Black Liquor Tax Credit Clouds Paper Companies’ Earnings

Paper mills aren't making money just on paper

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?During 2009, paper companies that converted black liquor (a byproduct of paper mills) into alternative fuel became eligible for an Alternative Fuel Mixture (AFMC) tax credit. The tax credit was an unexpected boon for paper companies. Sixteen paper companies reported an AFMC Windfall in 2009, averaging 8% of revenues and 161% of pre-tax income. The tax credit lasted for less than a year—it expired on December 31, 2009. Click here for our detailed report.

Investors betting on those companies to continue the earnings growth trend from 2009 may be sorely disappointed.

The AFMC windfall is a one-time, non-recurring source of income that can mask poor economic earnings with record-breaking accounting earnings. Accounting earnings are full of distortions that mask true economic earnings—-the AFMC windfall is just another example of why accounting earnings were not designed for equity analysis.

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Two companies, Kapstone Paper and Packaging (KS) and Verso Paper (VRS), reported positive pre-tax income with the AFMC windfall while they actually had negative pre-tax income after removing the AFMC windfall. These companies also had record-breaking accounting earnings and worst-ever economic earnings.

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The AFMC windfall also offers a unique opportunity to assess the consistency of companies’ accounting treatment and disclosure of this one-time item. We expected to see similar accounting treatment and disclosure, but the companies’ disclosure was highly inconsistent, and in several cases, misleading. In fact, we give two companies a failing grade for poor disclosure. More details on Disclosure Grades are in Figure 4 of our report on the AMFC windfall.

Of the 16 companies receiving the AFMC windfall, only one company, Kapstone Paper and Packaging (KS), chose to capitalize part of the AFMC windfall into inventory. This aggressive accounting essentially gives KS a cookie jar of earnings to use in 2010.

Despite the fact that the AFMC expired on December 31, 2009, KS’s aggressive accounting will allow it to book $0.31 in earnings per share in 2010 related to the windfall. KS is the only company in 2010 to book earnings from 2009’s expired AFMC Windfall. It should be no surprise that this company also had the worst disclosure. As Warren Buffett says, “There is never just one cockroach in the kitchen.”

Poor disclosure and aggressive accounting make it extremely difficult for everyday investors to reverse accounting distortions to measure a company’s true economic earnings. Though navigating poor and confusing disclosure in the Financial Footnotes to find the truth about corporate profitability and valuation takes hard work and expertise, I believe investors who do it sleep better at night.

There is no substitute for “doing the diligence.”? In the meantime, watch your back when investing in this market because no one else is watching it for you.

The AFMC windfall report is the second in a series of Red Flag reports that focus on culliing key details from the Financial Footnotes..? Our first Red Flag report focused on off-balance sheet debt and how it affects over 2900 companies.

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Black Liquor Tax Credit Comes Back To Burn Paper Companies

Image by Getty Images via @daylife

During 2009, paper companies that converted black liquor (a byproduct of paper mills) into alternative fuel became eligible for an Alternative Fuel Mixture (AFMC) tax credit. The tax credit was an unexpected boon for paper companies. Sixteen paper companies reported an AFMC Windfall in 2009, averaging 8% of revenues and 161% of pre-tax income. The tax credit lasted for less than a year—it expired on December 31, 2009.

Investors betting on those companies to continue the earnings growth trend from 2009 may be sorely disappointed.

The AFMC windfall is a one-time, non-recurring source of income that can mask poor economic earnings with record-breaking accounting earnings. Accounting earnings are full of distortions that mask true economic earnings—-the AFMC Windfall is just another example of why accounting earnings were not designed for equity analysis. Two companies, Kapstone Paper and Packaging (KS) and Verso Paper (VRS), reported positive pre-tax income with the AFMC Windfall while they actually had negative pre-tax income after removing the AFMC Windfall. These companies also had record-breaking accounting earnings and worst-ever economic earnings.

Special Offer: Why bother with stocks when you can beat the pants off of them with fixed income while taking on less risk? Earn 8% yields on top of chunky capital gains. Click here for recommended buys in Forbes-Lehmann Income Securities Investor.

The AFMC windfall also offers a unique opportunity to assess the consistency of companies’ accounting treatment and disclosure of this one-time item. We expected to see similar accounting treatment and disclosure, but the companies’ disclosure was highly inconsistent, and in several cases, misleading. In fact, we give two companies a failing grade for poor disclosure. More details on Disclosure Grades are in Figure 4 of our report on the AMFC Windfall.

Of the 16 companies receiving the AFMC windfall, only one company, Kapstone Paper and Packaging (KS), chose to capitalize part of the AFMC windfall into inventory. This aggressive accounting essentially gives KS a cookie jar of earnings to use in 2010. Despite the fact that the AFMC expired on December 31, 2009, KS’s aggressive accounting will allow it to book $0.31 in earnings per share in 2010 related to the windfall. KS is the only company in 2010 to book earnings from 2009’s expired AFMC Windfall. It should be no surprise that this company also had the worst disclosure. As Warren Buffett says, “There is never just one cockroach in the kitchen.”

Poor disclosure and aggressive accounting make it extremely difficult for everyday investors to reverse accounting distortions to measure a company’s true economic earnings. Though navigating poor and confusing disclosure in the Financial Footnotes to find the truth about corporate profitability and valuation takes hard work and expertise, I believe investors who do it sleep better at night.

There is no substitute for “doing the diligence.”? In the meantime, watch your back when investing in this market because no one else is watching it for you.

The AFMC Windfall report is the second in a series of Red Flag reports.? Our first Red Flag report focused on off-balance sheet debt and how it affects over 2900 companies.

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Black liquor tax credit Comes Back To Burn book Companies

Image by Getty Images via @ daylife

In 2009, which converted black liquor (a by-product of the paper mills) fuel to replace paper companies became eligible for a tax credit Alternative Fuel mixture (ACMC). The tax credit was an unexpected blessing for paper companies.Sixteen companies paper reported a discount ACMC in 2009, an average of 8% of revenues and 161% of income before tax credit imp?t.Le lasted less than a year - it has expired on 31 December 2009.

Investors bet on these companies to continue the trend of 2009 earnings growth could be sorely disappointed.

The AFMC manna is a single source, non-recurring income which can hide poor economic gains with record comptabilité.Gains accounting gains are full of distortions that obscure the economic gains Trues --l' bargain ACMC is just another example of why disagree DK unting gains are not designed for analysis. Two companies, Kapstone paper and Packaging (SC) and back Paper (RSV), reported income before positive with the AFMC windfall taxes while they had indeed income negative pre-tax after the withdrawal of the ACMC bargain. These companies have also been record accounting gains and never worse economic gains.

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The AFMC manna also offers a unique opportunity to evaluate the consistency of the accounting treatment by firms and the disclosure of this single point.? We expected to see similar accounting treatment and disclosure, but disclosure firms was highly inconsistent and in many cases, misleading.? In fact, two companies gives us a failure of the poor disclosure note.More details on the levels of disclosure are in figure 4 of our report on the bargain for.

16 Business receiving the AFMC exceptional company, document Kapstone and Packaging (SC), has chosen to draw part of Manna from the AFMC in inventory.This aggressive accounting gives essentially KS, a gains cookie jar using 2010.Malgré the fact that the AFMC expired on 31 December 2009, KS aggressive accounting will allow book $0.31 per share in 2010 of the bargain.KS is the only company in 2010 the remuneration structure of expired AFMC the 2009.Il boon is therefore no surprise that this company also had the worst disclosure.As Warren Buffett, "" there never one cockroach in the kitchen.""

Poor disclosure and aggressive Accountants make it extremely difficult for everyday investors reverse accounting distortions to measure true economic gains an entreprise.Bien poor navigation and confusion of disclosure in financial to find the truth about the business profitability and evaluation notes takes hard work and expertise, I think that investors who he sleep better at night.

There is no substitute for "due diligence" list.it interval, watch your back when investing in this market because that nobody else is watching you.

AFMC bargain report is the second in a series of flag rouge.Notre first report of the red flag reports focused on off-balance sheet debt and how it affects more than 2,900 companies.

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