Ford Abandons Brazil

A century ago, Henry Ford lost a considerable amount attempting to become a rubber baron in Brazil. Now, Ford is retreating from Brazil again. Over the past decade, the company lost about $7.8 billion on its Brazilian manufacturing, or about $2,000 per car, so the company exercised its option to abandon. Ford recently announced that it would close its plants in Brazil, paying an additional $4.1 billion to get out of commitments in the country, for a total loss of about $12 billion. Other car companies are also losing money in Brazil, with Volkswagen Brazil losing about $4.1 billion since 2011. Sometimes it is better to abandon a plan rather than continue to lose money.

Morningstar Stock Valuation

So how do analysts value a stock? A recent video from Morningstar, one of the most trusted independent sources for stock values, discusses the methodology it uses. If you watch the video, you will hear a lot of methodology similar to what we discussed in the textbook, especially discounted cash flow analysis. Similar to what we discussed, the value of the stock increases by the capital gains yield and will change as new information is received. Notice an important point: Morningstar only recommends a stock if it believes that is fair value is significantly above the current market value, which implies Morningstar does not believe the market is semistrong form efficient.

SPAC Issues Fall

SPAC issuance this year has been at a record pace, but an accounting change by the SEC appears to have slowed the market dramatically. The SEC recently announced that warrants issued by SPACs would be classified as liabilities, not equity. In March, 109 SPACs went public, but that number is is down to 10 in April. Warrants are typically granted to early investors as extra compensation for the cash invested. Valuing these warrants will be expensive and it appears that many companies may not have the internal capacity to do so. And the warrants will need to be valued every quarter when the company files its 10-K.

Apollo Shareholders Rule

One trend in corporate finance is that many companies have moved to unequal voting rights. For example, Comcast, Alphabet, Facebook, Lyft, Pinterest, and many others have some type of dual class share structure, with different voting rights for each share class. Investment management company Apollo Global Management is feeling different. Recently, former CEO Leon Black proposed that the company move to one share, one vote. As Mr. Black stated:

Moving to a “one share, one vote” structure to ensure that the voting rights of our shareholders align with their economic interests by eliminating the Class C voting stock, as well as examining a move to a single class of common stock.

Apparently, Mr. Black feels that shareholders should be counted by the number of shares owned.

 

Organizational Charts

Organizational charts can have very different structures when comparing companies and an individual with the same duties in one company could have a different title in another company. Elon Musk certainly does. In a recent SEC filing, Musk has added a new job title of "Technoking of Tesla." And in a nod to Game of Thrones, CFO Zack Kirkhorn is now the "Master of Coin." Tyrion would be proud!   

Cash Versus Earnings

A recent article in the Wall Street Journal notes that banks sharply increased their loan loss reserves in 2020 in response to the pandemic. Increasing such reserves reduces a bank’s reported profit, and decreasing them improves the profit picture. By 2021, the loan losses had not emerged at the level the banks anticipated, so their profits will be rising as the loan reserves are decreased. According to the WSJ, “U.S. banks are sitting on a pile of cash that could turn into billions of dollars of profits.” There’s only one problem. Loan loss reserves are just accounting entries. Increasing and decreasing them impacts reported profits, but has no cash flow implications. As JPMorgan CEO Jamie Dimon said "It's ink on paper . . .we don't consider that earnings." We recommend a review of Chapter 2 for the WSJ reporter.

Supply Chain Issues

Increasing demand for products in the U.S. has resulted in supply chain problems for many companies. For example, shipping from one Chinese manufacturer, which was 30 days a year and a half ago, is now three months and shipping costs have increased 50 percent. U.S. ports are a major bottleneck and ships can sit offshore for weeks at a time. Overall, global delivery times are the second longest on record. Shortages are the most severe for semiconductors, as demand increased when workers bought electronics to create home offices. In fact, the German Association of the Automotive Industry announced that only 240,000 passenger cars were made in February, about half of the November output. The reason given was the shortage of semiconductors.