Posted by: Howard Silverblatt on June 3, 2011
Back in 2002 S&P Indices deleted the foreign issues from the S&P 500, in effect making the S&P 500 a pure U.S. play, which fit well with S&Ps other country indices. But being an American company doesn’t mean that you’re not a global one. While globalization is apparent in almost all company reports, exact sales and export levels are difficult to obtain. Many companies tend to categorize sales by regions or markets, while others segregate government sales. Additionally, intra-company sales, and hence profits, are sometimes structured to take advantage of trade, tax and regulatory polices. The resulting reported data available for shareholders is therefore significantly less than the desired level for analysis. Traditionally, creating a report with half the data is unacceptable. However, with the utmost of notice and caution, S&P has created annual reports on foreign sales, not as an exact value, but as a starting point to permit a rare glimpse into the sales composition. The 2010 report is not due out until July 2011, due to fiscal reporting, manual data checks, and an enormous amount of research.
I’ve done an initial overview of the data, and a first glance is available. Overall reporting has remained the same - poor at best. Lots of nice pictures, messages from senior management, and few (if any) tabular tables, which are not required under GAAP via the FASB. Investors need to be careful of what data and statistics they use. To illustrate, based on the current (incomplete data), 2010 foreign sales appear to be 24.6% of total sales; however, if I only utilize the companies which report foreign sales, the rate is 41.6%, and if I eliminate some of the stranger values, such as companies reporting foreign sales of over 100% of total sales or reporting no foreign sales even as they have major foreign facilities, the rate is calculating to 47.0%, slightly ahead of the 46.6% rate for 2009 - this adjusted rate is the one S&P uses, although in the report I show them all.
There are some initial observations from the preliminary data developing. Last year S&P 500 companies paid slightly more to the U.S. government in Federal Income taxes than they paid to foreign entities. This year, while U.S. taxes are running 2% higher, foreign income taxes are running 23% higher, resulting in S&P 500 companies paying more in income taxes to foreign countries than they paid to the U.S. government; recall the dialog over the 2010 General Electric tax rate, as well the current discussions on repatriation, and then there are this mornings job numbers. Operating pre-tax income, reported by even fewer issues, and therefore even more suspect, shows that of the reporting companies, that 52.5% of operating pre-tax income is foreign in nature (remember operating has no legal definition, and pre-tax is a cost-accountants nightmare - so another grain of salt for this number). On a sector basis Information Technology has maintained its foreign sales, with 57% booked as foreign, with Financials showing a reduction, from 41% last year to 37% for 2010 (Financial are still difficult, whether it be sales, earnings, book value, on or off balance sheet items,..). Regional data is not yet available - need to clean up the top level first, however, it again appears that the largest declared region is ‘Foreign Countries’ - not a lot of help. I would like to say that there are current legislative or policy proposals to require reporting, but there are not. And companies do not want to report the actual values. From an investor side, I can think of fewer things I would like more than to be able to create a matrix based on production and sales: parts made in China, assembled in Europe, and sold in the U.K., with profits translated into the U.S. dollar; fill the currency rates (and maybe a currency hedge, if available) and see the net income impact. My editorial is don’t count on it. For now, I’m using 47.0% for a holding position for foreign sales, ‘over half’ for pre-tax operating from abroad, and expecting to see the data on taxes again used in editorials and position papers, from all sides. The tentative release date for the 2010 report is July 14, 2011 - let them eat cake.