March 2002

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What’s actually driving earnings growth? GPQS Eclipse lets you know what analysts are really saying Knowledge is power – but it’s not enough to simply know Price Earnings (P/E) ratio and consensus Earnings Per Share (EPS) forecasts or even what the range is from analyst to analyst. It’s what’s behind these figures that provides meaning and puts the power into the hands of investment managers.

For instance, two analysts may have exactly the same forecast EPS figures for a company – but the drivers that brought them to these conclusions may be completely different. Was it ‘Sales Growth’ for one and a ‘Change in tax rate’ for another? Which driver makes most sense and how does that effect your investment decisions?

GPQS Eclipse lets you know why the analysts are saying what they’re saying. It does this by letting you drill deeper than any other system – and with ease, by providing a number of simple mouse click features.

Compare at a glance … GPQS Eclipse allows you to compare a number of important measures at a glance. As well as EPS, you can see:

• Sales growth, • EBIT margins, • Change in tax rates, • Capital expenditure, • Change in working capital, • …

A simple forecast EPS or a sales number does not do justice to the quantity of valuable information available from analysts in the market. Knowing the key business drivers allows you to make more informed decisions.

Following the ‘bull’ or the ‘bear’? It’s easy to find out what the different forecast earnings are – all major systems provide this. Where GPQS Eclipse stands alone is its ability to show you why one analyst may have a ‘bull’ forecast and another a ‘bear’ forecast and another in-between. Armed with this knowledge, you can enhance your investment process and create meaningful dialogue with your analysts.

Take this a step further … and look at the profit breakdown The great thing about GPQS Eclipse is that with the click of your mouse you can see the dollar impact of sales growth and margin expansion on profit by looking at the profit breakdown.

In other words you can quantify how much the sales growth added to profit and how much the margin expansion added to profit. More than this, you can see the dollar impact of changes in tax rate, interest burden and depreciation.

You compare apples with apples Due to the depth of the data collected by GPQS Eclipse, you won’t encounter definitional differences between one analyst’s EPS forecasts and another’s. EPS forecasts are built from the bottom up using the one consistent formula. You can even adjust the formula to suit your own investment process needs using the raw line data provided within GPQS Eclipse.

Powerful, simple and flexible tools

You can drill deeper than ever before to enhance your investment process

March 2002

A worked example Find out what’s actually driving earnings growth for Qantas Airways Ltd?

The diagram below shows the detail of forecast data collected by GPQS Eclipse. Within the ‘Models Reports’ menu we have selected the profit & loss statement for 2003 across a range of analysts.

Armed with this level of detail, a worked example has been produced comparing forecast financials for Qantas Airways Ltd.

Disclaimer

We have used Qantas Airways Ltd in the worked example. This forecast data has been extracted at a certain date and will not reflect the latest forecasts. Qantas Airways Ltd has been chosen purely as a globally recognised brand name. This example should not be seen as a reflection on either the company or the analysts whose data is used in this example. See the general disclaimer at the end of this document.

Simply click on the report of your choice - or create your own

Select ‘Models Reports’ to view detailed company data

as at 2 April 2002

March 2002

Narrowing this down to just EPS…

The graph and table below show that the EPS numbers from Merrill Lynch (ML) and Salomon Smith Barney (SSB) are close for 2003. ML has an EPS forecast of 32.8 cents per share, whilst SSB is forecasting 33.3 cents per share. But what are the drivers for each of these forecasts?

Drilling deeper … Typically, you might want to look at the ‘bull’ UBS Warburg and the ‘bear’ ABN Amro to find out the underlying drivers. You would expect to find quite different drivers and with this knowledge you could have a more meaningful discussion with the analysts about the differences.

However, for this example we have chosen to look at analysts with similar EPS forecasts to see if they have similar drivers for their forecast decisions. On the surface, you may look at the similar EPS forecasts as basically being a consensus between the analysts. However, with a bit more digging you may find the analysts underlying views on the company’s direction and performance may be completely different. These very differences may have an impact on the investment decisions you make.

Using the right-hand mouse click we can graph any data.

EPS viewed as a graph

as at 2 April 2002

Similar EPS – but are the drivers the same?

UBS is the ‘bull’ and ABN Amro the ‘bear’ – find out why. Select ‘Ratio Analysis’

from the side bar menu and ‘Diluted EPS’ from the drop down box

March 2002

Simplifying the data for ease of analysis The ‘Models Reports Overview’ screen shows that there is a considerable difference between the forecast sales growth in 2003 between SSB and ML. This has been compensated by a difference in EBIT margin and tax rates between the two analysts.

The next step is to look at each analyst individually to find out what dollar impact the sales growth forecasts have on the profit bottom line compared to other aspects such as changes to EBIT margins.

GPQS allows you to go this step further by using the ‘Profit Breakdown’ screen, which clearly outlines the dollars behind the numbers.

The screen on the following page illustrates this.

as at 2 April 2002

Models Reports Overview

We have narrowed the analysts to ML and SSB for clarity – looking at an ‘Overview’ from 2001 to 2003 to see how the numbers have changed

Different sales growth forecasts

Expansion in EBIT margins

March 2002

The dollar impact – according to Salomon Smith Barney The table at the bottom of the ‘Profit Breakdown’ screen below shows that sales are forecast to grow from $11,959.8m in 2002 to $12,745.9m in 2003. That is a 6.57% growth in sales. At the same time, margins are forecast to expand from 5.8% to 7.8%. This results in a 38.64% growth in profits - or $150.5m in absolute terms.

The tree diagram then shows that this increase in sales has added $31m of the $150m in post tax profits. That is 20.6% of the forecast profit growth will come from the sales growth. The change in margin has made a much greater impact on post tax profit than the sales growth. The margin expansion from 5.8% to 7.8% adds $169.4m to post tax profit.

Other important information gleaned There are several other important pieces of information from this tree:

• Increases in Net Interest have reduced the potential profit by $52.3m (-34.7%). The forecast change in Net Interest has negatively impacted profits – almost twice that of the forecast sales growth increase;

• Increases in depreciation have not been a rapid as sales growth, thus the lower depreciation to sales margin has in effect added $24.2m (16.1%) in profit after tax;

• The marginal reduction in Tax Rate has added a further $2.4m (1.6%) to profit.

The next thing to examine is the dollar impact according to ML – see the following page.

The table

This table shows the difference between sales, profit and margin from 2002 to 2003 according to SSB.

The tree diagram

This tree diagram shows exactly what is having an impact on bottom line profit according to SSB.

as at 2 April 2002

March 2002

The dollar impact – according to Merrill Lynch The table at the bottom of the ‘Profit Breakdown’ screen below shows that sales are forecast to grow from $10,952.8m in 2002 to $11,348.3m in 2003. That is a 3.94% growth in sales. At the same time margins are forecast to expand from 6.1% to 8.5%. This results in a 35.95% growth in profits - or $137.4m in absolute terms.

The tree diagram then shows that this increase in sales has added $17.6m of the $137.4m in post tax profits. Therefore, according to ML, only 12.8% of the forecast profit growth will come from the sales growth as opposed to 20.6% predicted by SSB. The change in margin for both analysts has made a much greater impact on post tax profit than the sales growth – but ML are predicting that margin expansion will play an even bigger part in profit growth. The forecast margin expansion of 6.1% in 2002 to 8.5% in 2003 adds $177.5m to post tax profit – an increase of more than $8m on SSB’s forecast.

Other important information gleaned There are several other important pieces of information from this tree:

• Increases in Net Interest have reduced the potential profit by $57.6m (-41.9%). The forecast change in Net Interest has negatively impacted profits – more than three times that of the forecast sales growth increase;

• The Increase in depreciation between 2002 and 2003 relative to sales is substantial. SSB is predicting a larger cost reduction relative to sales than ML This would be an area for further investigation, cross broker comparison - followed by a call to the analysts;

The table

This table shows the difference between sales, profit and margin from 2002 to 2003 according to ML.

The tree diagram

This tree diagram shows exactly what is having an impact on bottom line profit according to ML.

as at 2 April 2002

March 2002

Great value below the surface of EPS As can be seen from this worked example of Qantas Airways Ltd, even though on the surface, EPS figures are very similar between Salomon Smith Barney and Merrill Lynch, the key driving factors for each analyst are considerably different. This type of knowledge may have a great impact on the investment decisions you make for a particular company. At the very least it provides investment managers with the knowledge to have more meaningful dialogue with analysts.

Many more features and benefits … This paper is just a glimpse at the functionality and depth of forecast financials available within GPQS Eclipse. The depth of this content has allowed tools to be built that have not previously been available. As part of the GPQS Eclipse solution, new features are being released on a regular basis.

A simple and powerful tool GPQS Eclipse has been built as a tool for analysts and investment managers.

At the click of a mouse, an investment manager can graph historic and forecast sales growth, profit margins, tax rates, required capital expenditure and other components that allow quick company evaluation – and much more.

To learn more, visit www.gpqs.com or enquiries@gpqs.com

General disclaimer

The contents of this document are only intended to provide general information on how a professional investor may use the GPQS Eclipse system. This document is not intended as a substitute for investment advice and must not be relied upon as such. This document does not provide, and must not be construed as providing, any recommendation in relation to any securities or other financial products and is not an invitation to take up any particular securities or other financial products or participate in any specific investment strategy. The content in this document is not, and should not be considered, in any way to be an indication of the merits of any entity. Any views that may be expressed in this document about any entity are for illustration only