|
|
| YOU ARE HERE: | Home > Market Trades & Forecasts > Investment Ideas |
Building a Facebook Model - Investment Ideas
Thu, 17 May 2012As a former equity research analyst I built financial models on numerous companies in several industries. I wrote on telecommunications companies (RIMM) I wrote on Software Security Companies (SYMNC) but mostly, I wrote on Internet companies.
The key to writing on companies is to understand the financials and what drives them. That is best achieved by building a model of the company and focusing most on the income statement. The income statement, after all, is the source of the revenue and EPS estimate, the things my clients cared the most about.
To get a better understanding of Facebook, I thought I would walk you, the reader of Zacks.com through how I would do this if I were a research analyst. This is a top-level discussion and all data is from a recent S-1 filing with the SEC.
The Caveat
When I did this professionally, I had a 50 call rule. I had to make at least 50 phone calls to customers of the target company. I had to make at least another 50 phone calls to the target company to talk to their sales department, the service department or anyone else at the firm to give me insight that I would not get from SEC filings or earnings calls.
I didn’t do this for Facebook as I am no longer a research analyst, but I didn’t do it for Google (GOOG)either and I was ranked #1 for Earnings Estimate Accuracy by Starmine… so take that with a grain of salt. For a small company, the calls are invaluable but for a huge company, they are an infinitely small sample from which I would base my assumptions. Google, like Facebook, has hundreds of thousands of advertisers, so my 50 calls would be meaningless.
The metrics
In order to estimate the revenue in a credible fashion, you have to rely on the metrics. At this point, the only metrics we have are ones we have from the S-1. Use the most recent S-1 when looking at a new company, or rely on 10K’s for modeling public companies that have been around for more than a few years.
The metrics will help you connect the dots on how to estimate the total revenue. For Facebook, the company published MAU’s (monthly average users), DAU’s (daily average users), Advertising Revenue, Payment Revenue and ARPU (average revenue per user). We find these metrics on page 48 of the S-1, they are embedded in the graphs so get them into a useable format in a spreadsheet. I did it in excel, but Google docs work just as well.
Facebook took the unprecedented step to break out the users and revenue by geography, giving us a clear idea how this worldwide social networking phenomena is not just a big deal in Palo Alto. It’s a big deal worldwide. I started making my model by focusing on revenue. So I listed all the metrics and then added in a few lines beneath each item to insert an equation for annual and quarterly growth. If you do this, part of your spreadsheet would look like this:
For purposes of clarity, I color code things so I know without checking what type of metric it is. Brown is MAU, Blue is DAU and Green is Revenue (for the color of money). I do not color code ARPU because it is a calculation more than a given data point (even though it is a supplied data point). I also added a % of total revenue for the revenue lines, this might help me down the road when I model out Zynga (ZNGA).
The idea is to work into a “proven” system that accurately shows how the data points are manipulated into revenue. That is done by dividing historical revenue by historical MAU’s giving us a proven ARPU. The ARPU that the company supplied us with for each geography doesn’t match up perfectly as there are times when the ARPU rate is higher or lower than our “proven rate” due to the difficulty Facebook has with coming to actual numbers of estimated users (they guess based on IP address) and assuming a 5-6% duplication of extra accounts.
I believe it’s best to do this one region at a time as opposed to doing it over the blended average, and yes that is basically 4 times the work, but over time it will pay off. Down the road after four more conference calls, we will pick up on trends by geography and our estimates should get better. The more details, the more data points the better.
Next I want to go ahead and work out what the proven ARPU rate is and break that out in terms of both advertising and payments. Basically I just divide the historical MAU’s by the desired Revenue line to get the ARPU I want. Also include the two lines to show percentage growth for both annually and sequentially. I also want to put in a graph right now that measures the different ARPU’s and their respective annual growth rates to get a good look how things trended. It should look like this:
The more astute readers will notice that I have what appears to be an estimate. I have made my estimates for 2Q12 ARPU for the Rest of the World segment and put them in blue text. This helps me understand what is an equation and what is an estimate. Why 3% for both… well I am just showing how to do it, I am not really giving my estimate.
The next step would be to do the same for MAU’s and DAU’s. Again I am using a static 5% for both, but this time I am looking at sequential growth instead of annual. I have found it best to use the time frame that fits best with your knowledge of the situation and the one that has the most apparent trend. A 5% sequential growth rate gives MAU's a reasonable annual growth rate that shows a deceleration, but still growing. Your model should now look like this:
Again, the astute reader will see that I have already stuck in a revenue estimate for both advertising and payments. Others will notice that the stated ARPU is here, as are a few extra lines that help me adjust the stated ARPU with my proven one. At this point we are just about done, if you can believe it. Just wash rinse and repeat for North America, Europe, and Asia. Once you have completed all four segments it is just a function of adding up the sums for each to come to a global estimate.
Those of you who are already good with excel know that pasting and dragging will save you a lot of time, and if you put that 3% and 5% in for all quarters for all geographies, you will end up with the wrong answer, but you will have modeled out Facebook revenue for 2012 as $4.9B or an increase of 32%. Being aware of seasonality and looking at the trends in each geography for each revenue line will lead you to creating the best estimate you can.
When you have your estimates completed, let us know in the comments below!
Brian Bolan is the Aggressive Growth Stock Strategist for Zacks.com. He is also the Editor in charge of the Zacks Home Run Investor service
Follow Brian Bolan on twitter at @BBolan1
Like Brian Bolan on Facebook
To read this article on Zacks.com click here.
Zacks Investment Research
Invest in Indonesia - The New Rising Star of Asia - Investment Ideas
Thu, 17 May 2012Emerging markets are an important part of the global economy and increasingly significant contributors to the global growth. Their high return potential and low correlation with the developed markers are main reasons why they should be a part of any diversified investment portfolio.
Most investors think about China and India when planning to invest in emerging Asian countries and many investors already have some exposure to these giant nations. Further, with both these countries facing significant headwinds currently, it is time that the investors take a serious took at some of new rising countries in that region. Indonesia is one such country which offers solid growth potential for future. (Read: India ETFs: Trouble On The Horizon?)
Indonesia was one of the worst suffers of the Asian currency crisis in 1997-98. The country has since transitioned from a dictatorship riddled with corruption and inefficiency to a democracy on the path of fast growth driven by significant market reforms.
The economy has grown at an annual rate exceeding 5% in seven of the past eight years, mainly due to increasing consumption by the rising middle class. The country now has a population of more than 240 million, behind only China, India and the U.S. (Read: Time to Buy the Singapore ETFs)
Foreign exchange reserves have risen to $110.5 billion (as of March 2012) from about $20 billion in mid 1997. Thus the currency, (which had declined about sevenfold during the crisis) has become much more stable with the central bank willing to defend it using reserves. At the same time, the external debt has declined from over 150% of GDP in 1998 to 26.7% of GDP in 2011.
Indonesia was one of the very few countries which had a positive stock market performance in 2011. Its bond market was the best performer in Asia last year. (Read: Why Colombia ETFs May Continue to Rise)
The economy is expected to grow at 6.1% and 6.6% respectively in 2012 and 2013 (per IMF) after an impressive 6.5% growth in 2011. GDP for Q1 grew 6.3% year-over-year, which while slightly down from the 6.5% growth recorded in the previous quarter, is still one of the highest growth rates in the world.
Rising domestic demand in the country is able to offset the weaker export demand. 65% of the GDP is domestic consumption driven in the Southeast Asia’s largest economy and thus the economy remains much less exposed to global economic headwinds.
Foreign direct investment has been rising. During the first quarter, the country attracted $5.6 billion in FDI (up 30%), which seems to be in-line with the governmentÂ’s target of attracting $22.4 billion in FDI this year, 18% higher than last year.
Moody’s and Fitch have recently upgraded the credit rating of the country to investment grade.
Looking at the negative side of the story-Inflation has been creeping up towards 6% and fiscal consolidation is the main solution in containing inflation (difficult task due to massive fuel subsidies). Corruption and poor infrastructure remain some of the main hurdles to faster growth.
Last week, the central bank left the key rate unchanged at a record low of 5.75% for the third straight month, after having cut the rate by 25 bps earlier this year and by 50 bps late last year.
The investors currently have a choice of two ETFs which provide exposure to the broader Indonesian economy.
Market Vectors Indonesia Index ETF (IDX)
IDX seeks to track Market Vectors Indonesia Index, which provides exposure to publicly traded companies that are domiciled and listed in Indonesia or generate at least 50% of their revenues in Indonesia. The fund currently manages $508.9 million in assets and holds 43 securities.
Van Eck recently cut the expense ratio to 57 bps from 60 bps earlier. In terms of sector exposure, financials are at the top with 30.2% weight, followed by energy (15.1%) and consumer staples (13.6%). The ETF has returned 48.4% to the investors since its inception. The fund's annual dividend yield is 1.57%.
iShares MSCI Indonesia Investable Market Index Fund (EIDO)
EIDO tracks the MSCI Indonesia Investable Market Index, which is designed to measure the performance of stocks in the top 99% by market cap of the stocks listed in Indonesia.
The ETF holds $238.8 million in 87 securities and is thus must more diversified than IDX. However, like IDX, this fund also has largest allocation to financials (31.5%), and the next two are consumer discretionary (16.8%) and consumer staples (12.2%). The fund charges 59 bps and has risen 16.7% since inception.
To read this article on Zacks.com click here.
Zacks Investment Research
Forget Facebook, Buy The Agriculture Stocks Instead - Investment Ideas
Wed, 16 May 2012With the Facebook IPO launching next week, and a string of hot technology IPOs in the last year, all of the focus has been on Silicon Valley and social media wunderkinds.
Yet there's a sector that has been quietly wracking up record earnings in 2011 and which is poised to do the same in 2012. Not only that, it's cheap, with many companies trading with single digit P/Es, well under the average of the S&P 500 which is 13.
What is this mysterious sector?
Agriculture.
Corn!
The U.S. Department of Agriculture is expecting a record corn crop of 48 million tons of corn, up 4.5 million tons, this year. It's projected to be the largest crop in the last 75 years.
Globally, corn production is expected to rise 10% to 946 million tons as several countries post records.
This has lit a fire under farmers who have gone on a buying spree of new tractors, combines, fertilizers and crop protection supplies.
Investors, however, have been ignoring many agriculture stocks which have led to rising earnings estimates and low valuations, a juicy combination.
Different Kinds of Agriculture Stocks
When you think of an "agriculture stock" you may think of a seed maker like Monsanto or an equipment manufacturer like Deere. But agriculture can encompass an assortment of different areas.
The top three industries in which to find agriculture stocks are:
- Farm Machinery
- Agriculture Products
- Fertilizers
Agriculture Products has a Zacks Industry Rank of 94 out of 265. There is only one Zacks #1 Rank (Strong Buy) out of 13 companies. These companies are the seed makers like Monsanto and the food product companies like Bunge and Archer Daniels.
Fertilizers has a Zacks Industry Rank of 182 out of 265. There are no Zacks #1 Rank stocks out of the 10 companies in this industry. The potash and phosphate fertilizer companies have seen demand slow and prices have flattened.
Nitrogen, however, is still hot. It is used on corn. Some companies handle all three fertilizers. Agrium, the only Zacks #2 Rank (Buy) in the industry, is one of those. It just reported record retail sales in the first quarter.
Four Of The Top Agriculture Stocks
1. AGCO (AGCO)
Makes agriculture equipment.
P/E = 7.8
Expected 2012 Earnings Growth: 23.4%
Zacks #1 Rank (Strong Buy)
2. CNH Global (CNH)
Makes agriculture and construction equipment.
P/E = 9.6
Expected 2012 Earnings Growth: 21%
Zacks #1 Rank (Strong Buy)
3. Titan International (TWI)
Makes wheels and tires for agriculture equipment makers.
P/E = 10.8
Expected 2012 Earnings Growth: 66%
Zacks #1 Rank (Strong Buy)
4. Agrium (AGU)
Agribusiness company which operates over 1100 retail locations in North and South America and Australia. Also produces nitrogen, phosphate and potash fertilizers.
P/E = 8.9
Expected 2012 Earnings Growth: - 4.2%
Zacks #2 Rank (Buy)
Stocks Getting Even Cheaper
In May, the agriculture stocks have gotten even cheaper as investors have fled the sector.
Take a look at the 3-month chart for each of these stocks. You can clearly see the May weakness across the sector. This has created a buying opportunity to add solid companies to your portfolio at a more attractive price.
Don't Follow The Herd
Most investors are focused on Facebook, Apple or LinkedIn right now. But other opportunities await those who dig a little deeper in other sectors.
The agriculture sector is still performing at the top of its game. Demand for food isn't going to soften any time soon. It is an opportunity to buy growth at cheap valuations.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Insider Trader services. You can follow her on twitter at @TraceyRyniec.
To read this article on Zacks.com click here.
Find Outperforming Stocks in a Down Market! - Investment Ideas
Wed, 16 May 2012This week I learned a great lesson of life in my tennis class. I found myself pitted against a better player and we were to play just one set. After the first two games, I was getting blown out while barely winning a point. I was down 0-2, and thought, "This guy's good and it's gonna be ugly." I imagined him winning six straight games. Then something in my mind shifted perspective. Just as easily as I pictured the impending doom, I had a moment of clarity. I envisioned, "No, get yourself together and make it hard for this guy. You can play better, so do it!" I rallied back to win six out of the next eight games to take the set. True story.
Needless to say, I've been bounding around since then and feel I have a new outlook on life. When you undergo something like that, it becomes crystal clear that success takes perseverance and determination. And for some reason, the taste of victory is always a little sweeter when you've had to struggle for it. I often try to keep learning from my experiences and apply learned perspectives to other aspects of my life.
So my experience made me think of how this particularly rings true for the stock market today. Since May 1, the market's down over 3% and down nearly 4% since April 2. I wrote about potentially tough times and the Sell in May effect about a month ago. Now I’ve formed an idea on how to find stocks that outperform in down markets.
Best Stocks for a Down Market
Like life, investing also requires equal measures of skill, luck and perseverance. So we need to find a way to find profitable stocks and continue to swim upstream even when the market's current is against us.
We don't have any control over luck, so let's ignore it in our winning formula. What we can control is the ability to endure and our skill. Each person's ability to persist is unique, so you need to find what works best for you. Paying less attention to daily market moves, taking meditative breaths and having a stiff upper lip are some examples, but find something--anything--that works specifically for you.
Where I can help you the most, though, is to point you to a tool that can improve your stock-picking skill. I'm going to use the Zacks Research Wizard to devise a strategy to pick stocks that tend to perform better than the market, specifically when the market is losing money.
Let's Take a Look
Since the Research Wizard contains hundreds of data items, I narrowed the list to a set of the one hundred that I thought would be helpful in this study. Those factors were selected based on my own experience and also knowing how others have addressed this in the past. I then conducted tests from 2002-2011, using monthly holding period returns for each factor to find the five that performed best during down markets. Drum roll please... The best five indicators are Beta, Coefficient of Variation, Pretax Margin, Return on Equity and Forward Earnings to Price Ratio.
Building a combination strategy using these five indicators provides very interesting performance results. First off, the strategy outperforms the market 76% of the time when the market is down and the average excess return during a down market is +2.1% per month. For example, if the market returns -1.1% for a month, this strategy, on average, would return +1.0% for that month.
Also, this five-factor strategy is less risky than the S&P 500. Its annualized volatility and average losing stretch in terms of number of periods and returns are all less than the S&P 500. But what's most remarkable is that this strategy also outperforms the S&P 500 over the ten-year test period!
The average annual compounded return is 13.3% for the strategy versus 2.7% for the S&P 500. $10,000 grew to $35,004 for the strategy and $13,094 for the S&P 500. This combination also beat the S&P 500 in average return per month, average number of positive months and highest number of positive months. Thus, we kind of have the Holy Grail of a strategy: one that outperforms the market, yet has less risk. It's not too often you discover something that special!
Here's the method for a market-beating strategy with less risk:
- First, start with only US stocks.
- Next, create a liquid, investible set of the stocks with the largest 3000 market values and average daily trading volume greater than or equal to 100,000 shares (if there's not enough liquidity, it'll be hard for you to trade it).
- Because a lot of stocks under a certain price are difficult to trade, keep only those stocks trading above $5/share.
- Add another filter by selecting the 250 stocks with the lowest Beta. (Let's minimize our exposure to the market by selecting low Beta stocks.)
- From this set, select the 100 stocks with the highest Coefficient of Variation. (CoV is the ratio of the consensus annual earnings estimate divided by standard deviation of the estimates. So we want a high earnings estimate and a low variation of these estimates.)
- Pick the top 50 stocks with the highest Return on Equity. (Companies with a high ROE perform well on average and this holds true for market slides as well. Think "flight to safety.")
- Next, opt for the 25 stocks with the highest Pretax Margin. (Profitable companies tend to perform well in down markets.)
- Finally, choose the 10 stocks with the lowest price-to-earnings ratio. (Lower means you want to pay less per unit of earnings.)
Here are five of the stocks the strategy produced this week (5/11/12):
CPB - Analyst Report - Campbell Soup Co.
Campbell, a New Jersey-based company, together with its subsidiaries, engages in the manufacture and marketing of branded convenience food products worldwide. This company has a Beta of 0.3, a high consensus earnings estimate with little variation, a whopping 71% ROE, a Pretax Margin of 15% and a P/E ratio of 14. "Soups on" when the dark clouds of the market loom.
BCR - Analyst Report - C.R. Bard, Inc.
C.R. Bard and its subsidiaries design, manufacture, package, distribute and sell medical, surgical, diagnostic and patient care devices worldwide. This stock has an attractive P/E of 15, a solid Pretax Margin of 18%, a 31% ROE, a high and agreed upon annual earnings estimate and a low Beta of 0.34. That all adds up to a fairly safe and consistent company, and the market generally rewards those companies in times of despair.
FRC - Snapshot Report - First Republic Bank
First Republic, together with its subsidiaries, provides personalized relationship-based preferred banking and business banking, real estate lending, trust and wealth management services to clients in the metropolitan areas of the United States. This company has an excellent P/E ratio of 12 and a fabulous Pretax Margin of 41%. Also, the 0.22 Beta is the lowest of these five stocks. "Solid and stable at an inexpensive price" best describes this stock.
APOL - Analyst Report - Apollo Group Inc.
Apollo, through its subsidiaries, provides online and on-campus educational programs and services at the undergraduate, masters and doctoral levels. With a high ROE, high Pretax Margin and a low P/E ratio, this stock is a good way to economically buy into solid corporate profits.
HTS - Snapshot Report - Hatteras Financial Corp.
Hatteras Financial operates as an externally-managed mortgage real estate investment trust (REIT). In terms of its P/E (8), this company is the least expensive of the bunch. Coupling that with the low Beta and the high Pretax Margin creates a good stock to hold when the market heads south.
Pick Yourself Up, When the Market Kicks You Down
Just as easily as I was able to turn my tennis game around, you can turn your investing fortunes around. I know you can. If you possess a winning strategy, you have to persist with it even if you suffer a few losses along the way. That's one of the attributes that separates the great investors from the poor investors. When faced with adversity, you have to find a way to work through it if you want to be profitable in the end. Remember, investing is a marathon not a sprint.
Want to find more stocks that outperform when the market takes a dive? Have your own ideas for selecting stocks in a down market and want to test it? These questions are very easy to answer with the Zacks Research Wizard.
Starting today, you are invited to use it free of charge. You'll have 14 days to create, tweak and backtest your strategies. At the same time, you can see the latest picks from pre-loaded winning strategies that average gains of up to +67.4% per year.
Learn more about your Research Wizard free trial >>
Let's make some money!
Kip
Kip Robbins is a Quantitative Analyst with Zacks.com. He analyzes screens and strategies for Zacks customers and for use in Zacks Research Wizard, which empowers individual investors to use market-beating screens, build their own, and backtest their results.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: http://www.zacks.com/performance.
APOLLO GROUP (APOL): Free Stock Analysis Report
BARD C R INC (BCR): Free Stock Analysis Report
CAMPBELL SOUP (CPB): Free Stock Analysis Report
FIRST REP BK SF (FRC): Free Stock Analysis Report
HATTERAS FIN CP (HTS): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Visit these pages for more investment ideas:
| Commodities | Dollar | Futues Trading Signals |
| Investment Ideas | Market Trends | Oil |
| Options Trading Signals | Precious Metals | Real Estate |
| S&P 500 | Stock Picks |