Friday, December 5, 2014
US Employment Report Chart Update
Nonfarm payrolls came in well above expectations at 321K vs expectations of 230K for November. In addition, the previous two months were both upwardly revised by a total 44K jobs. Private nonfarm payrolls were up a very impressive 314K. This is the largest monthly gain since January 2012 and the third largest gain during this recovery. Average weekly hours of all employees ticked up to 34.6 hours, which is the highest level since May 2008. Real average hourly earnings on a 3-month annualized basis increased to 2.22%, which is the highest level since January 2013. The participation rate remained unchanged at 62.8%. Lots of charts below...
Thursday, December 4, 2014
The Intangible Case For Autodesk
Autodesk (Ticker: ADSK) is a design software and services company that serves customers in various fields ranging from architecture, engineering, construction, manufacturing, digital media and entertainment. We think there is a positive case to be made for Autodesk in 2015, especially when one properly accounts for their vast intangible capital reservoir on their balance sheet.
According to GICS classification, Autodesk is in the information technology sector and in the application software sub-industry. In the MSCI North America, there are a total of 12 companies in application software sub-industry with well known companies such as Adobe Systems, Citrix Systems and Salesforce.com.
As figure one shows, year-to-date Autodesk is up an impressive 22%. We believe Autodesk may be able to continue its relative outperformance in 2015 as well.
Figure 1 - Year-To-Date Performance
Let's begin where we usually begin when analyzing stocks - valuations. As figure two illustrates, Autodesk seems to have lofty valuations, both in an absolute sense (24.9x CF) as well as in relative sense (6th highest P/CF in the group). However, after accounting for intangible investments and assets that go uncounted under traditional accounting practices, a more compelling valuation argument can be made (Figure 3). Autodesk drops to the seventh most expensive company in the group by P/CF and its P/CF ratio declines into single digits. Also, its P/B ratio is reduced by about half from 6.2x to 3.2x.
Figure 2 - "As-Reported" Valuations
Figure 3 - Intangible-Adjusted Valuations
Autodesk is a large, consistent investor in intangible assets. Autodesk spends nearly 42% of its sales on R&D and other intangible assets while spending only 2.8% on tangible fixed assets (Figure 4). Autodesk leads the group with 34.8% of its assets categorized as intangible assets and only 2% of its assets invested in PP&E (Figure 5). With an organizational commitment to investing in intangibles and minimizing its fixed capital stock, it is thus not surprising that Autodesk has incredibly high margins and low debt levels. Autodesk has the highest gross margins in the group at an impressive 87.9% and has a net debt level of -29.9% (Figure 6).
Figure 4 - Intangible-Adjusted Investments as a % of Sales
Figure 5 - Intangible-Adjusted Balance Sheet
Figure 6 - Intangible-Adjusted Margins
Moving on to sales and earnings expectations, financial analysts are not expecting much from Autodesk over the next four years. Sales are only expected to grow by an average of 5.8% per year, which is the second lowest in the group ahead of only Nuance Communications (Figure 7). EPS growth expectations are even lower as analysts are projecting two negative EPS years out of the next four for Autodesk. FY1 earnings are expected to crater by 30% while FY4 earnings are expected to fall by nearly 8%. Overall, Autodesk has the lowest four year average for EPS at -2.5% (Figure 8). These expectations seem even lower after considering Autodesk's impressive track record of growth over the past 20 years. Autodesk has managed to grow sales by 8.5% per year and EPS by 6.9% per year over the past 20-years according to our least squares growth rate calculation (Figure 9). Autodesk has also managed to grow book value by 10.6% and cash flow by 9.7%. Taking it all together, the external expectations on Autodesk seem like a low hurdle to clear.
Figure 7 - Analyst's Sales Growth Expectations
Figure 8 - Analyst's EPS Growth Expectations
Figure 9 - Intangible-Adjusted Growth Rates
Last but not least, let's take a look at how Autodesk looks from a technical perspective. Using our proprietary point and figure charting methodology, Autodesk is breaking out to new highs relative to the MSCI World Index after spending most of the past four years in a trading range. It has consolidated for most of 2014 and looks like it could make a substantial break out in 2015.
According to GICS classification, Autodesk is in the information technology sector and in the application software sub-industry. In the MSCI North America, there are a total of 12 companies in application software sub-industry with well known companies such as Adobe Systems, Citrix Systems and Salesforce.com.
As figure one shows, year-to-date Autodesk is up an impressive 22%. We believe Autodesk may be able to continue its relative outperformance in 2015 as well.
Figure 1 - Year-To-Date Performance
Let's begin where we usually begin when analyzing stocks - valuations. As figure two illustrates, Autodesk seems to have lofty valuations, both in an absolute sense (24.9x CF) as well as in relative sense (6th highest P/CF in the group). However, after accounting for intangible investments and assets that go uncounted under traditional accounting practices, a more compelling valuation argument can be made (Figure 3). Autodesk drops to the seventh most expensive company in the group by P/CF and its P/CF ratio declines into single digits. Also, its P/B ratio is reduced by about half from 6.2x to 3.2x.
Figure 2 - "As-Reported" Valuations
Figure 3 - Intangible-Adjusted Valuations
Autodesk is a large, consistent investor in intangible assets. Autodesk spends nearly 42% of its sales on R&D and other intangible assets while spending only 2.8% on tangible fixed assets (Figure 4). Autodesk leads the group with 34.8% of its assets categorized as intangible assets and only 2% of its assets invested in PP&E (Figure 5). With an organizational commitment to investing in intangibles and minimizing its fixed capital stock, it is thus not surprising that Autodesk has incredibly high margins and low debt levels. Autodesk has the highest gross margins in the group at an impressive 87.9% and has a net debt level of -29.9% (Figure 6).
Figure 4 - Intangible-Adjusted Investments as a % of Sales
Figure 5 - Intangible-Adjusted Balance Sheet
Figure 6 - Intangible-Adjusted Margins
Moving on to sales and earnings expectations, financial analysts are not expecting much from Autodesk over the next four years. Sales are only expected to grow by an average of 5.8% per year, which is the second lowest in the group ahead of only Nuance Communications (Figure 7). EPS growth expectations are even lower as analysts are projecting two negative EPS years out of the next four for Autodesk. FY1 earnings are expected to crater by 30% while FY4 earnings are expected to fall by nearly 8%. Overall, Autodesk has the lowest four year average for EPS at -2.5% (Figure 8). These expectations seem even lower after considering Autodesk's impressive track record of growth over the past 20 years. Autodesk has managed to grow sales by 8.5% per year and EPS by 6.9% per year over the past 20-years according to our least squares growth rate calculation (Figure 9). Autodesk has also managed to grow book value by 10.6% and cash flow by 9.7%. Taking it all together, the external expectations on Autodesk seem like a low hurdle to clear.
Figure 7 - Analyst's Sales Growth Expectations
Figure 8 - Analyst's EPS Growth Expectations
Figure 9 - Intangible-Adjusted Growth Rates
Last but not least, let's take a look at how Autodesk looks from a technical perspective. Using our proprietary point and figure charting methodology, Autodesk is breaking out to new highs relative to the MSCI World Index after spending most of the past four years in a trading range. It has consolidated for most of 2014 and looks like it could make a substantial break out in 2015.
A Look at how ETFs are Changing the Investment Landscape
GaveKal Capital’s Bryce Coward looks at the exploding growth
of ETFs and offers an idea on how to combine ETFs with mutual funds in an
optimal way to improve the risk and return characteristics of portfolios.
Wednesday, December 3, 2014
US PMIs Diverging - Is This A Cause For Concern?
The US ISM non-manufacturing survey for November was released today and showed an increase of 2.2 points to a robust level of 59.3. Meanwhile, the Market services PMI was also released today for November and it reported that the services sector declined for the 5th straight month to 56.2.So is the non-manufacturing sector of the US picking up momentum or losing it? Unfortunately one should not compare these two series to answer that question because the month to month movements in these two series do not usually move in tandem. For example, the Markit services PMI has 61 months of history dating back to November 2009. In 31 of those months the 1-month directional change (i.e. up or down from the previous month) has contradicted the 1-month directional change in the ISM non-manufacturing survey.
The Markit manufacturing PMI and ISM manufacturing survey have a slightly better track record of moving in tandem month to month. The Markit manufacturing PMI series has been around for 90 months (June 2007). In 40 of those months, the two series moved in opposite direction. Or put another way, a little over 55% of the time the two series move in the same direction.
Overall, right now the ISM survey is saying growth in the US economy is more robust than what its Markit counterpart is saying. Going back to the question of whether or not this divergence is a cause for concern, we would generally say no as these two series surprisingly move in divergent directions about half of the time.
The Markit manufacturing PMI and ISM manufacturing survey have a slightly better track record of moving in tandem month to month. The Markit manufacturing PMI series has been around for 90 months (June 2007). In 40 of those months, the two series moved in opposite direction. Or put another way, a little over 55% of the time the two series move in the same direction.
Overall, right now the ISM survey is saying growth in the US economy is more robust than what its Markit counterpart is saying. Going back to the question of whether or not this divergence is a cause for concern, we would generally say no as these two series surprisingly move in divergent directions about half of the time.
Tuesday, December 2, 2014
Chart Update of Global Stock Market Internals
Below is a quick and dirty of the state of global stock market internals. We try to hit on a few of the major categories to give a good cross section of what the internals look like. Generally, we observe that stocks have recovered from the oversold condition in October, but momentum and breadth continue to be weak. Despite new cycle highs in stock indexes, very few individual stocks are making new 200-day highs.
Overbought/Oversold Indicator:
Momentum Indicator:
Breadth Indicator:
Breadth Indicator:
New Highs:
Overbought/Oversold Indicator:
Momentum Indicator:
Breadth Indicator:
Breadth Indicator:
New Highs: