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Author: palsan Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5026  
Subject: Cutting through the hype Date: 8/31/2000 11:57 AM
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Received my copy of the second quarter shareholder report yesterday and I'm becoming concerned with the direction the financials are taking.

Facts (for 6 months ending 30/06/00 in $US and according to US GAAP):
- Revenue of $14.14B (28.28B annualized)
- COGS of $8.20B (16.40B annualized)
That translates to a cost of goods sold (cogs) of 58% and gross margins of 42%

- Net loss of $745M (but I will use management's number of $908M in "net earnings from operations applicable to common shares" found on pg.9 of the report or $1.82B annualized)
That translates to adjusted net margins of 6.4%

- Fully diluted adjusted EPS of $0.30 (or $0.60 annualized)
Using a current share price of about $82 that translates to a P/E ratio of 137 - this for a company with revenue and (adjusted) earnings growth of less than 30% over the last 3 years!

- Cash flow from operations of $35M (70M annualized)
- Capital asset purchses of $700M (I will make the conservative assumption that the company will not purchase any more capital assets for the rest of the year)
That translates to a NEGATIVE free cash flow of $630M and a negative free cash flow margin of 2.2%

Comparative analysis (fiscal year ended 31/12/99 vs "annualized" six months ended 30/06/00):
Positives:
Cash/Debt ratio up from 1.18 to 1.92
Debt/equity ratio down from 0.15 to 0.08

Negatives:
Gross margins down from 43.3% to 42.0%
Net margins down from 7.9% to 6.4%
Free cash flow margins down from 0.8% to (2.2%)
Flow ratio up from 1.44 to 1.66
Return on average equity down from 14.5% to 10.5%

Besides the tremendous growth in revenues (achieved through the empire building process of acquisitions) and all the hype surrounding the businesses NT is involved in, can someone show me how the negative trend in the financials can sustain the current valuation levels - let alone further increases in the share price? Furthermore, can someone demonstrate how all the recent acquisitions will benefit shareholders (i.e. me!) in the future?

palsan

p.s. I realize that simply grossing up 6-month figures by a simple factor of 2 to arrive at annualized numbers is unrealistic for a growing company but then again if management can use "adjusted" earnings numbers I think it reasonable to use estimates in my calculations.
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