Thursday, September 10, 2015

Why I Have Near Zero Confidence in Financial News

September 10, 2015
Is Yahoo’s core business really worth $0?

Some parts are valued straightforwardly. For example, Yahoo holds nearly $6 billion in cash and marketable securities; dividing by Yahoo's 941 million shares, one finds a value of about $6 per share.

Most seem to love talking about cash. Few seem to love talking about debt. Why is that? Why did I have to look elsewhere to find out that Yahoo has $1.2 billion in debt. How can one do a net worth analysis if one ignores liabilities?

If Yahoo borrowed another $10 billion in cash should its stock price really go up another $10 per share? Or would that all be just smoke and mirrors?

If debt isn't mentioned on the article, and it's not, then what else might the article be missing in its simple "worth" analysis? Why should I trust any of it?

Put another way, if I told you that I had $2 million to fund a comfortable retirement then you might assume that I am doing great. It might be really easy for me to sell you a book on how I managed to do it so that you could do it too.

However, if the the first chapter of my book starts off by telling you that I borrowed $2.2 million to both fund my lifestyle and spend $200k to print books for suckers, then you might start to think that I'm a con artist. Behold the power of debt to change an opinion.

In all seriousness, there's no way you can accurately determine the value of a company in a page or two of simple analysis, which is very sad because most news won't even give you a sentence or two of simple analysis. Then there's Mad Money. Got lightning round cowbell? Booyah. Sigh.

Update:

Pacioli's comments are worth a read. It seems debt is not being ignored. I therefore must add the "my personal blunders" tag. Hey, nobody's perfect! ;)

10 comments:

Pacioli said...

The $6/shr is NET debt. So, no, they didn't ignore debt in the analysis. Any sum-of-the-parts analysis based on EBITDA is going to be based on NET debt (hence the use of EBITDA as opposed to earnings).

https://goo.gl/WexrbL

Stagflationary Mark said...

Pacioli,

EBITDA is not a balance sheet concept. It is an earnings concept.

EBITDA is earnings before interest, taxes, depreciation, and amortization. That's what the acronym stands for.

If you are talking EBITDA, then you are specifically exluding debt since you are ignoring interest on the debt.

EBITDA

It is intended to allow a comparison of profitability between different companies, by discounting the effects of interest payments from different forms of financing (by ignoring interest payments)...

See how it says that interest payments are ignored? So no matter how big the debt gets, EBITDA won't care.

Stagflationary Mark said...

From my link in the post:

Cash: $5.82 billion
Debt: $1.24 billion

The article talked about the cash being just under $6 billion but made no mention of the debt.

My source was Yahoo Finance so most might expect Yahoo Finance to know Yahoo's finances. Just sayin'.

Stagflationary Mark said...

As a side note, my last employer was big on EBITDA after the massive accounting scandal.

They tied my future bonus compensation to it. I didn't stick around long enough for it to kick in though. I left that sinking ship like a rat would, and sink it eventually did. Sigh.

Stagflationary Mark said...

People who use EBITDA are either trying to con you or they're conning themselves. Telecoms, for example, spend every dime that's coming in. Interest and taxes are real costs. - Warren Buffett, 2002

For what it is worth, I am and have been in his camp on this.

Pacioli said...

"If you are talking EBITDA, then you are specifically exluding debt since you are ignoring interest on the debt."

You are backwards on this. If you are talking EBITDA, you are trying to evaluate unleveraged earnings (i.e. regardless of capital structure). Therefore, you need to consider ALL capital, i.e. Enterprise Value (equity + net debt). That is why you always see EV with EBITDA, versus P (equity only) with E (earnings, leverage effected).

From MY link in my comment:

Cash: $1.2
Marketable Securities: $5.8
Debt: $1.2
Shares: 0.936

Thus, NET DEBT of $6/share.

Stagflationary Mark said...

Pacioli,

I see the problem now. I missed the long-term marketable securities in the first table when I looked at your link and my link didn't include them. My bad. Thanks for clearing that up.

That said, the technical definition of "net debt" only includes cash and short-term cash equivalents, not that I should exclude long-term marketable securites when trying to value a company.

As for EBITDA, I think I understand where you are coming from now. I don't think I did a good job explaining my point of view, especially to one who is more knowledgeable than myself on this topic.

EBITDA should not be looked at in isolation. A company with extremely high debt loads could have an EBITDA that looks pretty good. That's why I was very concerned that debt was being ignored. It wouldn't be the first time.

Thanks for your comments. They are much appreciated.

Stagflationary Mark said...

I have added an update to this post encouraging people to read your comments. I have slso added the "my personal blunders" tag to reflect my error.

mab said...

Whatever. I still have little faith in financial news. Actually, I have even less faith in political news.

Stagflationary Mark said...

mab,

Blog 'n' bitch. ;)