Heartbreak Ahead For JDA Software Bulls

Nov. 30 2010 - 3:09 pm | 444 views | 0 recommendations |

It's not easy going up against Oracle

JDA Software Group (JDAS) is one of November’s Most Dan-ger-ous Stocks. To earn this dubious designation, the company?has mis-lead-ing earn-ings (account-ing prof-its are pos-i-tive and ris-ing while true, eco-nomic prof-its are neg-a-tive and falling) and high val-u-a-tion (very high expec-ta-tions embed-ded in the cur-rent valuation).

Below are the specific red flags my research reveals:

1. Mis-lead-ing earn-ings: JDAS reported a $14.6mm increase in GAAP earn-ings while our model shows eco-nomic earn-ings declined by $12.9mm (a dif-fer-ence of $27.5mm or 155% of reported net income).
2. Very dan-ger-ous val-u-a-tion: stock price of $27 implies JDAS must grow its NOPAT at over 20% com-pounded annu-ally for 10 years. A 10-year growth appre-ci-a-tion period with a 20%+ com-pound-ing growth rate sets expectations for future cash flow performance quite high.
3. JDAS competes with industry giants Oracle (ORCL)?and SAP (SAP), whose businesses are growing stronger while JDAS appears to be weakening. I doubt a comeback is in the cards for JDAS.
4. Free Cash Flow was -$203mm or -15% of the company’s enterprise value last year.
5. Asset write-offs of $21mm or 3% of net assets – this means that management has written off at least $0.03 of assets for every $1 on the current balance sheet. Writing off assets is the opposite of creating shareholder value as it reflects management’s inability to derive any profits for the investments it makes with shareholder funds.
6. Off-balance sheet debt of $40mm or 6% of net assets.
7. Outstanding stock option liability of $13mm or 1% of current market value.

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Over-all, the risk/reward of invest-ing in JDAS’s stock looks “very dan-ger-ous” to me. There is lots of down-side risk given the mis-lead-ing earn-ings and red flags while there is lit-tle upside reward given the already-rich expec-ta-tions embed-ded in the stock?price.

Our report on JDAS has detailed appendices for you to see how we perform all calculations. The primary cause of the dif-fer-ence between eco-nomic ver-sus account-ing earn-ings is that JDAS’s NOPAT rose much slower than its invested cap-i-tal. See Appen-dix 4 to learn how JDAS’s NOPAT rose more slowly than Net Income. See Appen-dix 5 for details on JDAS’s invested cap-i-tal and how off-balance sheet debt and asset write-offs are added back to provide a more accurate reflection of the capital invested in the business. Appen-dix 7 (in the return on invested cap-i-tal sec-tion) shows how a slight rise in NOPAT mar-gin paired with a big decrease in invested cap-i-tal turns result in a decrease in return on invested capital (from 6.9% to 4.7%) and eco-nomic earnings.

In a business where investors make money by buying stocks with low expectations relative to their future potential, JDAS fits the pro-file of a great stock to short or?sell.

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Donors disappointed ahead of meeting

Nothing will be pledged during the conference, says finance minister

ISLAMABAD:?Miseries of millions of flood-stricken people may not ease even after a meeting of the Pakistan Development Forum (PDF) because of the government’s seemingly unenthusiastic approach and the donors’ lukewarm response to the United Nations appeal for assistance.

A two-day meeting of the PDF is going to start in Islamabad on Sunday where Pakistan will present its economic reform agenda to hundreds of participants from all over the world.

According to Finance Minister Dr Abdul Hafeez Shaikh, the forum is not a pledging session. For the donors, it is an opportunity to get knowledge of Islamabad’s plan to deal with the aftermath of floods and more importantly the use of their money.

Background interviews with officials of key donor agencies in Islamabad reveal that they are somewhat disappointed with the PDF’s agenda since the donors were expecting that the government would present an outcome-based plan that would highlight sector-specific rehabilitation and reconstruction plans.

“Various aspects of the damage and need assessment report should have been part of the meeting agenda,” said an official of a European country’s embassy. The official said that so far the government has not provided a copy of the assessment report that discusses sector-wise damages and reconstruction requirements.

In late July through mid-August, the floods submerged ten per cent of Pakistan and affected 20 million people. A joint report of the World Bank and Asian Development Bank put damages caused by the floods at $10.07 billion and said that Pakistan needs over $6 billion for reconstruction.

“An overview of the agenda shows that the government is going to talk about what it has already been telling the donors,” said an official of a key lending agency.

According to the agenda, on November 14 the four provincial governments will give presentations but the topics have not been mentioned. Only the presentation by the National Disaster Management Authority chairman on relief, early recovery and disaster reduction may shed some light on the floods.

National Database and Registration Authority Chairman Ali Arshad Hakeem will give a presentation on Watan Cards to address donor concerns about the misuse of their money.

The second day of the conference will focus on fiscal expenditure management, monetary policy, inflation, the economic growth model, power sector reforms and a few words on aid effectiveness by Hina Rabbani Khar, the Minister of State for Finance and Economic Affairs.

On the other hand, the response of donors to the disaster and rehabilitation has also not been encouraging at all. The United Nations had appealed for $2 billion for early relief and rescue, but official documents show that so far the international community has pledged $1.8 billion, of which 74 per cent has not been honoured.

Donors are defending themselves by saying that they suspect misuse of their taxpayers’ money due to corruption in Pakistan.

Out of the total pledges, $739.4 million or around 40 per cent are in cash but disbursement has been only $287.5 million, which is just 15.4 per cent of the pledges. The donors also committed $631.2 million worth of goods but released items worth only $202 million.

Despite a considerable lapse of time, the status of $490 million worth of pledges is not clear as to whether these pledges are in the form of goods or cash, said the documents. The finance minister has said that some of these countries do not want to help Pakistan and are using corruption as a pretext.

Published in The Express Tribune, November 14^th, 2010.

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