Earnings Reports, 4/21/2021
In this series, I look at the financial disclosures of the stocks in my portfolio.
It’s earnings season! Most companies will be reporting their 1Q2021 financial results within the next 6 weeks or so. In this and future Earnings Reports articles, I am going to go through each of my stocks’ results and give my opinion on what they mean for my investment. In general, these articles will be for subscribers only, but this first one is free for everyone! If you enjoy it, you should consider subscribing. I have a 30 day free trial if you want to try it out first without paying - just click the button below. As usual, this is not financial advice.
The first of my stocks to report its 1Q2021 results was Xerox Holdings (XRX). When I covered XRX in my Portfolio Part 3 article, I had this to say:
I first bought XRX on July 9, 2020. I have sold most of my original investment: only 1.52% of my portfolio is in XRX. My average entry was $15.45; I have a profit of 59.2% on my current holdings. Again, XRX is a solid enough company that I feel confident using it as a store of value. Its IV is around $30 per share; if it goes much over that, I will probably sell the rest of my holdings.
Before this earnings report, which was released before the market opened on April 20, 2021, nothing in this paragraph had changed for me.
Whenever a company releases financial data, I skip all of the press releases and company/media spin. The data cannot lie to me, so that is where I go first. I skip all of the fancy charts and go directly to the statement of income and balance sheet tables. If there is something that I do not understand there, then of course, I will see what the talking heads are saying. If I have to do this, I generally only look for facts and not forward-looking statements or anything of that sort.
For XRX, the first notable number is the EPS, which they have listed as $0.18. Taking the net income and dividing by the amount of shares outstanding gives $0.20 per share, and most sources quoted $0.22 per share, but I am not going to worry about the small discrepancies too much. This number was widely regarded as a miss, so the stock sold off. As you could guess from my value investing article, things like EPS and revenue are of secondary concern to me: they are needed to grow the book value and pay dividends, but they are not always directly correlated to IV. A bad EPS number does not necessarily mean a bad earnings report. In fact, bad earnings could be good news for a value investor, because the ensuing sell-off could be a buying opportunity.
The main number I look at is, of course, the shareholder equity. In this case, the equity was $5.4 billion, down from the last several quarters. Why did XRX decrease its book? The reason I see is share buybacks. The number of outstanding shares of XRX decreased by nearly 10% this quarter, as shown in Figure 1 below.
I have not covered buybacks in an article before, but the basic ideas is that they are equivalent to a dividend: the company spends cash to increase the share price, essentially giving out that increased share price to investors. Buybacks are not something that needs to be modeled separately in IV calculations, because they are taken into account in the company’s book value growth (in addition to these buybacks, XRX actually paid out dividends totaling $54 million). The decreased number of shares actually led to an increased book value per share despite the lower shareholder equity, as shown in Figure 2.
The effect on the intrinsic value, as you could guess, was actually positive: I get an IV of around $32 per share now, compared to around $30 before the report. Nothing else on the report was alarming: long-term debt to equity was down, there were no surprise announcements, guidance was fine, etc. All-in-all, I think the XRX report was very positive, even if the stock dumped on the earnings miss. I will not be buying more of it, but I am satisfied to continue holding.
That’s all for this report! Agree with my analysis? Let me know what you think in the comments or on Twitter (@ReportIv). If you enjoyed this article, please share it or join my mailing list for free. If you want to get my analysis of future earnings reports, you’ll have to subscribe - it’s only $5 per month or $50 per year, and I have a 30 day free trial at the top of this article! Thanks for your support, see you next time!