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EPS: a deeper meaning

Jun 02 2010 15:21

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The EPS Table

 
What's the bottom line?

That’s the question investors worldwide tend to ask when perusing company results.

Earnings per share (EPS) has traditionally been recognised as the bottom line on a company’s income statement.

EPS is literally the bottom line, coming in right at the bottom of a company’s income statement.

But bottom line, of course, also referred to the ultimate gauge of company performance – the amount of profit earned for shareholders after all other costs and deductions were factored in.

But over recent years the numerous changes to financial reporting has obfuscated the natural progression from turnover to operating profit to pre-tax profit to after-tax earnings.

One at a time now

All manner of things can distort – or should we rather say “cloud” bottom line – resulting in a number of variations on EPS.

That can at any time include EPS, headline EPS, core EPS, recurring EPS or diluted EPS.

Currently, earnings can take in the movement of value in underlying investments – which can be a massive “paper” boost when values are rising but turn into a serious “paper” bruising should market values fall.

There are also various write-offs and one-off costs (including black empowerment transaction costs) that can have a marked effect on bottom line and obscure the company’s actual operating performance.

That’s probably why so much emphasis, at least among professional investors, is laid on operational cash generation – which, in most cases, can determine the quality of a company’s earnings.

Indeed, our rule of thumb is that if a company’s operating profits aren’t fully or mostly reflected in its cash flow statement then a cynical eye must be cast over any claims of earnings growth by that company.

For the record, the EPS table records headline earnings.

By definition, headline earnings include all the profits and losses from operational, trading and interest activities that have been discontinued or bought in the year and exclude profits or losses from the sale or termination of discontinued operations, fixed assets or related businesses.

The table, of course, mustn’t be taken at face value.

Top ranked

It would stand to reason the biggest 40 companies on the JSE – the so-called Top 40 stocks – would be the top ranked companies in terms of earnings.

Instead, readers will notice more than a handful of companies holding on to some of the top rungs in the table ranking.

The physical EPS number really has nothing to do with the size of a company’s profits.

In fact, it’s the number of shares in issue that determines what earnings a share number is recorded. Certainly, a company earning 100c/share isn’t necessarily bigger than a company earning 10c/share.

For example, XYZ Holdings may generate R100m in bottom line profits but only post EPS of 10c/share because it has 1bn shares in issue.

Whereas ABC Holdings posts earnings of 100c because its R10m earned at bottom line is spread amongst a mere 10m shares.

And the winner is

This year’s “top” ranked company is base metals specialist Assore, which recorded earnings of more than R137/share.

Even though Assore only has 28m shares in issue, that great dollop of earnings equates to well over R3bn in bottom line profits.
 
If there’s any intrigue in the rankings it would be that Assore has displaced Anglo Platinum – which endured a tough 2009 – at the top of the rankings.

But certainly other “top” ranked companies – such as short-term insurer Zurich SA, building supplier Masonite, liquor group CapeVin (formerly KWV Investments), investment company Eureka Industrial and industrial conglomerate Hudaco – aren’t in the so-called big league in terms of either profits or market capitalisation.

Eureka, which posted EPS of more than 600c/share, has only 2,4m shares in issue; while Masonite, which managed EPS of 1 145c/share, only has 7m shares in issue.

To illustrate the point further, Masonite – which earned roughly R80m at bottom line – was only ranked 176th in this survey’s after-tax profit rankings. Eureka – despite a commendable R14m at bottom line – would have ranked way out of the top 200 in after tax profits.

The truth is that readers will have to delve much deeper into the table to garner any useful information in JSE earnings’ patterns.

Dig deeper

Over five years, small media company African Media Entertainment (AME) – which owns a couple of regional radio stations – came out tops, with a growth in EPS of 281%.

But we need to remember AME’s earnings came off a very low base in what was a rather prolonged turnaround effort that stretched from the late Nineties until at least 2004.

Still, that’s no reason to belittle the strenuous efforts that have turned AME into a real contender.

Interestingly, empowerment group Hosken Consolidated Investments (HCI – which also owns a prominent media asset in e.tv) rattled up a 143% growth in EPS over five years.
While e.tv is a very profitable operation, HCI’s earnings growth – the truth be told – has come mostly from successful gaming investments.

In terms of more traditional media diversified media conglomerate Naspers managed 22% growth in EPS over five years, while Kagiso Media came in at a more pedestrian 12.6%.

Mining companies also feature prominently over a five-year span.

Steel group Highveld managed to more than double EPS over five years, while African Rainbow Minerals just about doubled its bottom line.

While Anglo Platinum (42%) flew the flag for the large mining corporations it was the largely unsung counters, such as Palabora Mining Company (46%), Assore (88%) and Petmin 136%) that were the most impressive.

Anglo American showed 25% growth in EPS over five years, Sasol 22% and BHP Billiton 13.45%.

Nedbank produced a most impressive 135% gain in EPS over five years.

But, again, we need to take cognisance of the fact Nedbank, which was a bit of a laggard (compared to its peers) about five years’ ago, had to play catch-up.

For the record, Absa managed 22% over five years, Standard Bank 16% and FirstRand 3.8%.

Construction boom

Another sectoral trend was that construction companies – not surprisingly, considering the building boom between 2004 and 2008 – notched up sterling five-year EPS gains.

Aveng did 56%, WBHO 50% and Murray & Roberts 33%.

But top of the pile was Basil Read, with an astounding 75%.

In essence – and it might be hard for some punters to believe this – construction companies have kept pace with cellular services giant (and market darling) MTN, which notched up just more than 40% growth in EPS over five years.

There are some interesting comparisons to be made over the five-year rankings.

Stellenbosch-based liquor producer Distell delivered a (gulp) spirited 21% growth in EPS over five years, while SABMiller (which ironically owns around 29% of Distell) recorded less-than-frothy 9% growth.

Shoprite looked the best of the retailers over five years, with 38% with Spar (20%) and Pick n Pay (12%) lagging.

Rex Trueform, which owns the small Queenspark chain, looked the best of the fashion retailers at 38%.

Truworths (25%) and Mr Price (23%) also made a stylish swish over five years.

Others worth mentioning would be private equity specialist Brait (earnings up 89%) and Capitec Bank (up 39%).

As market stalwarts go, there were a couple of well-known family owned businesses that could best be described as “slow burners”.

Remgro’s EPS showed a mere 1% growth over five years – but the success of an investment trust is usually measured in NAV rather than earnings.

Liberty International, still controlled by Donny Gordon’s family, was also in the 1% EPS growth range over five years.

The table

The beauty of the EPS table is that you can spot the “sleepers” – the companies that deserve wider recognition due to superior performance over five years.

A list of unsung heroes would include Masonite (43%), Omnia (20%), Hudaco 21%), Cashbuild (25%), Invicta (22%), Famous Brands (33%), Howden 26%, Aspen (30%). Trencor 928%), Bell (56%), Adcorp (23.5%), ELB Group (26%), EOH (235), Pinnacle Technology (52%), BJM (54%), AdvTech (355) and Datatec (40%).

Those counters comfortably beat recent market favourites Bidvest (115), Grindrod (15%) and Steinhoff (18%) over the five-year EPS growth stretch.

Some well-known counters performed dismally over five years. Barloworld, Investec, PPC and Combined Motor Holdings all went backwards over five years.

Hopefully, we’ll see that trend reversed over the next few years.

One of the more startling rankings was micro-lending specialist African Dawn (Afdawn), which recorded a breathtaking 107% growth in EPS over five years.

The company’s growth over one year was a jaw-dropping 54%.

Considering the rather unsavoury developments at this company over recent months we might wonder whether Afdawn was a case of too much too soon?

Short term help

While we tend to forego the one-year EPS rankings in favour of the longer term assessments the short term measure actually does provide some insight into the general “business condition”.

There were a number of sizeable drops in EPS– which, no doubt, relate in some way to the tighter economic conditions after the great financial system meltdown of 2008.

Some are understandable, such as a 52% drop in EPS for automotive components manufacturer Metair, the 45% dive at building supplies group DAWN and the 52% profit plunge at packaging giant Nampak.

What’s perhaps worrying is that so many “classy” companies reported massive hits to bottom line.

Those would include highly rated gas business Afrox (down 32% over one year), private hospitals group Medi-Clinic (down 23%), Tote specialist Phumelela (down 20%), Rainbow Chicken (down 39%), cement group PPC (down 39%), hotel group City Lodge (down 31%) and publishing group Caxton (down 24%).

 - Finweek

To view the Eps table, click here

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