Sunday, February 15, 2009

Got Goodwill? Part 18 Shaving Down Goodwill?

Some accounting sport has been had in forecasting which companies might announce goodwill impairment. Ccompanies where goodwill is 15% or greater proportion of total assets and where that ratio is greater than their industry median are likely candidates.

Also consider rising ratios of:

  • accounts receivable to sales
  • accumulated depreciation to plant, property and equipment
  • underfunded pension benefits to liabilities

Multiple amended securities filings also seem to be a predictor.

The above ratios shouldn't vary much in companies in control of their financial position. For example the ratio of receivables to sales, for example, ought to be pretty consistent quarter over quarter. When ratios start changing for the worse, say a worsening over 2-3 years it may be an indicator of near-term problems.

Procter & Gamble has $60-billion of goodwill and a total of $90-billion of goodwill and intangibles. Some have identified their goodwill as ripe for a write-down. P&G bought Gillette for $57 billion in 2005 and put goodwill of $37-billion created from the merger on its balance sheet. Warren Buffett called it a "dream deal." Gillete had the world's largest share of shaving products prior to being bought by P&G.

P&G's goodwill is spread across the following businesses:

Beauty: $17 billion
Grooming: $25 billion
Health Care: $9 billion
Snacks, Coffee and Pet Care: $2 billion
Fabric Care and Home Care: $ billion
Baby Care and Family Care: $2 billion

It will be interesting to watch P&G for goodwill impairment--interesting because their products are generally not considered luxury products and may not be affected by current economic malaise. Their shares were at a 52 week high of $73 before last fall and are sitting at about $50 now. Their market cap is about $150 billion, more than twice their book equity.

People who watch the ratios noted above are saying that other companies to watch may be biotech Amgen which has been on a buying spree. Monsanto, Kraft, and CVS Caremark, all of which have done big mergers and acquisitions over the past few years. Also eBay and Transocean.

With information from Barron's

Malcolm McKay

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