Author Topic: Stock value with a negative EPS  (Read 7031 times)

nawhite

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Stock value with a negative EPS
« on: April 21, 2014, 12:34:00 PM »
I work in telecom so I like to look at the stocks of the major telecom businesses. No real plans to purchase individual stocks just learning about Value investing.

I'm looking at CenturyLink (CTL) which currently lists an EPS of $-0.40. When EPS is negative, the P/E is not applicable so I have no anchor with which to value the company. Can someone walk me through another way to value a company with a negative EPS?

kyleaaa

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Re: Stock value with a negative EPS
« Reply #1 on: April 21, 2014, 12:50:11 PM »
You value the shares exactly the same as you'd value shares in a profitable business: the present value of expected future cash flows. There are many books written on this methodology.

One pretty decent book that covers the topic I read a few years ago:
http://www.amazon.com/Five-Rules-Successful-Stock-Investing-ebook/dp/B000SEIYBK/ref=sr_1_1?ie=UTF8&qid=1398106386&sr=8-1&k

I'm sure there are even better newer books specializing on the subject.
« Last Edit: April 21, 2014, 12:54:22 PM by kyleaaa »

daverobev

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Re: Stock value with a negative EPS
« Reply #2 on: April 21, 2014, 03:08:30 PM »
Look in the annual and quarterly reports to see why there is negative EPD. Might be a one off, restructuring, writedowns, etc. Work out what you estimate EPS will be going forward.

tat96

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Re: Stock value with a negative EPS
« Reply #3 on: April 21, 2014, 03:17:26 PM »
While expected future cash flows is a good way to value a stock, a company with a negative EPS  probably does not have a lot in the way of earning potential/cashflow.  To value the company you need to look at things like intrinsic value and goodwill.  Granted these are super subjective but if the company has a great product and a market it may be an attractive buy.

Tesla Motors for instance has a negative EPS however many people believe it is going to revolutionize the world hence it is a super expensive stock (has intrinsic value).  Granted you can take things into account like property, plant and equipment (PPE) and some intangibles (in Tesla's case copyrights, research, trademarks, intellectual property). 

Hope this helps.  You have a fairly complex question that I believe has no definitive answer and a great many opinions.  Good luck with the research.

grantmeaname

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Re: Stock value with a negative EPS
« Reply #4 on: April 21, 2014, 07:13:34 PM »
A loss that substantial is likely a write-down that management is taking now in order to report lower expenses in the future. What does a normal quarter's EPS look like?

KingCoin

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Re: Stock value with a negative EPS
« Reply #5 on: April 21, 2014, 08:01:15 PM »
A loss that substantial is likely a write-down that management is taking now in order to report lower expenses in the future. What does a normal quarter's EPS look like?

As well as looking at the past, you can also "look at the future". Forward estimated P/E for 2015 is 13.58, which should give a realistic idea. This should be pretty accurate for a slowly melting ice cube of a business like CTL.

This exercise becomes much more complicated for fast growing business that investors hope will turn a profit when the business "matures". There's really no shortcut for valuing these companies besides building a model.

Also, I'd respectfully suggest that if you have to ask this kind of question, your chances of beating the market based on stock valuation insight are rather slim.

innerscorecard

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Re: Stock value with a negative EPS
« Reply #6 on: April 21, 2014, 08:15:20 PM »
Also, I'd respectfully suggest that if you have to ask this kind of question, your chances of beating the market based on stock valuation insight are rather slim.

This felt unnecessarily rude. The OP didn't even say he was looking to buy the stock or make any investing decision (and actually literally said that he doesn't plan to buy individual stocks), but rather that he was just trying to learn more about how companies are valued.

KingCoin

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Re: Stock value with a negative EPS
« Reply #7 on: April 21, 2014, 09:14:17 PM »
Also, I'd respectfully suggest that if you have to ask this kind of question, your chances of beating the market based on stock valuation insight are rather slim.

This felt unnecessarily rude. The OP didn't even say he was looking to buy the stock or make any investing decision (and actually literally said that he doesn't plan to buy individual stocks), but rather that he was just trying to learn more about how companies are valued.

You're probably right. A willingness to learn should be supported, not shot down, but I worry that a little knowledge can be a dangerous thing, especially when it comes to investing in individual stocks. Doing cursory "analysis" by looking at things like P/E ratios can give an investor the false belief that a stock is a "good value" when in fact more savvy investors have priced a stock "cheaply" because it is, in fact, high risk.

I'll modify my original statement by saying, doing good fundamental analysis is extremely hard. Like any skill, it takes years of hard work to do it well, and a demonstrated mastery (even without the ability to consistently pick winners) will land you a mid-six to seven figure salary on Wall St. If you're up for a lot of work and study, then have at it, especially if you hope to parlay your knowledge to a career into finance.

Ultimately, I feel like this kind of question is akin to "how do I diagnose my wife's illness?". You can offer some pointers about using WebMD, but the right answer is that you need to go to medical school.
« Last Edit: April 22, 2014, 05:07:19 AM by KingCoin »

nawhite

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Re: Stock value with a negative EPS
« Reply #8 on: April 22, 2014, 10:41:46 AM »
Also, I'd respectfully suggest that if you have to ask this kind of question, your chances of beating the market based on stock valuation insight are rather slim.

This felt unnecessarily rude. The OP didn't even say he was looking to buy the stock or make any investing decision (and actually literally said that he doesn't plan to buy individual stocks), but rather that he was just trying to learn more about how companies are valued.

You're probably right. A willingness to learn should be supported, not shot down, but I worry that a little knowledge can be a dangerous thing, especially when it comes to investing in individual stocks. Doing cursory "analysis" by looking at things like P/E ratios can give an investor the false belief that a stock is a "good value" when in fact more savvy investors have priced a stock "cheaply" because it is, in fact, high risk.

I'll modify my original statement by saying, doing good fundamental analysis is extremely hard. Like any skill, it takes years of hard work to do it well, and a demonstrated mastery (even without the ability to consistently pick winners) will land you a mid-six to seven figure salary on Wall St. If you're up for a lot of work and study, then have at it, especially if you hope to parlay your knowledge to a career into finance.

Thanks for the ideas so far. Basically, I'm an adamant indexer, but I really like the idea behind value investing a la Buffet and Joshua Kennon (buy good companies when they are "cheap" and hold them forever). I recognize that I have a LOT to learn and even if I were to become very knowledgeable about valuing companies, I'd probably still stick with indexing. But if some day decades down the road >80% of people are indexing and thus screwing with the markets, it would be nice to have some other skills available to beat the pack.

grantmeaname

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Re: Stock value with a negative EPS
« Reply #9 on: April 22, 2014, 10:46:00 AM »
Thanks for the ideas so far. Basically, I'm an adamant indexer, but I really like the idea behind value investing a la Buffet and Joshua Kennon (buy good companies when they are "cheap" and hold them forever). I recognize that I have a LOT to learn and even if I were to become very knowledgeable about valuing companies, I'd probably still stick with indexing. But if some day decades down the road >80% of people are indexing and thus screwing with the markets, it would be nice to have some other skills available to beat the pack.
I wouldn't worry too much about that. Even if all mutual funds were totally passive, you'd still have all the other institutional investors - private equity, hedge funds, sovereign wealth funds, endowments, insurance and pensions - and the other users of the stock market like Danny Daytrader and corporate employees exercising their options.

KingCoin

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Re: Stock value with a negative EPS
« Reply #10 on: April 22, 2014, 05:05:16 PM »
In CTL, I actually prefer stepping up in the capital structure and owning the bonds instead of the equity. I own both the 7.995 '36 (old Embarq paper) and the 7.75 '31 (old Qwest Capital Funding paper).

Yielding ~7.75%, I think they're not bad for the reasonably low risk. It's important to figure out how they fit into your overall fixed income portfolio however.