But, as with any public company, it’s a stock, too. Any choice to buy, sell, or hold requires scrutinizing earnings quality indicators that, if low quality, are good predictors of poor stock performance ahead. Days sales outstanding, or DSOs, which is the time it takes revenues to turn into cash in the bank, are job one in earnings quality analysis. And Google Inc (NASDAQ:GOOG)’s year-over-year quarterly increase in its DSO for seven of the last eight quarters raises eyebrows.
(Disclosure: My co-author John Del Vecchio and I were Authors@Google, and I intend no ungratefulness here to our most generous hosts. But I know that my Google friends expect no less than callin’ ’em as I see ’em.)
How long to get paid?
Days sales outstanding is calculated for our quarterly analysis as (accounts receivables/revenues) * days in the quarter.
Examine DSOs in two ways. First, look at DSOs year over year to correct for seasonal variations in a business. And then, to smooth it out to capture trends more accurately, take the LTM (last 12 months) average per quarter. If the latter increases consistently each quarter, there could be trouble for the stock, regardless of the overall market’s broad race to the sky that we’ve seen for the past four years. Look at eight quarters of LTM to perceive the trend over more time. And quarterly year-over-year comparisons can show poor trends that may show up in LTM numbers.
The following table examines year-over-year quarterly DSOs, and then the more important sequential change in LTM DSOs at four companies competing with each other fiercely in many areas: Google Inc (NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Yahoo! Inc. (NASDAQ:YHOO)! . There’s clearly a big fifth in Facebook Inc (NASDAQ:FB), but we lack enough data for anything meaningful on DSOs so far.
| Company and
Calendar Quarter | Q4 2012 | Q3 2012 | Q2 2012 | Q1 2012 |
|---|---|---|---|---|
| Google: Quarterly DSOs | 48 | 46 | 45 | 45 |
| Year-Over-Year | +4 | +3 | +1 | +1 |
| LTM DSO Avg | 46 | 45 | 44 | 44 |
| Seq. LTM Change | +1 | +1 | 0 | 0 |
| Yahoo ! Quarterly DSOs | 67 | 76 | 74 | 74 |
| Year-Over-Year | +1 | +7 | +4 | +1 |
| LTM DSO Avg | 73 | 73 | 71 | 70 |
| Seq. TLM Change | 0 | +2 | +1 | 0 |
| Microsoft : Quarterly DSOs | 52 | 74 | 67 | 64 |
| Year-Over-Year | 0 | +7 | +1 | +1 |
| LTM DSO Avg | 64 | 64 | 63 | 62 |
| Seq. LTM Change | 0 | +1 | +1 | 0 |
| Apple : Quarterly DSOs | 19 | 24 | 19 | 19 |
| Year-Over-Year | +4 | +6 | 0 | (3) |
| LTM DSO Avg | 20 | 19 | 18 | 18 |
| Seq. LTM Change | +1 | +1 | 0 | (1) |
Sources: S&P Capital IQ and my calculations. Rounded.
| Company and Calendar Quarter | Q4 2011 | Q3 2011 | Q2 2011 | Q1 2011 |
|---|---|---|---|---|
| Google: Quarterly DSOs | 44 | 43 | 44 | 44 |
| Year-Over-Year | +1 | (1) | +1 | +3 |
| LTM DSO Avg | 44 | 44 | 44 | 43 |
| Seq. LTM Change | 0 | 0 | +1 | +1 |
| Yahoo! Quarterly DSOs | 66 | 69 | 70 | 73 |
| Year-Over-Year | +7 | +16 | +18 | +19 |
| LTM DSO Avg | 70 | 68 | 64 | 59 |
| Seq. LTM Change | +2 | +4 | +5 | +5 |
| Microsoft: Quarterly DSOs | 52 | 67 | 66 | 63 |
| Year-Over-Year | 0 | +2 | +3 | 0 |
| LTM DSO Avg | 62 | 62 | 61 | 60 |
| Seq. LTM Change | 0 | +1 | +1 | 0 |
| Apple: Quarterly DSOs | 15 | 18 | 19 | 22 |
| Year-Over-Year | (5) | (2) | +1 | +2 |
| LTM DSO Avg | 19 | 20 | 20 | 20 |
| Seq. LTM Change | (1) | 0 | 0 | 0 |
Yahoo! Inc. (NASDAQ:YHOO)’s LTM DSOs have been steadily improving. This has corresponded with a rising stock price; but whatever turnaround may be happening, it doesn’t change the fact that the stock is absurdly priced by the market at 11 times EV to LTM EBITDA and, gulp, 30 — yes, thirty! — times market cap to LTM-levered free cash flow! Steer clear.
Microsoft Corporation (NASDAQ:MSFT)’s steady year-over-year increases don’t look as significant when smoothed through the LTM average. Microsoft is cheap at seven times EV to LTM EBITDA, and 11 times market cap to levered free cash flow, but we’ll next see that Apple is cheaper. Which company would you bet on for any multiple expansion (where the market will pay a higher multiple of EBITDA or free cash flow for the business value)?
