Investor’s Business Daily regularly carries either a profile of a company or an industry that can provide a wealth of information. These profiles are helpful tools in the search for companies and/or industries where consolidation (takeovers) is taking place. Very often you will find that IBD is profiling a company that has been on the acquisition trail itself or that operates in an industry where takeovers are taking place. Since we already know that IBD is partial to the larger, higher-profile companies, you will usually find that the companies profiled in this section are larger companies that have been buying other companies rather than potential takeover targets. But that’s fine, because by reading the profiles of companies like this, you can often get a feel for the reasoning behind the takeover trend in a certain industry. Not only that: When IBD profiles a company that has been acquiring other companies, you will often find a detailed explanation of the reasoning behind these takeovers, and on occasion the CEO of an acquiring company will offer a set of clues as to where that company might be looking for future takeover targets.
Another extremely useful aspect of the industry profiles section is a listing of companies that operate within the industry being profiled. Headlined “Who’s Who in the Group,” this list of companies provides an excellent starting point for superstock sleuths who may be seeking takeover candidates within that particular industry.
This list of industry participants is also useful because IBD will often note various takeover transactions that have recently taken place within the industry. For example, on August 16, 1999, IBD’s
industry profile was entitled: “Paper Products: Tighter Supplies, Consolidation Fuel Upswing in Long-Suffering Industry.” The story talked about the recent trend toward takeovers in the industry and contained a table of 25 companies operating within the paper and paper products industry, including three notations on takeover trans- actions involving Kimberly Clark, Boise Cascade, and Pope & Talbot.
When I encounter a story like this in IBD, my tendency is to focus on the mid-size and smaller companies in the industry, based on two premises. First, if a consolidation trend is taking place and the larger companies in an industry are getting bigger and more cost-efficient, the mid-size to smaller companies in that industry are likely to be more receptive to being acquired. Second, the smaller companies in any given industry are less likely to be overfollowed and overanalyzed by Wall Street, which increases the probability that there will be bargains among them relative to their takeover potential.
Of course, Investor’s Business Daily, which focuses on relative strength, earnings momentum, and other characteristics of stocks that are already currently in vogue and in the forefront of the market, cannot simply list the industry participants from top to bottom in terms of size, based on revenues or market capitalization. Instead, IBD lists the companies from top or bottom in terms of stock performance and/or earnings growth. The stocks, says IBD, are “ranked (not ‘listed,’ mind you, but ‘ranked’—this is Big Brother we are talking about, remember) by a combination of their earnings per share and Relative Strength rankings.”
So you will have to do a little reshuffling of the list if you want to focus on the smaller companies in the group.
But that’s a small price to pay for a very useful presentation, and I have uncovered quite a few takeover targets by reading IBD’s industry profiles section on a regular basis.
Posts Tagged ‘bonds’
Industry Profiles
November 15th, 2010Accounting Treatments Based on Intent
October 13th, 2009The accounting method used affects reported earnings, book value and the value for Tier I capital as defined in the Basel Accord. Under US GAAP banks are permitted to use both the carried-at-cost and mark-to-market methods. From an economic value perspective this is clearly nonsense. The same security held in different accounts will be valued in different ways based on intent!
A bank could have holdings in an identical bond booked in three different accounts based on “intent”. If the intention is to hold the bond to maturity it is included at cost. If booked as “available- for-sale” the asset is held on the balance sheet at current market prices with unrealized gains or losses included in a reserve account within the equity account. If the bond is counted as a “trading security” the bond is marked to market with any gains or losses taken through the earnings statements. Finally, if the bank had raised finance itself by issuing its own bond with identical economic characteristics as the bond held as an asset this will be carried at cost.
The rigorous application of accounting standards results in book value numbers that are precise but have limited real meaning (although they are of consequence). Numbers that reflect economic value, by their very nature, should be approximate and based on estimates but would at least have a real significance.
Most banks have argued against compulsory mark-to-market accounting on the basis that it will result in more volatile reported earnings, book value and level of reported regulatory capital. So what? External auditors usually sign off a company’s accounts with a statement along the lines of “these financial statements give a true and fair view of the state of ABC Bank as of December 31 2006 and of the profit of ABC Bank for the year then ended”. If the economic reality is volatile then this should be reflected in financial statements and management should be prevented from trying to hide this fact through accounting obfuscation and obstruction.
The main criticism of those efforts that have been taken to make reported book value reflect economic value better is that they did not go far enough. The main area where there has been some progress in this direction has been in the treatment of traded securities. It is difficult, however, to see the sense of taking just selected parts of the interest rate-sensitive portion of a bank’s balance sheet and marking them to market, while ignoring the much larger proportion held in loans and also non-equity liabilities such as bonds that a bank has issued.