We closed this position on August 11, 2015. A copy of the associated Position Update report is here.
- Misleading earnings = accounting profits are positive and rising while true, economic profits are negative and falling
- High Valuation = very high expectations embedded in the current valuation.
- Misleading Earnings: CBG reported a $1,045mm increase in GAAP earnings while our model shows economic earnings declined by $358mm (a difference of $1,403mm or 34% of revenue). The main drivers of the difference between Economic versus Accounting earnings are CBG’s’s (a) $1,208mm in asset write-offs — 30% of Net Assets and (b) $675mm of off-balance sheet debt — 17% of Net Assets.
- Very Dangerous Valuation: Stock price of $19.06 implies CBG must grow its NOPAT at 20% compounded annually for 15 years. A 15-year Growth Appreciation Period with a 20% compounding growth rate is quite a high standard to beat, as per my post on How To Make Money Picking Stocks.
- Asset write-offs of $1,209 million (30% of reported net assets – 30cents of every $1 invested in the business over its life)
- Stock option liabilities of $80mm (1% of market value)
Overall, the Risk/Reward of investing in CBG’s stock looks Very Dangerous to me. There is lots of downside risk given the Misleading Earnings and there is little upside reward given the already-rich expectations embedded in the stock price.
See Appendix 4 to learn how CBG’s NOPAT declined versus last year while though Net Income rose. See Appendix 5 for details on CBG’s Invested Capital. Appendix 7 (in the Return on Invested Capital section) shows how a rising NOPAT Margin but falling Invested Capital Turns result in a decrease in ROIC (from 3.4% to 3.2%) and Economic Profit, which fell by $358mm while Net Income rose by $1,045mm.