Stocks and Trading Thread - Channeling your inner Mono

[alfred russel]

It is, but depending on the policy, it may be over 20 years or more. With inflation and even modest growth in the business, it doesn't even out. Microsoft takes 100% of the hit today; Ford is still taking some of it a couple decades from now.

So, are you saying if depreciation was not a thing, and Ford had to expense equipment purchases today, Ford would have a higher PE?

Absolutely.

Why wouldn't it? Whether Ford depreciates equipment over 50 years, 20 years, 5 years, or immediately--that has no cash flow impact - it is just book accounting. It doesn't even impact taxes because tax depreciation is separate from book accounting (which is used to compute earnings). It shouldn't impact the valuation of the company in any way.

[Admiral Yi]

Absolutely.

Why wouldn't it? Whether Ford depreciates equipment over 50 years, 20 years, 5 years, or immediately--that has no cash flow impact - it is just book accounting. It doesn't even impact taxes because tax depreciation is separate from book accounting (which is used to compute earnings). It shouldn't impact the valuation of the company in any way.

Ford buys equipment for $100.  This equipment generates $20 in annual revenue for  the life of the machine.

Scenario A, Ford expenses the equipment in year one.  That year Ford has minus $80 in cash flow.  Every year after it has 20 positive cash flow.

Scenario B, Ford amortizes the equipment over 20 year, 5 depreciation/year.  "Earnings" are 15 /year.

You said if Ford expensed equpment, it would have a higher PE.  P has to stay the same, because its the same profit stream.  That means E has to be lower in scenario A.  E is in fact lower in year 1; it's negative.  But it's higher in the out years. 

So, I still don't see your point.  Explain to me, very simply, as you would to a young child or a golden retriever, how E is lower in scenario A.

[alfred russel]

Ford buys equipment for $100.  This equipment generates $20 in annual revenue for  the life of the machine.

Scenario A, Ford expenses the equipment in year one.  That year Ford has minus $80 in cash flow.  Every year after it has 20 positive cash flow.

Scenario B, Ford amortizes the equipment over 20 year, 5 depreciation/year.  "Earnings" are 15 /year.

You said if Ford expensed equpment, it would have a higher PE.  P has to stay the same, because its the same profit stream.  That means E has to be lower in scenario A.  E is in fact lower in year 1; it's negative.  But it's higher in the out years. 

So, I still don't see your point.  Explain to me, very simply, as you would to a young child or a golden retriever, how E is lower in scenario A.

Over a theoretical long term like you just laid out, where Ford just makes one purchase over 20 years, over a 20 year cycle it balances out. In reality there is inflation and business growth. The dollar value of the purchases in year 1 are greater than the preceding years.

I looked up the actual financial disclosures of Ford. I'm going to use 2018 (just because 2019 Ford was at breakeven).

Net Income for its shareholders (the E) was $3.7 billion.

Putting aside ford capital, capital spending was $7.7 billion and depreciation/amortization was $5.4 billion.

If you were to take your "expense it all day 1" perspective, there would be an additional $2.1 billion reduction to net income, and the E would go down from $3.7 billion to $1.6 billion. Whatever the PE was would more than double.

2018 wasn't an outlier--Ford disclosed 3 years, and for each year of 2017-2019 the capital spending exceeded depreciation/amortization by $2.0 - $2.3 billion each year.

[Admiral Yi]

Throg head hurt.  Throg must rest.

[Admiral Yi]

A lot of action after hours on news Gilead Science might a cure for covid 19.

[garbon]

A lot of action after hours on news Gilead Science might a cure for covid 19.

Which seems like irresponsible reporting based on what was released.

[Admiral Yi]

Which seems like irresponsible reporting based on what was released.

https://www.cnbc.com/2020/04/16/sp-500-etf-jumps-2percent-after-hours-on-report-gilead-drug-showing-effectiveness-treating-coronavirus.html

You don't like the word "cure?" 

[garbon]

Which seems like irresponsible reporting based on what was released.

https://www.cnbc.com/2020/04/16/sp-500-etf-jumps-2percent-after-hours-on-report-gilead-drug-showing-effectiveness-treating-coronavirus.html

You don't like the word "cure?" 

I don't like that it is partial data from one trial site. Seems premature to get hopes up.

https://www.reuters.com/article/us-health-coronavirus-gilead-sciences-idUSKBN21Y3GV

[Josquius]

Gilead?
:handmaid:

[Admiral Yi]

Gilead, in an emailed statement, said "the totality of the data need to be analyzed in order to draw any conclusions from the trial."

UChicago Medicine, also in an email, said "partial data from an ongoing clinical trial is by definition incomplete and should never be used to draw conclusions."

Seems like responsible reporting to me.  Your results may vary.

[garbon]

Gilead, in an emailed statement, said "the totality of the data need to be analyzed in order to draw any conclusions from the trial."

UChicago Medicine, also in an email, said "partial data from an ongoing clinical trial is by definition incomplete and should never be used to draw conclusions."

Seems like responsible reporting to me.  Your results may vary.

My link at least clarifies that near the front, yours does not.

Also, they quote saying no conclusions should be drawn and we get headlines about Gilead's drug showing effectiveness. It is misleading.

[Admiral Yi]

OK Grab On.  Don't buy Gilead stock. 

[garbon]

I'm not really worried about stock.

[Richard Hakluyt]

I'm not really worried about stock.

.........and yet it is crucial if you want to make a really nice soup 

[mongers]

I'm not really worried about stock.

.........and yet it is crucial if you want to make a really nice soup