In part one, we looked at the Red Flag Analysis tool as well as a few functions of the ChartMachine to get a deeper look at the fundamentals of General Dynamics Corp. In this section we are going to use the ChartMachine to compare two companies.
When researching prospect stocks, it is important to manage our expectations. Each company belongs to an industry and each industry is different. Comparing a defense contractor such as Boeing to a technological conglomerate such as Apple is not going to get you far in terms of fundamental analysis; they are two very different companies in two very different sectors. However, to every rule there is an exception. Fundamentals show us what management can do with a company, whether it is good or bad. While we aren’t going to cover that in this post, I invite you to research how much money the management of a company scoops into their own pockets. If their salaries are going up year after year while their revenue is going down simultaneously, run.
Today we are going to compare Lockheed Martin Corporation (LMT) with, you guessed it, General Dynamics Corporation (GD). Although they vary in market cap, these two companies are some of the largest global defense contractors. Let’s get LazyFA fired up and head on over to the ChartMachine where we will pull up LMT:
In the upper left box labeled “Add another ticker,” we are going to enter GD for General Dynamics. GD is the slightly lighter green:
This is where things get really exciting. We can now pull up metrics for both companies and compare them side by side. For simplicity we will be using annual data. Here we can see each company’s revenue. From 2017 to 2018 (right edge of the chart) both companies realized a slight gain in revenue. Revenue is crucial, but seeing how much that revenue cost the company is even more crucial. On the left hand side of the chart, click “Cost of Revenue”:
This is where I like to zoom in on the chart to keep things clean and simple. This can be achieved by using the gray slide bar just above the chart legend at the bottom, or by scrolling with your mouse. You can also click and drag to pan left and right. As we can see, both companies are actually nearly identical in their revenue vs. cost of revenue margin. We can confirm this by selecting “gross profit” on the left hand side of the chart and viewing that:
Very close! Even those these companies have very different market caps, they are both nearly identical in their gross profit. This is the power of fundamental analysis. We are pulling back the “layers” of their SEC filings and getting an in-depth look at how they are performing, much faster than we could do by manually reviewing SEC filings. As investors, we want to see our companies and their management using assets wisely.
While we are here, let’s compare these two in terms of their receivables. According to Investopedia.com:
“Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit.”
This will give investors an idea of new invoices being generated as well as new clients. Most companies have receivables and it is important to research how they each do business and if that business is seasonal or not. Defense contractors submit bids to government entities and “win” contracts whether it is a new submarine or next generation weapons system. News of a company winning a contract is usually followed by a boost in share price. Here is a comparison of Lockheed and General Dynamics' receivables:
Immediately we see a difference. More specifically let’s look at that past two annual filings. Lockheed Martin has remained flat while General Dynamics has gained around $1.5B year over year. This could mean a few things, LMT may not be accepting new contracts right now as they finish outlying projects. It is your job to dive deeper and research recent news and in the case of Lockheed Martin, look into recent contract awards. Further, though they've remained relatively flat in recent years, there was a large change from 2016-2017 in Lockheed's receivables, so it would be good to know what caused such a drastic drop.
One final thing I want to point out is the ability to view annual, quarterly or TTM data. The chart can be changed to reflect any of these by clicking the buttons above the chart. Some companies outside of the US do not report quarterly data to the SEC so please keep in mind that data may not always be available for those companies. If you are looking for specific data it is recommended you look into earnings reports where metrics such as revenue and cost of revenue will be reported during the investor presentations.
This is just scratching the surface of how LazyFA can speed up your research process. Rather than perusing hundreds of pages of SEC filings, you can view all the financial data on easy to read charts and quickly identify trends that would otherwise be invisible. If a company passes your basic tests, you can use the Manipulation Monitor to identify potential accounting tricks, the granular details of the Red Flag Analysis tool to direct your research to areas that require deeper investigation, and the Insiders and Institutions tool to keep track of how company insiders and major institutional investors are investing in the company.
By combining the power of automated analysis with detailed, targeted research in specific areas, you'll be able to identify diamonds in the rough that would have otherwise gone undetected.