Valens Equity Insights and Inflections - 2017 11 01
KHC currently trades near recent averages relative to Uniform Earnings, with a 24.1x Uniform P/E. At these levels, the market is pricing in expectations for Uniform ROA to increase from 48% in 2016 to record-high 66% levels in 2021, accompanied by 5% Uniform Asset growth going forward. Moreover, analysts have similar expectations, projecting Uniform ROA to increase to 58% in 2018, accompanied by 5% Uniform Asset shrinkage. However, Valens' qualitative analysis of the firm's Q2 2017 earnings call highlights that management has concerns about margins and growth, suggesting headwinds markets are not expecting. At current valuations, markets are pricing in a near-best case scenario for the business, and considering management concerns about their outlook, any negative surprise could lead to material equity downside.
ABT Q3 2017 Embedded Expectations Analysis – Market expectations are for record-high Uniform ROA, but management's concerns about FX tailwinds and their Alinity systems imply this may be unwarranted
DAL Q3 2017 Embedded Expectations Analysis – Market expectations are for sustained, record-high Uniform ROA, but management's concerns about ROIC, margins, and yields imply this may be unwarranted
DHR Q3 2017 Embedded Expectations Analysis – Market expectations are for record-high Uniform ROA, but management concerns about their Diagnostics and Dental businesses imply this may be unwarranted
A, AKS, ALXN, APD, BNS:CAN, CAH, FIS, GE, HEI:DEU, K, SLB, TEVA, TSN, TXT, UAL, VFC
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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