How to spot a dubious investment when stocks are over-performing
Lowe’s and Home Depot investors are happy campers right now.
Both home-improvement stocks have been dynamite. Over the past year, Lowe’s has risen by 61 percent and Home Depot’s by 48 percent. To an investor looking for his next opportunity, Lowe’s appears to be, hands-down, the best company to buy into at the moment. A closer look, however, tells a more complex story that may provoke an investor to think twice before buying into a stock based solely on its recent upturns.
For example, even though Lowe’s stock rose by 13 percentage points more than Home Depot’s, according to the Wall Street Journal, the latter store produced better results in number of sales and rate of revenue growth. This means that, as long as Home Depot continues to do better in these indexes, in the long run, Home Depot may not be as inferior a competitor as some numbers may show.
A look at both companies’ compound annual revenue growth (CARG) also takes some gloss away from Lowe’s stock price promise. Over the last five years the CARG for Lowe’s is 3.8 percent and for Home Depot it’s 4.7 percent. And glaringly, Lowe’s operating margin is 8.6 percent, compared to its rival’s 12.6 percent. Operating margin is an important indicator about how well a company is running its business in day-to-day operations. By comparing gross margin, an important factor in operating margin, allows insight into the expenses of returns of merchandise and discounts that marketing has given its customer base to drive sales. It also shows how well an organization is absorbing depreciation and managing its tax obligations. The numbers show that Home Depot is outperforming Lowe’s in these nuts and bolts of business.
Another important factor in weighing these two stocks is that, as the Wall Street Journal points out, “The problem is that a strong economic backdrop already is factored into the share prices of both companies.” While this factorization is needed, it also lends the value of the stock a dash of capriciousness. If the “strong economic backdrop” continues—in this case, in housing—then the stock will continue its gallop. If the prediction is wrong, the stock may trip.
This is not an endorsement of Home Depot stock. Both companies are doing well in some important ways. This is not reason enough to run out and buy into them, or any company, that looks great on the surface.
*This article is not intended as financial advice or brand endorsement. Please consult a professional when making investment decisions.
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Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.