27 August 2009

NVDA: Financial Gauge Analysis for the July 2009 Quarter (Update)

We previously posted NVIDIA's (NASDAQ: NVDA) preliminary Financial Gauge scores for the July 2009 quarter

Data from NVIDIA's latest earnings announcement were used to calculate the scores, but NVIDIA later filed a more complete 10-Q report.  For our purposes, Balance Sheet details and a Cash Flow statement, which was not included in the original report, were the most important additions. 

We have now updated the financial metrics that determine our scores to take advantage of the new information.

The latest data added one point each to the Profitability gauge (raising it from 5 to 6, of 25) and the Overall gauge (from 19 to 20, of 100).  These changes are immaterial:

For the record, the updated financial metrics are listed below, with changes shown in red text.

Cash ManagementJul 2009Apr 2009Jul 20085-Yr Avg
Current Ratio2.
Debt/CFO (years)
Inventory/CGS (days)70.972.653.069.1
Finished Goods/Inventory57.2%63.2%52.9%55.6%
Days of Sales Outstanding (days)66.859.449.750.2
Working Capital/Invested Capital158.3%131.1%167.0%176.4%
Cash Conversion Cycle Time (days)59.965.249.161.1
Gauge Score (0 to 25)771613

Relative to the April quarter, NVIDIA made some progress trimming its total Inventory, as measured by Cost of Goods Sold, and the proportion of Finished Goods in the Inventory.  However, more progress is needed.

There is one thing about Inventory we don't understand.  We could not find any explanation in the 10-Q for the following dramatic restatement for the Inventory composition as of 25 January 2009.

Inventory on 25 January 2009Originally reportedRestated in 10-Q
Raw materials$27,804$122,024
Work in-process$132,960$38,747
Finished goods
Total $537,834 $537,834

GrowthJul 2009Apr 2009Jul 20085-Yr Avg
Revenue growth-35.4%-33.4%25.5%10.7%
Operating Profit growth4.8%13.3%63.8%26.1%
CFO growth -65.8%-78.0%-21.6%N/A
Net Income growthN/AN/A-4.6%26.5%
Gauge Score (0 to 25)01413
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.  The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Although Cash Flow from Operations did not fall at the 70 percent rate we estimated, the actual result was still ugly.  Special charges certainly haven't helped.

ProfitabilityJul 2009Apr 2009Jul 20085-Yr Avg
Operating Expenses/Revenue106.1%104.8%82.7%89.2%
Free Cash Flow/Invested Capital 12.1%1.9%57.0%52.8%
Accrual Ratio -15.0%-12.9%11.4%0.9%
Gauge Score (0 to 25)641414

Free Cash Flow as a percentage of Invested Capital was significantly better than our 7.7 percent estimate. 

The Accrual Ratio has been thrown out of kilter because of special charges and should not be relied upon.

ValueJul 2009Apr 2009Jul 20085-Yr Avg
P/E vs. S&P 500 P/E N/AN/A0.61.6
Enterprise Value/Cash Flow (EV/CFO) 18.720.05.319.9
Gauge Score (0 to 25)572511

The EV/CFO ratio was not as high as the initial estimate of 21.4.

At the end of January, NVIDIA shares sold for $7.95.  The price rose to $12.93 by the end of July.  Given the lack of profits, it was inevitable that the share price increase would cause the contrarian Value gauge to fall.

OverallJul 2009Apr 2009Jul 20085-Yr Avg
Gauge Score (0 to 100)20217250

None of the category gauges were impressed by the results from the July quarter.  We should note that Cash Flow from Operations and, therefore, Free Cash Flow were significantly better than we first estimated.  The trailing-year decline in Cash Flow should not look too bad next quarter, and positive growth is possible by January.  (An extra week in the fiscal year should also help!)

Full disclosure: Long NVDA at time of writing.

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