First-quarter 2023 ends this week. That means first-quarter earnings reports will start arriving a few weeks after that, and in recent years the large banks have been the first companies to file their quarterly reports.
So, since everyone is kinda sorta unnerved that maybe there’s a banking crisis afoot, Calcbench offers this quick refresher on where in the footnotes a financial analyst might look for useful disclosures about bank health.
Specifically, some banks include footnotes entirely dedicated to their deposits. What do those footnotes tell us?
Let’s start with Citigroup ($C). The bank included a deposit footnote in the 10-K it filed on Feb. 27 that offered three tables explaining the amount of deposits, the change in deposit amounts from one year to the next, total deposits inside and outside the United States, and more.
For example, Figure 1, below, shows that total deposits rose from $1.317 trillion at the end of 2021 to $1.365 trillion at the end of 2022, an increase of 3.7 percent. A majority of that increase came from branches inside the United States ($28.3 billion) rather than branches outside the United States ($20.4 billion). And to little surprise, the large majority of deposits are in interest-bearing accounts rather than non-interest accounts.
Even more interesting, Citigroup includes a breakdown of “time deposits” (read: certificates of deposits) whose denominations exceed the $250,000 limit on deposit insurance. See Figure 2, below.
What can analysts do with disclosures like this? For starters, you might use this data to help you understand a bank’s interest expense — the money it pays to depositors who hold interest-bearing accounts. The higher interest rates go, the more money people deposit into savings accounts, and the higher a bank’s interest expense climbs. (Banks do report interest expense as its own line-item on the income statement, of course.)
As for deposits that exceed insurance limits, that disclosure might give you a better sense of the risks that a bank poses to the larger financial system. After all, the heart-attack moment for Silicon Valley Bank’s collapse was the realization that almost all its deposits exceeded federal deposit insurance limits, so most depositors were potentially looking at financial ruin.
Clearly such a scenario is much less likely for a giant such as Citi, which has larger capital reserves and “failure risk” that is negligible. But mid-sized banks might paint a very different story.
Not all banks are as chatty about their deposits as Citi. Bank of America ($BAC), for example, offered only one table about the maturity of CDs in the 10-K report the company filed on Feb. 22. (See Figure 3, below.)
On the other hand, U.S. Bancorp ($USB) provided a table that listed deposits by savings account, checking account, money market accounts, CDs, and non-interest accounts. (See Figure 4, below.) Do the math, and you’ll find that the biggest increases came in CDs (up 45 percent) and money market accounts (up 26 percent) — which happen to be the accounts that offer the best interest rates. Who woulda guessed?
Finding these disclosures in Calcbench is easy. Simply open our Disclosures & Footnotes database, select the bank (or banks) you want to research, and then look for a “Deposits” footnote among the many disclosures listed on the left-hand side of your screen.
As we said, the exact disclosures will vary from one bank to the next, and some banks (mostly smaller ones, from our cursory research) might offer no such disclosures at all. But among those banks that do, you’re likely to find some fascinating nuggets of data that you can use (along with other disclosures the banks make, such as interest expense and net interest income) to drive your analysis of which banks are doing well these days.
First-quarter reports will be arriving by late April. Start planning your models now!
We’re history buffs here at Calcbench. So when the U.S.-China trade war turned five years old today, we decided to celebrate — with a bit of financial research!
It was March 2018 when then-president Donald Trump announced that he would impose tariffs on steel and aluminum imports, primarily as an action against China. Trump signed an executive order to that effect on March 8, and the tariffs formally went into effect March 23. So did the trade war.
The United States and China then lobbed a series of tariffs on each other and engaged in negotiations to end the war. The history of who promised to make what concessions is long and convoluted, and the war kinda sorta paused in 2020 as the covid pandemic started.
Many of the Trump-era tariffs remain in place today, and U.S. companies have even more restrictions, especially around semiconductors and other technology. (The Trade Talk podcast is an excellent resource if you want to nerd out on trade policy. Its most recent episode walks through the trade war’s history.)
Anyway, back to our celebration of financial data. We decided to use our Segments, Rollforwards, and Breakouts page to see which S&P 500 firms report significant revenues from the China market. We picked 15 companies with the largest reported revenue, and compared 2018 to 2022. The result is Figure 1, below.
Companies that saw a decline in the portion of total revenue coming from China are shaded in red. Don’t bother squinting: it’s nine of the 15 firms, and six of those nine are in the semiconductor sector.
Total revenue for our group grew 29 percent from 2018 to 2022. Total revenue specifically from China, however, grew only 24.4 percent — slower, but not that much slower considering there’s a war on.
We should also stress that the 15 companies in our sample are only a small glimpse into overall U.S.-China trade. Several U.S. companies with significant sales to China (Boeing and Starbucks, for example), have odd fiscal year-ends and haven’t yet reported 2022 sales.
Many other companies also report China as part of a larger geographic segment — “Asia Pacific,” for example, or “China and Japan,” or some other segment. We didn’t include those firms since there’s no easy way to pinpoint China revenues. The 15 above all have segments that simply say “China.”
You can, of course, conduct your own analysis of companies’ overseas revenue, either by using the Segments page or by sifting through the segment disclosures companies make in the footnotes via our Interactive Disclosure tool.
As bank failures unfold, investors, regulators, businesses, and everyday people are looking at which financial intuition is going to be the next Bear Stearns, Washington Mutual (WaMu), or Silicon Valley Bank. Ultimately the public will have in-depth reports (and probably even books) on how these failures happened. Fundamentally, these firms held large amounts of concentrated risk without a coherent, fully developed strategy for asset and liability management (ALM).
For Bear Stearns, its downfall was exposure to mortgage-backed securities — and then doubling down on those investments when the proverbial [expletive] hit the fan. WaMu had a focus on risky mortgage lending and an untenable expansion approach. For Silicon Valley Bank, its concentration in tech-backed start-ups and the bank’s high proportion of held-to-maturity (HTM) securities ultimately led to its demise.
To explore bank concentration risk in more detail, fintech entrepreneur, former financial analyst, and friend of Calcbench Marvin Chang did some sleuthing on banks and home lending asset trends. Chang evaluated more than 20 banks, ranging from the big national banks, to super-regionals, regionals with under $80 billion in assets, down to local community banks with under $10 billion in assets.
Figure 1, below, is a sample of what Chang found. It shows the different growth rates in home lending for the various sizes of banks.
Overall, asset growth has been muted at national banks over the past four years. Home lending (mortgage and home equity) at these institutions has been declining from 2018 through 2022. With the one exception of Wells Fargo ($WFC), home lending is a single digit percentage of total lending at each of the big banks.
At super regional banks, regional banks, and local community banks, the story is different. From 2018 through 2022, asset growth was more accelerated, and mortgage lending rose. Often, the smaller the bank (in asset size) the more aggressive they’ve been in real estate which is interesting given that home lending has increasingly become a scaling/technology game.
For super-regionals, the focus has been on home lending which hovers around 23 percent of total lending in 2022; at regionals with less than $80 billion in assets, home lending is 26 percent of total lending that same year.
As Calcbench first reported last summer, with interest rates on the rise, real estate lending has fallen off a cliff. For super-regional and regional banks specifically, Chang recommends taking a deeper look at their portfolios to understand what shoe might drop next.
Using Calcbench to do this research was easy, or as Chang says, “it’s like riding an electric bicycle.”
To download Chang’s detailed spreadsheet and see the tags he used with his Calcbench’s Excel Add-in, click here.
About the Author
Marvin Chang is currently chief commercial officer at digital lending platform Revvin. He has led digital transformation programs at Caliber Home Loans, which enabled this top mortgage lender to achieve a 10x increase in loan production via digital channels. There, he cultivated relationships with many of the leading residential housing value chain disruptors. At First Data, Chang led efforts to build innovative consumer loans propositions, focusing on point-of-sale and buy-now-pay-later lending. While overseeing international business development, Chang set up the company's venturing arm in India to tap into the market’s payment innovation. At Citigroup, his leadership in managing the legacy mortgage portfolio helped turn the mortgage holdings unit into a steady generator of returns. At Morgan Stanley, Chang held innovation leadership roles within the institutional research unit.
Remember our in-depth series on corporate debt loads back in January, when we analyzed 22 companies in the S&P 500 that seemed to have alarmingly high debt in our world of rising interest rates?
Well, the crack Calcbench research team was at it again recently. Now they’ve analyzed the debt loads of 75 companies in the S&P 500 — and the picture is as alarming as before.
First, a recap. Corporations loaded up on debt in the 2010s, an era of rock-bottom interest rates. Now much of that debt is coming due, except the 2020s have been an era of rising interest rates. So those companies seeking to roll over that older debt might be in for a rude awakening, as their interest expense costs jump sharply.
Consider Figure 1, below. It shows how total debt among S&P 500 non-financial firms surged from 2016 through 2022. (Keep in mind that we don’t have all filings for 2022 yet, including some large firms with significant debt.)
Likewise, interest expense among S&P 500 non-financial firms also surged from $133 billion to $156.8 billion — an increase of 18 percent, and we’re still not done yet with 2022 filings. See Figure 2, below.
Now back to the 75 firms we mentioned previously.
Those 75 companies were carrying a total of $1.206 trillion in debt against $4.741 trillion of assets. Nearly $382 billion, or 28 percent of that total debt, will mature in the next five years. The weighted average interest rate for debt maturing in the next five years ranged from 2.53 to 4.96 percent. See Figure 3, below.
The big question: What will happen to those companies when their debt comes due? Will they refinance at higher rates, and see their interest expense jump? Will they retire the debt, at the risk of shrinking their cash reserves? Will they raise new capital through an equity offering of some kind and dilute current shareholders? Something else?
To make matters even more complex, until this week it was pretty much a foregone conclusion that the Federal Reserve would keep raising interest rates. Now, thanks to the collapse of Silicon Valley Bank and Signature Bank, and yellow alerts about the health of other regional banks, the Fed may well decide to hold rates steady or even cut them later this year. So maybe those firms with debt coming due will find an escape hatch after all.
Companies do disclose their schedule of debt instruments and interest rates in the footnotes. The table below shows examples from the 75 companies we studied, and the effect of rolling over the debt is significant.
For example, Thermo Fisher ($TMO) has two senior notes coming due in 2023 for a total of $3.17 billion, paying an average interest rate of 1.44 percent. Let’s assume that Thermo rolls over that debt at 4.58 percent, the Federal Funds Rate this week. In that case, Thermo’s annual interest expense on that debt rises from $45.6 million to $145.1 million.
Calcbench has an updated research note going into more detail about these findings, including a watch list of other companies whose interest expense already equals a substantial portion of net income. You can download the note from our Research page, or revisit our original series on corporate debt to see how you can conduct your own analysis with Calcbench resources.
Wall Street is hyperventilating this week about the collapse of Silicon Valley Bank and the question of whether other mid-sized banks might soon follow suit — and whenever financial analysts start hyperventilating, Calcbench is happy to hold the paper bag for you. Let’s go through the data.
First, a quick summary of what happened to Silicon Valley Bank ($SVB). The bank spent years issuing loans at low interest rates. Then, more recently, it had to start offering higher interest rates on savings accounts, to remain competitive in a world where the Federal Reserve had been raising rates.
So the value of those assets (the loans) couldn’t keep pace with the costs of servicing SVB’s liabilities (the savings accounts). That means the bank was under-capitalized. Customers saw that state of affairs and got scared. They began pulling out their savings. This made SVB even weaker, until the bank failed on Friday.
The assets at the heart of this debacle are known as held-to-maturity securities: assets (say, mortgages or mortgage-backed securities) that a bank holds quarter after quarter. Lots of banks have them. The banks disclose the value of these securities in their quarterly reports, and the securities count as assets a bank can use to satisfy its capital reserve requirements.
So, the obvious question for financial analysts: Which other banks carry lots of “HTM” securities, relative to their total assets? And what do the banks say about the underlying value of those securities, and the risks to that value?
Figure 1, below, gives us a sense of things. It lists numerous mid-sized banks and compares HTM securities to total assets as of year-end 2022. Notice that in relative terms, SVB (may it rest in peace!) had the highest portion of HTM securities to total assets.
To be clear, just because a bank is on this list, that does not automatically mean the bank is in jeopardy. Many banks hedge their interest rate risks to avoid falling into the trap that took down SVB. But if you want a sense of where to begin looking for potential risk, an analysis such as what’s in Figure 1 is a logical place to start.
Next question: What do these banks actually say about their HTM securities? Analysts can research that detail by going to each bank’s risk disclosures. For example, we used our Company in Detail page to research the disclosures from Prosperity Bancshares ($PB), which said the following:
The company’s dependence on loans secured by real estate subjects it to risks relating to fluctuations in the real estate market that could adversely affect its financial condition, results of operations and cash flows.
Approximately 79.9 percent of the company’s total loans as of Dec. 31, 2022, consisted of loans included in the real estate loan portfolio, with 29.2 percent in commercial real estate (including farmland and multifamily residential), 35.8 percent in residential real estate (including home equity) and 14.9 percent in construction, land development and other land loans. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A weakening of the real estate market in the company’s primary market areas could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing the loans and the value of real estate owned by the company…
Then an analyst can start asking further questions, of either the bank’s investor relations team or the world at large. For example, where are Prosperity’s major markets? How far along are those 14.9 percent of loans for construction projects and land development?
Or, for the world at large, how solid is the real estate market? In 2008, we had a surplus of residential development collide with rising unemployment, leading to the global financial crisis back then. Those two forces don’t seem present today, but perhaps we do have a surplus of commercial real estate.
Calcbench doesn’t know the answers to those questions. We can, however, provide the data that will help to bring your questions into sharper focus. Then you can build models and gather other data as necessary to find the answers yourself.
For the record, we also looked at the growth in HTM securities for the 11 banks we cited above. The result is Figure 2, below.
Umm, wow. That’s a big spike in 2021, and there are more mid-sized banks out there than the 11 we cited. Plan — and analyze — accordingly.
One of the more fascinating concepts that can be found deep in the footnotes of a company’s 10-K annual report is called ‘unrecognized tax benefits’. In short, it is the difference between the amount of money the company knows they ought to pay in taxes (and therefore report on their income statement as tax expense), and the amount they actually plan on paying (and therefore report on their tax return). You see, unlike us individuals, large companies tend to treat the IRS as more of a kid brother than an angry parent.
As a result of this, at any given time large companies have a certain amount of unpaid taxes (AKA unrecognized benefits!) that they are kind of just hoping they can get away with. And as time passes, many of these positions ‘expire’, or, that is, the statute of limitations runs out. So the IRS can no longer look to enforce payment. So they do get away with it. In total US public companies grabbed an extra $8 billion or so each of the last 2 years in total due to these expirations.
But, as you may know, the IRS picked up a large funding infusion over the summer (What the IRA budget increase for the IRS means for taxpayers: PwC), and the plan at least is for some of it to be used to go after some of these corporations. Since the companies must report these details for all of us to see…it will be interesting to watch if the numbers do in fact start dropping. In the meantime, here is a peek at ‘unrecognized tax benefits’ in 2021, and (most of) 2022:
In our previous post, we introduced the concept of the “fundamental data strategy” and why such a strategy is so useful for financial analysis. Today we follow up with a few specific examples from actual companies to demonstrate what we mean.
First, for those who didn’t read our previous post, a quick recap. A fundamental data strategy seeks to pull data out of corporate financial filings as soon as those filings arrive, rather than reading through the filings in (painstaking) detail. This approach is useful because many companies have a gap between the time they report an earnings release and the time they subsequently file their quarterly report to the Securities and Exchange Commission — a gap that in some cases can run to a week or longer. Plus, plenty of companies include some data points in the earnings release but not the 10-Q, or vice-versa.
So what does all that strategic theory look like in practice? We have two examples to show you.
First is Qualcomm ($QCOM). On Nov. 2, 2022, Qualcomm reported its full-year fiscal 2022 earnings and delivered its 10-K annual report to investors. Calcbench processed the earnings release first, at 4:03 p.m., and extracted 80 standardized data points for the period. The full 10-K arrived at 4:29 p.m. that same day, and added 268 more standardized data points.
The earnings press release for the annual period included six unique data points that were not in the 10-K document. Another 74 data points were in both the earnings release and the 10-K — but by digesting the earnings release immediately, rather than waiting for the 10-K, an analyst would have those 74 data points 26 minutes earlier.
In Qualcomm’s case both documents were received on the same day, so the delay in waiting for data was minimal; but as we noted earlier, other companies might have days between earnings release and 10-K. Do you want to wait days for data that’s readily available via a fundamental data strategy?
Table 1, below,summarizes the above findings for Qualcomm. The differences make clear why a serious user would want both earnings release and 10-K data, as soon as possible.
Our second example is Adobe ($ADBE). In this case, Adobe filed an earnings release on Dec. 15, 2022, which contained 72 data points. The subsequent 10-K filing on Jan. 17, 2023, more than a month later. That 10-K did contain all 72 data points that were in the earnings release, plus another 103 more that the earnings release didn’t. See Table 2, below.
Waiting an entire month for the data from a 10-K filing? That’s an eternity in the capital markets. A fundamental data strategy, executed with the right data provider, would bring as much data to your computer screen as possible, as fast as possible — including non-GAAP disclosures, performance ratios, and other information that can help you put all the formal, GAAP-based disclosures into better context.
That’s why this stuff matters, and why Calcbench does what it does.
Smart financial analysis depends on access to data — lots of it, as soon as possible, ready to drop into whatever models you’ve cooked up on your computer screen.
As obvious as that idea might sound, however, the truth is that plenty of financial analysts struggle to achieve it because they don’t have an effective fundamental data strategy. So today we want to unpack exactly what such a strategy means, and how it can help with your daily work.
First question: Exactly what do we mean by a “fundamental data strategy?” That’s easy. It is the strategy of seeking out the data in corporate financial filings, rather than waiting for those filings and then reading them. That is, your goal is to obtain the financial data, rather than the filing that contains the data.
That might sound like hair-splitting, but it’s not. In the world of financial analysis, where even a few minutes can give you a competitive advantage over rivals, a fundamental data strategy can be crucial.
For example, Calcbench recently examined corporate filings submitted to the Securities and Exchange Commission from Oct. 12 to Nov. 11, 2022. We collected 3,386 “pairs” of earnings releases and their corresponding 10-Q or 10-K filings. On average, the lag from the earnings release to the 10-Q or 10-K was 2.6 days. See Figure 1, below.
Most of the 10-Q or 10-K filings in this period (more than 76 percent) were filed within two days of the earnings report, as seen in the histogram — but almost 20 percent of the SEC filings occurred more than four days after their earnings release was published. Included in this group were firms such as Blackrock, United Healthcare, JPMorgan, Wells Fargo and JB Hunt. Ten percent of the firms took 10 days or more to submit their quarterly SEC filings after their earnings release!
Moreover, the earnings release and the quarterly filing don’t necessarily contain the same data. Some companies cram their earnings release with non-GAAP disclosures that don’t make it into the 10-Q. Some include data in the 10-Q that isn’t mentioned in the earnings release.
A fundamental data strategy works by capturing all that data, in both earnings release and quarterly SEC filing, on an automated basis. That saves you the trouble of waiting for a company’s formal filing, and the risk of overlooking a critical piece of information that only exists in the other filings you’re not reading.
You can execute a fundamental data strategy in several ways. First, you can subscribe to a data provider such as Calcbench (what, you thought we wouldn’t give ourselves a shameless plug?) and use our numerous database tools to search the data as we scoop it up from corporate filings. Or, you can arrange for an API so the data we collect automatically flows into whatever models and tools you’ve developed in-house.
EIther way, you get what you need for successful financial analysis: data.
Calcbench did just publish a (free) whitepaper explaining fundamental data strategy in more detail, and we encourage you to download it and give it a read. Later this week, we’ll give a few examples of what we mean from specific companies.
Earlier today, Bloomberg published an article citing UBS research, that effectively stated that earnings quality as measured by the comparison of cashflow from operations versus net income is growing and, thus, deteriorating. This work is near and dear to our hearts at Calcbench as some of us cut our teeth by following the work of Richard Sloan on this topic!
So, we set out to show people just how efficiently you can build models like this using Calcbench. It also illustrates the importance of having a strategy to obtain fundamental financial data.
Without further ado, here is a link to a spreadsheet that does an exercise similar to that in the Bloomberg article. In short, we collected Net Income, Cashflow from Operations and Depreciation & Amortization from our database using our Excel Add-In. Next, we subtracted Depreciation from Net Income and then compared that to Cashflow from Operations.
We summarized our work in two charts. In both cases, the universe is the S&P500 ex financials.
It confirms the UBS work (phew). In the chart below, for 2022, the 11.2% of our firms, had Net Income greater than Cashflow from Operations. In the lower chart, notice that the green bars ( CFO minus Net Income) are above zero for every year since 2016. Our study included more firms because we used data that became available through yesterday (February 28, 2023).
The link to our spreadsheet is here. Please note that the spreadsheet comes with embedded Calcbench formulae and will not work without a subscription. For a Calcbench trial subscription, please visit https://www.calcbench.com/join
Calcbench loves getting lost in the data, and today delivery giant UPS ($UPS) gave us an excellent example of how to do just that with its disclosures about financial performance and fuel costs.
First let’s look at the headline numbers, which are underwhelming at best. In its 2022 report filed this morning, UPS reported revenue of $100.34 billion. That’s an increase of 3.14 percent from one year ago — but once we start looking further down the income statement, the picture gets rather ugly.
Total operating expenses rose 3.3 percent to $87.24 billion, so operating profit only squeaked up 2.2 percent. UPS also reported $2.2 billion less in the ever-hand “other income” line, so the company’s pretax income, net income, and EPS were all down more than 10 percent from year-ago numbers. Yuck.
Still, we wanted to investigate UPS’ fuel costs because (1) they’re a significant expense for transportation-heavy businesses such as a shipping company; and (2) they can tell analysts a lot about where inflation might be going in quarters to come. So we opened our Interactive Disclosure tool and simply searched for “fuel.”
We found two important tidbits.
First, UPS imposed a fuel surcharge on customers for 2022, and while we don’t know exactly how much revenue that surcharge brought in for UPS, the company did say the increase in surcharge revenue was $3 billion. So UPS’ entire revenue growth for last year (from $97 billion to $100 billion) can be attributed to its fuel surcharge alone.
Second, that surcharge adjusts weekly, based on commodity energy prices — and those prices have been falling steadily after reaching a peak in mid-2022. Hence UPS added this disclosure in the Management Discussion & Analysis that seems important: “We expect a reduction in fuel surcharge revenue in 2023 based on the current commodity market outlook.” Well, given that fuel surcharges accounted for all of UPS’ revenue growth in 2022, what are the implications of that decline for UPS’ overall revenue picture in 2023?
We know some of you will immediately say, “Wait! If fuel costs decline, that means UPS’s operating expenses will decline, and that will cancel out the decline in fuel surcharge revenue!” Perhaps not. Look at Figure 1, below.
Fuel expenses only rose $2.171 billion from 2021 to 2022. So that $3 billion increase in fuel surcharge revenue last year was more than the increased fuel costs, and the $829 million difference was gravy that could fall to UPS’ bottom line. There’s nothing to say that equation can’t run in reverse: UPS sees lower fuel costs and lower fuel surcharge revenues, but also less gravy too.
Rival shipping giant FedEx ($FDX) also imposes a fuel surcharge, and the company did say in its most recent 10-K that fuel costs “had a significant benefit to operating income in 2022 as higher fuel surcharges outpaced increased fuel prices.”
Except, FedEx doesn’t disclose any specific dollar amounts like UPS does, and FedEx’s fiscal year ends on May 31 — and at that time in 2022, fuel costs were sky high. So we won’t have any update at all on FedEx’s fuel costs until sometime this summer, and even then we might not be able to ask the same questions that arise from UPS’s disclosures.
Filed under: food (or fuel) for thought.
Hyatt Hotels and Wyndham Hotels & Resorts both filed their annual reports for 2022 this week, which allows us to revisit two of our favorite macro-economic issues: recovery from the pandemic and inflation. Both companies offer glimpses into both issues.
Let’s begin with Hyatt Hotels ($H). The company’s income statement is a mixed bag. Total revenue nearly doubled, from $3.03 billion one year ago to $5.89 billion this year; pre-tax income and net income were also up sharply, too.
Except, how useful is it to compare a hotel chain’s 2022 numbers to 2021, while the pandemic was still very much a disruptive force? So we compared 2022 to Hyatt’s 2019 performance, and a rather different picture emerged. See Figure 1, below.
That performance is less glamorous. Revenue is 17.3 percent higher than the pre-pandemic numbers from 2019, which is nice; and expenses rose only 13.9 percent, so operating income increased too.
But Hyatt also had a collection of losses in 2022 that led to pretax income of only $363 million, 64 percent lower than the $1 billion Hyatt reported three years ago. Plus, notice the line item for interest expense: it doubled, from $75 million in 2019 to $150 million today. That’s higher interest rates, and they aren’t going away any time soon.
We see almost the opposite configuration at Wyndham Hotels & Resorts ($WH). There, the company’s 2022 revenue was down considerably from 2019 totals — but expenses were down even more, leading to pretax and net income lines that both more than doubled. See Figure 2, below.
Two hotel chains, two very different long-term strategies. Just goes to show how attention to specific line items and disclosures over time matter so much to helping you understand what’s really going on with a company.
We next started digging into the footnotes, to see whether hotel prices have risen in cost like so much else in the world these days, especially since travel, leisure, and hospitality are supposedly one sector where consumers want to keep spending, inflation be damned.
The data told a somewhat confusing story. We looked up RevPAR (revenue per available room), ADR (average daily rate), and occupancy levels, comparing 2022 to 2019. Table 1, below, shows the results for Hyatt.
Occupancy rates are down across all Hyatt brands (and kudos to management for breaking down the data by brand, by the way), but average daily rate was up. RevPAR is calculated by multiplying a hotel's average daily room rate by its occupancy rate. So fewer people are booking rooms, but paying more when they do. (It’s also true that Hyatt has more rooms today than it did in 2019.
Alas, Wyndham doesn’t report occupancy and ADRs, so we can’t whip up a comparable table; and we’re still waiting for other peers such as International Hotel Group ($IHG) to file their 2022 reports in the next few weeks.
Food for thought while you book that next business trip.
In our previous post we examined the gross and operating profit margins at Google ($GOOG) to see what those disclosures might tell us about how well Google is handling cost pressures. (TL;DR — not great.)
Today we want to widen the lens, looking at the gross and operating margins for groups of companies. Can that tell us anything too?
Well, yes and no. First we used our Bulk Data Query tool to calculate the gross and operating margins for non-financial companies in the S&P 500 (roughly 400 firms in total) for the last four years. The result is Figure 1, below.
The most striking thing in the above chart is how gross margins held steady across the entire period — from the comfortable pre-pandemic times of 2019, through the pandemic in 2020, through the supply chain disruptions of 2021, through the inflation of 2022. (We ended at Q3 2022 because not enough Q4 filings have arrived yet.) Through all those gyrations, median gross margin was 38.3 percent, and no single quarter was more than 1.2 percentage points above or below that number.
Operating margins are a different story. Notice how they dropped sharply at the start of 2020, coinciding with all the new costs companies encountered as they scrambled to shift operating processes, cover expenses for dislocated employees, and so forth. Then operating margins increased in 2021 as covid’s economic turmoil receded, followed by a decline in margins in mid-2022 — which coincided with inflation’s high-water mark and employees in a tight labor market demanding more wages.
Except, let’s be honest here: across the entirety of the 15 quarters we examined, operating margins didn’t fluctuate all that much either. Yes, they seesawed in 2020 thanks to the pandemic; but operating margins were at 11.5 percent at the start of 2019. They were 12.9 percent in late 2022. That’s a notable shift upward, but not a huge one.
So perhaps the biggest lesson in looking at a broad group such as S&P 500 non-financials is that you can’t draw any clear conclusions. Some sectors clearly have taken it in the teeth lately (lookin’ at you, tech sector), but others haven’t, and a 60,000-foot analysis like Figure 1 doesn’t reveal much.
In that case, if you want to do a margin analysis, you’re better off looking at specific sectors, or comparing one sector against another. (You can use our screening tools to establish whatever peer group you want, of course.)
Out of curiosity, we also looked at the collective margins for nine large tech companies:
We excluded Amazon because it’s more a commerce company than a technology company; ditto for Tesla, which is a car company that depends on tech. The nine companies mentioned above are as close to pure-play tech firms as we could find.
Figure 2, below, shows the trend in margins for these firms.
This chart clearly tells a different story than Figure 1. For example, our tech group saw a larger increase in operating margins through latter 2020 and all of 2021. Even the decline in operating margins toward the end of 2022 is still appreciably higher than where margins were in 2019 before the pandemic.
On the other hand, gross profit margins declined in 2022 as inflation costs picked up. That’s a bit weird, since tech companies supposedly don’t rely on physical supplies as much as other sectors. So the data is calling out issues that might warrant further investigation, either by digging into footnote disclosures or asking firms what’s going on when you’re on the next earnings call.
Either way, studying the margins of a firm, or groups of firms, can help you better understand what’s going on with firms you follow in these tumultuous economic times. Calcbench has the data and tools you need to do that.
Some of the most important insights about corporate performance can be found at the margins. So we at Calcbench wondered — what do the margins say about companies’ fight against inflationary forces?
Specifically, we wondered about gross margins and operating margins. Both disclosures are non-GAAP metrics, but they are easy to calculate and consistent across many companies. They also provide a window into how well a company can pass along rising costs to its customers.
How so? First let’s look at gross margins. That is simply gross profit divided into revenue, and gross profit is revenue minus cost of goods sold. So as your cost of goods rises, your gross margins will fall. The way to counteract that would be to pass along those rising costs to customers by raising prices. Those higher prices would lead to higher revenue, and your gross margins would return to normal.
Operating margins work in the same way. They are calculated as operating profit divided into revenue, and operating profit is revenue minus cost of goods sold and sales, general, and administrative costs. So as your costs for labor and services rise, your operating margins get squeezed. Again, you counteract that by raising prices, which leads to higher revenue, which preserves operating margins.
That’s how things work at the theoretical level. Here in the real world, companies spent all of 2022 grappling with higher costs for materials and labor. Did that squeeze their margins? Using our Bulk Data Query page and our Multi-Company page, we decided to investigate.
First we looked at Google ($GOOG). Figure 1, below, shows the change in gross and operating margins from 2020 through 2022.
We can see a few things here. First, Google has impressively high gross margins — but then again, why wouldn’t it? Google is a tech company. It doesn’t spend lots of money buying materials to be reprocessed as physical goods to sell.
Second, you can see how operating margins bulged upward from second-quarter 2020 (16.7 percent) into third-quarter 2021 (32.3 percent). We didn’t look into the footnotes to understand exactly why that happened, but it’s not surprising; everyone was stuck at home either working remotely or surfing the internet. Result: lots of Google searching, which means a rapid increase in revenue for Google. When growth in revenue exceeds growth in operating costs, operating margins go up.
Third, however, notice how operating margins started to decline in late 2021, with gross margins drifting downward in the same timeframe. That operating margin decline continued all through 2022, dropping from the 32.3 percent we saw in mid-2021 to 23.9 percent at the end of 2022.
Why? One reasonable theory is that Google splurged on hiring in 2021, so its SG&A costs went up. For example, Google headcount went from 150,000 in September 2021 to 190,000 at the end of 2022, a jump of 26.7 percent. Now look at the increase in costs shown in Figure 2, below.
R&D costs rose by 17.9 percent from Q4-2021 to Q4-2022. Sales and marketing costs fell by 5.5 percent, but general and administrative costs popped by 23 percent. That led to a drop in operating income of $3.72 billion at the end of 2022 compared to the year-earlier quarter. Operating margin fell from 29 percent one year ago to 23.9 percent now — and in relative terms, that’s a lot.
Look at everything that way, and suddenly you can see why Google decided to cut headcount. It’s a brutal but efficient way to cut operating costs and keep those margins up — which, in turn, preserves net income and ultimately helps share price. (In the short term, at least.)
That’s enough for today. But the next obvious question is what we can learn from changes in gross and operating margins (or the lack thereof) at other companies, other sectors, and even the S&P 500 overall.
That will be in our next post.
As you may have seen in the headlines lately, Bed Bath & Beyond ($BBBY) now seems destined for bankruptcy. The company has already missed interest payments on its debt, its financial performance looks awful, and analysts everywhere are predicting a filing within weeks.
Who could have seen this coming? Well, anyone who followed the company’s financial disclosures closely.
We compared Bed Bath & Beyond’s numbers to two competitors: Walmart ($WMT), representing the discount retailers competing against Bed Bath & Beyond from the low end; and Williams-Sonoma ($WSM), representing the upscale retailers competing from the high end.
First we pulled the three companies’ revenue, gross profit, and SG&A expenses for fiscal 2018 through 2022. Then we looked at gross profit margin and SG&A costs as a percentage of revenue for all three companies over those four years. The result is Table 1, below.
Ooof. Those are some pretty painful trends for Bed Bath & Beyond. Gross profit margins fell, while SG&A costs as a portion of revenue went up; that pretty much sets up the whole story. We didn’t even bother to include operating profit, since those numbers were printed in red every single year and Table 1 is colorful enough already.
Meanwhile, Williams-Sonoma saw its gross profit margins rise and SG&A as a portion of revenue fall. Perhaps that’s because Williams-Sonoma caters to a more upscale consumer, and they had plenty to spend during the pandemic thanks to government stimulus payments and (by late 2020, at least) thriving economy. Meanwhile, Walmart kept its margins essentially flat, because Walmart is so huge that it can force suppliers to keep costs low.
Many other circumstances pushed Bed Bath & Beyond to this unfortunate precipice too, of course; we don’t mean to say a quick glance at gross margins and SG&A costs can predict bankruptcy — but those quick glances can tell analysts that something is amiss, and worth further investigation.
Then you can keep digging into the data for better answers, and as always, Calcbench has all that other data too.
Everyone loves to talk about Netflix ($NFLX), either because you want to gab about some great new show you discovered (Kaleidoscope, people!) or you want to complain that there’s nothing on Netflix (us, immediately after finishing Kaleidoscope).
So when the company filed its 2022 annual report the other day, we decided to take a look at the two numbers behind those concepts: total content liabilities Netflix has, for programs it has committed to purchasing; and total number of paying subscribers.
Figure 1, below, shows what we found over the last five years. Fascinating to see that content liabilities (in blue) plunged in 2020 and 2021, presumably because film production shut down during most of the pandemic. When life and art began returning to normal in late 2021, those content liability numbers started to climb again.
On the other hand, subscriber growth — which is the most important factor to determine revenue, let’s remember — is chugging upward (in red) at a pace that’s steady, but by no means brisk. Total paying subscribers stood at roughly 110 million at the start of 2018. It was 230.7 million at the end of 2022, an increase of 108 percent. If you squint, you can see that the pace of subscriber growth increased in 2020 while we were all confined to quarters, but since then subscriber growth has decelerated.
One can see the strategic choices that emerge from these trends. Either Netflix trims its commitment to future programming; or it accelerates subscriber growth massively with, um, pixie dust or something; or it fiddles with its pricing options to raise more revenue from existing subscribers and the new subscribers trickling in over the years to come.
Indeed, Netflix has already started to pursue that third choice, with its idea of a low-cost subscription offering that includes advertising. The company launched that subscription product in November, reportedly to lackluster interest so far. (Netflix hasn’t broken out that advertising tier as a separate operating segment, nor does it report advertising revenue as a separate line item.)
So the other choices are fewer major commitments to content in the future (Bridgerton fans will riot if Netflix goes that route) or ramping up subscriber growth massively. Since just about every household in North America that wants Netflix already has Netflix, that also means said subscriber growth will need to be driven by global markets.
Something to think about when you see all those foreign shows in your feed.
Now that the largest U.S. banks have all filed their Q4 2022 reports, we decided to revisit one of our favorite issues for this sector: the changing revenue streams from interest and non-interest lines of business.
Figure 1, below, shows the changes in net interest income and non-interest income for the six largest banks in the United States (by assets) over the last four years: Bank of America ($BAC), Citigroup ($C), Goldman Sachs ($GS), JPMorgan ($JPM), Morgan Stanley ($MS), and Wells Fargo ($WFC).
Note the two spikes in non-interest income at the start of 2020 and again at the start of 2021 Those spikes coincide with (1) the Federal Reserve first cutting interest rates essentially to zero at the start of the covid-19 pandemic, prompting a wave of corporate loans; and (2) the refinancing boom in home mortgages in 2021.
Then came 2022 and the Fed raising rates to combat inflation. Mortgage rates spiked, home refinancing fell off a cliff — and net interest income jumped 45.1 percent in 18 months, from a low of $45.47 billion in mid-2021 to $65.97 billion at the end of 2022.
Then we wanted to get more granular. Figure 2, below, shows the change in non-interest income among those same six banks over the same four years.
First, note that only three banks now have non-interest income substantially lower than pre-pandemic levels: Bank of America, Morgan Stanley, and Wells Fargo. The other three saw considerable drops from their high-water marks in 2021, but Q4 non-interest income was still in the ballpark of where it was in 2019.
Second, the bank with the widest swings in non-interest income was Goldman Sachs — somewhat surprising, since these are the folks who supposedly know everything. Then again, considering how Goldman just admitted that its foray into consumer banking was a bust, maybe they’re not omniscient after all.
We’ll revisit the banking sector again in a few weeks, once the smaller banks complete their Q4 reports and we have a fuller picture of who’s earning how much from which lines of revenue. Plus, analysts do have one big question to ponder for 2023.
What happens to net interest income and non-interest income when the Fed pauses interest rate hikes? Because that could well happen, and then the shifting lines we see in Figure 1 might change quite a bit.
Just about every big technology company in Silicon Valley has announced layoffs lately. Why? Ostensibly so the company can match its costs (driven by headcount) to a shrinking or changing revenue picture.
To get a better sense of those dynamics, Calcbench decided to chart revenue per employee over the last 14 years at six major tech companies. The result is Figure 1, below.
A few points jump out immediately. First, as usual, Apple ($AAPL) is showing off with stellar numbers that far outpace other big tech companies. Perhaps it’s no surprise, then, that Apple is the only company in our sample group that has not announced large-scale layoffs lately.
On the other hand, one also needs to consider differences in business model. Apple makes high-end hardware with lucrative profit margins, Salesforce ($CRM) is a business-to-business software provider, and some people would argue that Amazon ($AMZN) isn’t even a tech company at all; it’s a tech-savvy retailer with a huge blue-collar workforce that other tech companies don’t have.
One also needs to consider the two variables that make the revenue per employee ratio. So is Apple’s ratio so high because its revenues have grown so much, or because it keeps the pace of hiring prudent?
Facebook ($META) might be an even better example of the question. In late 2022 the company announced that it would lay off 11,000 employees, roughly 13 percent of its workforce. That is certainly unwelcome news to the 11,000 losing their jobs, but remember that Facebook had 87,000 employees at the time — up from 72,000 employees at the start of 2022, just 10 months earlier.
So critics could argue that Facebook “overhired” throughout last year, even as the company started suffering a significant revenue decline thanks to changes in how Apple lets other apps track user activity on iPhones. Did CEO Mark Zuckerberg make a critical misjudgment because he was too busy building the Metaverse? You tell us.
Just for kicks, we also charted net income per employee over the last decade. That’s in Figure 2, below.
Hmmm. This paints a rather different picture. For example, Facebook saw a huge surge in profit per employee in the mid-2010s, which then spluttered in 2019 and has yet to recover in the 2020s. That might qualify as a decline in employee productivity, which (in theory) one might reverse by shedding employees in lackluster product lines while investing in the Next Big Thing.
Also notice how Amazon has a low level of profit per employee. That’s not news, really; the company’s e-commerce segment is a huge part of its overall operations, but that segment has always been hit-or-miss on printing the bottom line in black ink. In many quarters, Amazon’s e-commerce operations actually lose money, and its high-growth, high-profit Amazon Web Services segment is what keeps the total empire afloat.
Updated as of 2/3/23
In the summer of 2020 Calcbench had a post on this blog about wild swings in the price of eggs, and how that volatility affected Cal-Maine Foods ($CALM), the largest producer and distributor of eggs in the United States.
Well, as you may have seen at the supermarket lately, egg prices remain stubbornly high despite signs that inflation is receding in many sectors. That’s partly due to persistent supply chain problems in the egg industry, and partly due to an avian flu virus that emerged in 2022 and devastated the poultry population.
So we decided to revisit Cal-Maine. What do its disclosures say these days about the ceaseless rise of egg prices?
One can start with gross profit, which is revenue minus the cost of revenue. Figure 1, below, charts the astonishing rise in Cal-Maine’s gross profit from the start of the pandemic through the end of 2022.
The story here is simple. Egg prices have soared, so Cal-Maine’s revenue has soared. Its cost of revenue, however, has increased at a much more moderate pace — so the company is generating huge piles of cash to manage its operations. Consider its most recent quarterly report. Revenue grew by 110 percent from the year-earlier period, while cost of revenue only rose 43 percent; that translated into a jump in gross profit of more than 620 percent.
The rest of Cal-Maine’s operations grew at a moderate pace too. So by the time we reach the bottom of the income statement (see Figure 2, below), we arrive at net income growth of 16,830 percent. No, that’s not a typo.
Now let’s widen the lens a bit and look at what else Cal-Maine is disclosing about its egg operations, to get a better sense of potential future growth or pitfalls.
Yep, we used that pun. We do not apologize.
Because Cal-Maine’s latest disclosures come from a 10-Q rather than a full-year 10-K (next one arrives in summer), we have less data than we’d like. But one can still find startling details from the earnings release that Cal-Maine also filed with its most recent quarterly report. See Figure 3, below.
Net average selling price for a dozen eggs essentially doubled, from $1.36 one year ago to $2.71 this quarter — and that blends together both conventional and “specialty” eggs, which we didn’t even know were a thing until just now. Conventional eggs alone had their price take flight from $1.15 to $2.88 per dozen, an increase of 250 percent. That increase is what’s leaving you staring at prices on the supermarket shelf.
We should note, however, that unit sales of eggs didn’t rise all that much: only 5.4 percent, from 269.5 million one year ago to 284.1 million today. That begs a question someone might want to put to Cal-Maine on the next earnings call: given the fierce demand, how much will Cal-Maine invest in future production capacity?
You can kinda sorta get an answer to that from Cal-Maine’s inventory disclosures, since “inventory” is just another word for “chickens” here. Apparently the company has “layers,” which are mature chickens that lay eggs; “pullets,” which are immature chickens too young for the task; and “breeders,” which are roosters and fertile hens used to make the next generation of layers.
As of the latest quarter, Cal-Maine had 10.4 million pullets and breeders, down from 11.5 million last May; and 43.7 million layers, a modest increase from 42.2 million last May. So will that be enough to overcome the avian flu virus still threatening flocks? Are the breeders breeding fast enough? Would Cal-Maine ever want to purchase more chickens to meet rising prices and strong demand?
We don’t know. But we do have the data to help analysts who follow the poultry industry let their analysis take flight.
Today we want to return to our usual fare on the Calcbench blog, noodling over recent financial reports to find interesting pieces of data — and if you want noodles, why not start with supermarket giant Albertsons?
Albertsons (ACI) filed its most recent quarterly report last week. At a cursory glance, its numbers look underwhelming. Revenues rose 8.5 percent from the year-earlier quarter to $18.15 billion, but costs rose even faster, so net income actually fell 11.5 percent. Ouch.
Granted, inflation for supplies and labor has pressured many companies’ margins lately, even as those companies pass along at least some of their higher costs to keep top-line revenue growing. But that might not be the whole story here.
Figure 1, below, shows Albertsons’ most recent quarter compared to the year-earlier period.
Notice the line high-lighted in blue: the ever-popular “Other expense (income)” line. One year ago, Albertsons posted a gain of $38.3 million — which, because it appears on the expense section of the income statement, gets reported as a negative number. In this quarter, that line item was reported an expense of $1.7 million.
Indeed, if you look just a few lines higher, you’ll see that Albertsons also reported a $7.3 million loss on disposition of… well, something; we’ll investigate exactly what shortly. But one year ago, that same line item was a $13.4 million gain.
Taken together, those two “other” items delivered a $51.7 million boost to Albertsons’ net income line one year ago. If you exclude those numbers, net income one year ago would have been $372.8 million, which would’ve been lower than what Albertsons just reported now.
So did Albertsons underperform this quarter? Or did it overperform one year ago thanks to some one-time items?
To learn more about exactly what these other gains and losses are, you can use our Interactive Disclosure page. Just call up the 10-Q for the relevant period, and most times other income is discussed in the Management Discussion & Analysis section.
For example, when you read the MD&A for Albertsons’ quarterly filing one year ago, you find this about that $13.4 million gain:
For the third quarter of fiscal 2021, net gain on property dispositions and impairment losses was $13.4 million, primarily driven by $15.8 million of gains from the sale of assets, partially offset by $2.4 million of asset impairments, primarily related to right-of-use assets.
That could mean the sale of some Albertsons properties, plus an impairment on the value of long-term operating leases (which are carried on the balance sheet as right-of-use assets).
Further down in the MD&A, Albertsons also says this about that $38.3 million in other income:
For the third quarter of fiscal 2021, Other income, net was $38.3 million compared to $19.2 million for the third quarter of fiscal 2020. Other income, net during the third quarter of fiscal 2021 was primarily driven by non-service cost components of net pension and post-retirement expense, unrealized gains from non-operating investments and income related to our equity investment.
We’ll be honest that we’re not sure what that disclosure means. Then again, that’s really the point here: Calcbench can help you find the data and disclosures you need to help you ask better questions — such as, “Albertsons, could you please translate that into plain English?”
That’s how you can be sure a company is giving you substantive answers, rather than leaving you standing in the baloney aisle.
Our next post on corporate debt is more about practical advice for Calcbench subscribers: a look at the tools you can use within the Calcbench website to find disclosures about corporate debt for the companies you follow.
If you want data from a group of companies, one place to start is our Multi-Company page. First, select the group of companies you want to research. (We have an entire post dedicated to creating a peer group if you need a refresher.) Once that group is set, you can choose from any number of debt-related disclosures we include in our Standardized Metrics field on the left-hand side. Those disclosures include:
Just enter the disclosure you want to research, and presto! Those disclosures will populate for every company in your peer group (assuming the company made those disclosures for the period you’re researching).
You can always use the Multi-Company page for a single company’s disclosures, too; just set your peer group to that sole company. But we also have numerous other ways to research debt disclosures one company at a time.
On the Company-in-Detail page, you can research what the company reports on the income statement and the balance sheet. This approach is somewhat hit or miss, because not all companies report interest expenses on the income statement — although all companies do report debt on the balance sheet. You can pull up the disclosures for the company you follow and see what it reports in the primary financial statements.
If you want a truly deep dive into the debt data, you can also run a Calcbench “Quick Report,” which will export all the debt data we have on your company into an Excel spreadsheet. To do this, click on the Quick Reports tab and then look for the debt report option. See Figure 1, below.
Be warned, this option gives you a lot of data. We selected Apple ($AAPL) at random, and the resulting spreadsheet listed nearly 900 rows of data across dozens of columns — a separate data cell for each debt instrument Apple reported, for every quarter going back to 2013. Suffice to say that a company as large as Apple has many debt instruments, so yes, the Excel spreadsheet really did need to be that large.
You can also get a global sense of a company’s debt disclosures using our Segments, Rollfowards & Breakouts page. Start by selecting the specific company you want to research. Then select “Debt Instruments” from the pull-down menu of dataset options on the left side of the screen.
Figure 2, below, shows some of the results for Oracle ($ORCL).
Again, a lot of information is packed into these results. We give you a list of notes due, the amount, the stated interest rate, the effective rate, and other snippets of information about the date a debt instrument is due.
For example, we can see in Figure 2 that Oracle has a $1 billion loan coming due in July 2023 (July 23, to be exact) with an effective interest rate of 3.73 percent. Given where interest rates are today, does anyone expect Oracle will be able to refinance that debt at a comparable rate in six months’ time? Anyone at all?
For just about all the disclosures you see from the Segments page, you can also hold your cursor over the item and then use our world-famous Trace feature to trace that number back to its exact disclosure in the financial statements. When we traced that $1 billion debt instrument coming due in July, the resulting chart in Figure 3 quickly appeared.
If you squint at Figure 3, you can see one item high-lighted in yellow. That is the original $1 billion number from the Segments results, traced back to the most recent disclosure Oracle made in its footnotes — along with all the other debt instruments Oracle also reported.
That brings us to our final method to research debt disclosures: by looking in the footnote disclosures directly.
Start with our Interactive Disclosures database. Select the company and specific period you want to research. In the list of Notes to the Financial Statements, look for something along the lines of Notes Payable and Other Borrowings (the headline Oracle used), and you should see the full table of debt disclosures. For example, looking up that disclosure for Oracle would present the same table in Figure 3, just a bit larger and more readable.
Not all companies label their debt disclosures as Notes Payable. Many do, but others might label them as Debt, Debt Instruments, or perhaps some other title. Keep your eyes peeled and your mind open, but the data will be in there somewhere.