with highest Tier 1 in the most recent quarter (based on 1st quarter reports):
Rank Bank Tier 1 Ratio
1 State Street (STT) 19.13%
2 Bank of New York Mellon (BK) 13.80%
3 BB&T (BBT) 12.10%
4 Citibank (C) 11.80%
5 JPMorgan Chase (JPM) 11.30%
6 KeyCorp (KEY) 11.16%
7 Suntrust (STI) 11.00%
8 US Bank (USB) 10.90%
9 Fifth Third Bank (FITB) 10.90%
10 Regions Financial (RF) 10.37%
11 PNC Bank (PNC) 10.20%
12 Bank Of America (BAC) 10.09%
13 Wells Fargo (WFC) 8.28%
As banks are starting to repay the TARP funds infusion that they received, we should pay careful attention to the bank’s Tier 1 ratios this upcoming earning season – as this will give us a clear picture on how banks are building their capital reserve to offset the continuing credit losses.
Monday, April 13, 2009
Wells Fargo: Earnings Announcement No Cause for Euphoria
Bloomberg reported Monday that Wells Fargo (WFC) may need an additional $5OB to pay back the U.S. Treasury and to cover loan losses. WFC surprised the market last week, by pre – announcing a $3B profit in the 1st quarter, but provided limited details of that pre – announcement.
We should not be euphoric about this announcement, as there are some unknown details and negative headwinds that the company still faces.
With the current job losses continue to increase at a 700K per week clip, we can expect the credit losses for WFC will rise with the higher unemployment. This will reduce the company’s bottom line, and will impact their earnings going forward.
As reported by Bloomberg, WFC charge – off rate significantly increased to $3.3B in its current quarter compared to $2.8B from the last month.
Credit Suisse analyst Moshe Orenbuch stated,
“Given rising unemployment, continued home price declines and general macroeconomic headwinds, WFC’s consumer and commercial portfolios remain at risk for meaningfully higher credit losses over 2009 and 2010.”
I could not agree more.
I believe the strong movement in WFC is premature, and will settle back down in the mid to low teens.
Disclosure: The author does not have a position in WFC.
We should not be euphoric about this announcement, as there are some unknown details and negative headwinds that the company still faces.
With the current job losses continue to increase at a 700K per week clip, we can expect the credit losses for WFC will rise with the higher unemployment. This will reduce the company’s bottom line, and will impact their earnings going forward.
As reported by Bloomberg, WFC charge – off rate significantly increased to $3.3B in its current quarter compared to $2.8B from the last month.
Credit Suisse analyst Moshe Orenbuch stated,
“Given rising unemployment, continued home price declines and general macroeconomic headwinds, WFC’s consumer and commercial portfolios remain at risk for meaningfully higher credit losses over 2009 and 2010.”
I could not agree more.
I believe the strong movement in WFC is premature, and will settle back down in the mid to low teens.
Disclosure: The author does not have a position in WFC.
GS: Strong Earnings, Still Faces Negative Headwinds
The early earnings released today by Goldman Sachs (GS) came as a surprise to all, but what is more of a surprise is the results were better than expected.
The street was expecting $1.60 (First Call) per share for the quarter, but GS reported a quarterly result of $3.39 per share, a 5% increase as compared to the first quarter of 2008.
Strong Trading and Principal Investments helped the top line, but weak Asset Management and Investment banking hinder GS total revenue stream. GS liquidity continues to gain strength.
There are some important highlights that we should look at from their press release.
Their investment banking segment showed a 30% decline Y/Y, and what is alarming is decline of 20% Q/Q. This is primarily due to a “significant decline in industry – wide equity and equity – related offerings.” We should expect this to be the constant theme for the upcoming year, as the global market conditions are unfavorable to stable.
The trading and principal investments showed a healthy increase of 40% Y/Y. This is very impressive given the current market conditions. This is due to a strong “performance in interest rate products, commodities and credit products.”
There are also a few things that we need to bear in mind in their press release statement. GS advises that their “illiquid assets generally continued to decline in value.” This can cause some concern in the near future.
In addition, GS mentioned that “credit products included losses from corporate debt and private equity investments, and mortgages included a loss of approximately $800M (excluding hedges) on commercial mortgages loans and securities.” This is an improvement over the 1st quarter of 2008, when GS reported a $1B loss in credit products.
The Asset Management and Securities services declined 29% Y/Y, and for the past quarter it reported a 17% decline Q/Q. During the recent quarter, GS reported a decrease of $27B to $771B, due to $16B of market depreciation, primarily in equity assets, and $11B of net outflows. This is a major area that investors should keep their eye on for the next year.
As assets continue to deteriorate, we can see continue decline of GS Asset Management business segment to continue to hinder their revenue stream.
However, on the bottom line of the income statement, GS expenses increased by 10% Y/Y. Of that amount the compensation expenses increased by 18% Y/Y, while other operating expense offset the increase due to modest to healthy reductions in other businesses expenses.
As been reported for the past couple days, GS has announced that it will offer $5 Billion of its common stock for sale to the general public. The purpose of the sale is to pay back part of the $10 Billion of the TARP funds received from the U.S. Treasury.
In closing, Chairman and CEO Lloyd Blankfein mentioned that
“Given the difficult market conditions, we are pleased with this quarter's performance…Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people. We believe these attributes position the firm to continue to create value for our clients and actively fulfill our role in the capital markets.”
Although GS has reported strong earnings for the quarter, as like Wells Fargo (WFC), I believe we have to take a wait and see approach with GS. We do not know the whole details of their earnings and what is on their balance sheet.
Disclosure: The author does not hold any positions in GS
The street was expecting $1.60 (First Call) per share for the quarter, but GS reported a quarterly result of $3.39 per share, a 5% increase as compared to the first quarter of 2008.
Strong Trading and Principal Investments helped the top line, but weak Asset Management and Investment banking hinder GS total revenue stream. GS liquidity continues to gain strength.
There are some important highlights that we should look at from their press release.
Their investment banking segment showed a 30% decline Y/Y, and what is alarming is decline of 20% Q/Q. This is primarily due to a “significant decline in industry – wide equity and equity – related offerings.” We should expect this to be the constant theme for the upcoming year, as the global market conditions are unfavorable to stable.
The trading and principal investments showed a healthy increase of 40% Y/Y. This is very impressive given the current market conditions. This is due to a strong “performance in interest rate products, commodities and credit products.”
There are also a few things that we need to bear in mind in their press release statement. GS advises that their “illiquid assets generally continued to decline in value.” This can cause some concern in the near future.
In addition, GS mentioned that “credit products included losses from corporate debt and private equity investments, and mortgages included a loss of approximately $800M (excluding hedges) on commercial mortgages loans and securities.” This is an improvement over the 1st quarter of 2008, when GS reported a $1B loss in credit products.
The Asset Management and Securities services declined 29% Y/Y, and for the past quarter it reported a 17% decline Q/Q. During the recent quarter, GS reported a decrease of $27B to $771B, due to $16B of market depreciation, primarily in equity assets, and $11B of net outflows. This is a major area that investors should keep their eye on for the next year.
As assets continue to deteriorate, we can see continue decline of GS Asset Management business segment to continue to hinder their revenue stream.
However, on the bottom line of the income statement, GS expenses increased by 10% Y/Y. Of that amount the compensation expenses increased by 18% Y/Y, while other operating expense offset the increase due to modest to healthy reductions in other businesses expenses.
As been reported for the past couple days, GS has announced that it will offer $5 Billion of its common stock for sale to the general public. The purpose of the sale is to pay back part of the $10 Billion of the TARP funds received from the U.S. Treasury.
In closing, Chairman and CEO Lloyd Blankfein mentioned that
“Given the difficult market conditions, we are pleased with this quarter's performance…Our results reflect the strength and diversity of our client franchise, the resilience of our business model and the dedication and focus of our people. We believe these attributes position the firm to continue to create value for our clients and actively fulfill our role in the capital markets.”
Although GS has reported strong earnings for the quarter, as like Wells Fargo (WFC), I believe we have to take a wait and see approach with GS. We do not know the whole details of their earnings and what is on their balance sheet.
Disclosure: The author does not hold any positions in GS
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