A Clearer View of Beta

In the spreadsheet below, I have first calculated the beta for Apple (AAPL) using the S&P500 as my market return, basing my beta on 5 years of monthly returns for Apple and the S&P500, then adjusting all of these returns to real returns by subtracting out the 30-Yr Zero Coupon U.S. T-Bond.  I have outlined this technique in another of my blog posts:  How to use the CAPM and beta

My calculated beta for Apple (1.29) is in cell C5 of the Analysis worksheet.  I checked this against Google’s reported beta for Apple (1.32), and Yahoo’s reported beta of 1.42.  As I have commented on in previous blog posts, Yahoo’s beta’s are not correct, while Google’s beta’s are correct, at least based on the methodology that I choose to use when determining my betas.

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How to Predict the Stock Market

In a recent article in the Wall Street Journal (WSJ) by Jason Zweig, titled The Simple, Best Way To Predict The Market, we see some very fundamental concepts being preached.

Citing a Journal of Portfolio Management article written by John C. Bogle, three factors are mentioned that account for all stock returns dating back to 1915, plus the future.  What are these three factors: (1) the current dividend yield of the stock, (2) earnings growth of the company, and a speculative premium (i.e., herd mentality factor, measured by the P/E ratio) for the company (perhaps industry driven).

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A Simplistic Model Examining Offshoring

Many companies choose to offshore their manufacturing and other labor such as call centers.  The reason behind this is simple, foreign labor is cheaper, and this will increase the company’s profit margin.

To explore this, let’s take a look at Apple Inc., and make a few assumptions to see the potential impact of offshoring.  Apple was not chosen for any reason, and this exercise could equally be applied to any set of financials.  I’ll make two simple assumptions: (1) that COGS is 50% labor-based, and (2) that this will be offshored at 20% of the original labor cost (i.e., it takes 5 workers overseas to equal one U.S. salary).

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The Leverage of DSO, DPO, DOI, and the CCC

When optimizing a company’s cash conversion cycle (CCC), it is important to understand both the value and the cost in doing so.

First the value:  when a company collects it’s receivables earlier (Days Sales Outstanding, DSO), delays its payments (Days Payables Outstanding, DPO ), and/or reduces its inventory (Days of Inventory, DOI), it is maximizing its free cash.  The company can then use this free cash to (1) invest back into itself by purchasing operating assets, or (2) payback its stakeholders in the form of dividends, stock repurchases, and/or paying off debt (i.e., buying back its bonds, paying down its revolver, etc.).

The value of investing back into itself will earn the company’s return on invested capital (ROIC), and paying back its stakeholders will earn the company’s weighted average cost of capital (WACC).  Both of these interest rates should be compelling enough to make any astute company eager to implement six sigma/lean practices to maximize their free cash, and thus capture this value.

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The Top Line Versus the Bottom Line

In business, the sales force is considered the revenue center, while all other functional areas within the company are viewed as expense (i.e., cost centers).  This practice is obviously the result of the income statement where sales (revenue) leads at the top, less all other cost centers to obtain the bottom line (profit, or loss).  Because sales pay for the expenses incurred by the company, the sales force is typically the most compensated and monitored area within a company.  But the objective of a company should be to obtain the highest profit (i.e., bottom line) for the shareholder, not just the top line (i.e., sales).  Below is the structure of the income statement in very simplistic terms:

Revenue -Variable Expenses – Fixed Expenses = Profit

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