New Constructs

Stock Pick of the Week: JDA Software Group Inc (JDAS) – Very Dangerous Rating

Red Flags: 1. Mis­lead­ing earn­ings: JDAS reported a $14.6mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $12.9mm (a dif­fer­ence of $27.5mm or 155% of reported net income). 2. Very dan­ger­ous val­u­a­tion: stock price of $27 implies JDAS must grow its NOPAT at over 20% com­pounded annu­ally for 10 years. A 10-year growth appre­ci­a­tion period with a 20%+ com­pound­ing growth rate sets expectations for future cash flow performance quite high. 3. Free Cash Flow was -$203mm or -15% of the company’s enterprise value last year. 4. Asset write-offs of $21mm or 3% of net assets – this means that management has written off at least $0.03 of assets for every $1 on the current balance sheet. Writing off assets is the opposite of creating shareholder value as it reflects management’s inability to derive any profits for the investments it makes with shareholder funds. 5. Off-balance sheet debt of $40mm or 6% of net assets. 6. Outstanding stock option liability of $13mm or 1% of current market value.
by David Trainer, Founder & CEO