This 2018 IPO Is Starting To Look Like A Bargain
My latest featured stock is a company recently upgraded after being lukewarm on its IPO last year. I pulled this highlight from last week’s research of 232 10-K filings.
Analyst Jacob McDonough found several unusual items in the footnotes of AXA Equitable Holdings’ (EQH) 2018 10-K.
When EQH went public last year, I initiated coverage with a neutral rating. The company’s economic earnings– the true cash flows of the business – had improved in 2017, but I wasn’t sure if it was a one-year blip or a longer trend. In addition, the company still had a modest return on invested capital (ROIC) of 7% and negative free cash flow, so I advised caution.
As Figure 1 shows, EQH’s economic earnings continued to improve in 2018.
Figure 1: Economic Earnings for EQH Since 2016
Along with growth in economic earnings, EQH’s ROIC improved from 7% to 10%, and its free cash flow turned positive.
I made two key adjustments to EQH’s income statement in order to calculate ROIC and economic earnings:
- On page 244, I removed a $109 million (1% of revenue) non-recurring pension settlement charge from operating expenses
- On page 264, I removed a $7 million restructuring charge from operating earnings
I also made an important balance sheet adjustment:
- On page 261, I added back $1.4 billion in accumulated other comprehensive loss
Despite its fundamental improvements, EQH is down 3% from its first day post IPO closing price (vs. S&P up 4%), which leaves the stock with a price to economic book value (PEBV) ratio of 0.3. This ratio means the market expects the company’s after-tax operating profit (NOPAT) to permanently decline by 70%.
This cheap valuation, along with its improved cash flows, led me to upgrade the stock to very attractive.
Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology
In total, I made the following adjustments to AXA Equitable Holdings’ 2018 10-K:
Income Statement: I made $913 million of adjustments, with a net effect of removing $543 million in non-operating expense. I removed $185 million in non-operating income and $728 million in non-operating expense. You can see all the adjustments made to EQH’s income statement here.
Balance Sheet: I made $7.5 billion of adjustments to calculate invested capital with a net increase of $5.2 billion. You can see all the adjustments made to EQH’s balance sheet here.
Valuation: I made $4.1 billion of adjustments with a net effect of decreasing shareholder value by $4.1 billion. You can see all the adjustments made to EQH’s valuation here.
The Power of the Robo-Analyst
I pulled this highlight from last week’s research of 232 10-K filings, from which my firm’s Robo-Analyst technology collected 21,224 data points. The analyst team used this data to make 4,371 forensic accounting adjustments with a dollar value of $972 billion. The adjustments were applied as follows:
- 1,776 income statement adjustments with a total value of $88 billion
- 1,834 balance sheet adjustments with a total value of $364 billion
- 761 valuation adjustments with a total value of $521 billion
Figure 2: Filing Season Diligence for Week of March 11-17
Every year in this six-week stretch from mid-February through the end of March, my firm parses and analyzes roughly 2,000 10-Ks to update models for companies with 12/31 and 1/31 fiscal year ends. This effort is made possible by the combination of expertly trained human analysts with what I call the “Robo-Analyst.” Featured by Harvard Business School in “Disrupting Fundamental Analysis with Robo-Analysts”, this research automation technology uses machine learning and natural language processing to automate robust financial modeling.
Disclosure: David Trainer, Jacob McDonough, and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.