Years of profit

The number in each card’s corner is the price divided by the last twelve months of profit per share, after dilution: what investors call the P/E. Profit comes from the company’s own filings with the SEC, and the price is the latest close.

Profit leaves out gains and losses on investments: the company’s stakes in other companies going up or down in value. They don’t come from running the business and rarely repeat, so they’re taken out after tax, from the figures the company files. The stakes themselves are still yours. So their value on the latest balance sheet comes off the price before counting years of profit, and the years are what you pay for the business itself. Counting investments at today’s value this way follows Michael Mauboussin and Alfred Rappaport’s Expectations Investing (2001, revised 2021). Banks keep their gains, because buying and selling investments is part of a bank’s business. Berkshire Hathaway’s profit leaves out the paper gains and losses on its stock holdings, after the tax on them, the way Berkshire reports it itself. TSMC and ASML file full years only in a form we can read, so for them last year’s profit is the last calendar year.

Next year’s forecast

The forecast view grows last year’s official profit at the analysts’ average forecast growth for their next fiscal year, the one ending six to eighteen months from now. That keeps both years counted the same way: analysts’ own figures usually leave out costs such as pay in shares, so they can’t be compared with official profit directly. Where gains on investments were more than a fifth of last year’s profit, the analysts’ figures for this year include them, so those cards show no forecast.

On the forecast view the whole card follows next year’s profit: the growth its price assumes, the “if” line and its section. So a company can move section, which shows how much the price leans on the analysts being right. Cards with little or no profit stay where they are.

Inflation

How fast US consumer prices rose, from the official consumer price index as published in Robert Shiller’s data: a year on average over the last decade, and what money kept as cash since then can buy today. The bond is set against the last twelve months’ rise, so the card says “currently”: in some years, such as 2021–22, prices rose faster than the bond paid. Only months already published are used.

Earns

What the business earns each year as a share of its price: one over the years of profit. A company priced at 25 years of profit earns 4% of its price a year. Dividends are those paid over the last twelve months. A card spells out the dividend only when it is 3% of the price or more, where it explains why the price assumes little growth; smaller dividends are still counted in “Priced for”. Buybacks aren’t counted as cash returned: they already raise profit per share.

What “Priced for” means

“Priced for” is the profit growth a year the price assumes, for the stock to return what the S&P 500 has averaged since 1928, 10% a year, with dividends. The return over ten years comes from three things: profit growth, the dividends paid along the way, and the change in how many years of profit people pay. Hopeboard assumes that in ten years people pay an ordinary 18 years of profit, the long-run average, and works backwards to the growth each price assumes.

Under it, what the company’s price assumed ten years ago, worked out the same way with the filings known then, next to how fast profit actually grew over the decade.

return per year = (1 + growth) × (1 + dividends) × (18 ÷ years of profit today)^(1/10) − 1

Finances

The “Finances” link on each card shows up to five things about the company’s health, each left off when its figure isn’t in the data.

Cash or debt: from the latest balance sheet in its SEC filings. Cash counts cash, short-term investments and marketable securities; debt counts borrowing, without leases. The difference between them is shown in years of last year’s profit, or as close to even when it’s under a quarter of a year. Cards with little or no profit have none to measure against, so they say only which is bigger. Banks are left out, because most of what a bank owes is its customers’ deposits.

Investments: stakes in other companies, at their value on the latest balance sheet, in years of last year’s profit. Shown when they’re worth half a year of profit or more.

Profit on sales: how much of each dollar of sales it kept as profit, over its latest three fiscal years added together, leaving out gains on investments. Not shown for banks, whose sales are mostly interest, or for cards with little or no profit.

Dividends: those paid over the last twelve months, as a share of today’s price.

Shares: how fast the number of shares changed each year, from the average count in the latest annual report and the one ten years before (as few as five, for companies listed more recently). Fewer shares means the company bought some back of the profit; more means it issued new ones, often as pay for staff or to buy another company.

The sections

Pricey: the price assumes profit grows 14% a year or more. Normal: 10% to 14%. Bargain: under 10%. Little or no profit: the company lost money last year, or made so little (under 0.2% of its price, more than 500 years of profit) that a growth rate means nothing; these cards say instead how much profit the price assumes by 2036.

The “if” lines

Each card tests what happens if growth falls short, using a growth rate you can check: the company’s own last decade, no growth at all, or the average big US company: the S&P 500’s profit growth over the last decade, 10% a year. Losses are over the full ten years.

On Pricey cards the line adds “& the story fades”: by 2036 buyers go back to paying an ordinary 18 years of profit, instead of the extra they pay today for the company’s story. That’s most of the loss on those cards.

Last decade

Last-decade growth compares profit per share at the two ends of the decade, adjusted for stock splits. Each end is the average of three fiscal years, the latest three and the three ten years before them, so one unusual year can’t decide the rate. The S&P 500’s is worked out the same way.

Past views

The 1-, 5- and 10-year views use only the filings published by that date and that day’s prices, so each one shows what an investor could have known then. Stock returns since then include dividends. The stories are one-line summaries of what the market was saying at the time.

Compare over time

Each card can compare today’s price with a week, a month, three months or a year ago: the growth the price assumed then, using the filings known then, against what it assumes now. Less growth assumed means cheaper.

Under the dates, the cheapest month in the last decade: the month’s end when the price assumed the least growth, using the filings known then (since listing, for companies listed later). It’s left off for businesses whose sales fell by a quarter or more in a year, where a boom year’s profit makes a price look cheap, and months priced under 5 years of profit are skipped, since a profit that high is almost always a one-off.

Rounding

All figures are rounded and approximate. ≈ marks a rough estimate, where the data isn’t complete.

Updates

Prices, dividends, filings and forecasts are downloaded every day and every figure is recomputed. A day’s figures are only published if every card’s wording still holds for them.

Sources

Not advice

Hopeboard is an educational tool. It isn’t investment advice and doesn’t recommend buying or selling individual stocks. Figures can be out of date or wrong.