Revenue Dynamics for Express Scripts (ESRX)

• Thanks in part to PBM success, the growth of prescription drug expenditures has slowed to the low- to mid-single digit level, organic growth for ESRX is not likely to be much above this level. 
• The industry has consolidated, so the opportunity for acquired growth is also limited.
• The best chance for more rapid revenue growth is through the zero-sum game of poaching another PBM's client.

The Economics of Lenders

Financing companies are not “normal” companies and their assets are not “normal” assets.

A financing company’s main asset is the cash it loans to customers. Unlike a manufacturer’s assets—a metal-bending machine or a lathe, for instance—a financing company’s assets do not stay put at its headquarters, but instead get transferred to the control of its client.

Implied Volatility is Unimportant

Read any options trading article, listen to any pony-tailed pundit, and it will not be long before you'll hear the term "implied volatility." Pundits appear on cable news shows and opine about the VIX--an index representing the implied volatility of options contracts on S&P 500 futures--as if it was one of the most important financial gauges in the world.

Well, the joke is on them. Implied volatility is unimportant.

Oil Price Impact on GE - Part I

With Crude Oil futures trading below $50 / barrel (bbl), my attention has turned to the effects of low oil prices on General Electric’s business, and on how much an extended period of low oil prices is likely to affect IOI’s valuation of the stock.[1]

At the close of FY2013, 11% of General Electric’s revenues were directly derived from its Oil & Gas division (as shown in Figure 1 below), but it also has exposure to energy prices through its financing division, GE Capital Corporation (GECC).

Figure 1. Source: Company Statements, IOI Analysis

This article will investigate the impact of lower oil prices directly on the Oil & Gas division and my next will do the same for the Oil and Gas facing portion of GECC.

Oil's Effect on Ford

Crude oil prices have nearly been cut in half over the past few months, and while U.S. consumers are happy to spend less at the pump, the precipitous fall could cause Ford (F) problems.

One of the original reasons I decided on an unlevered investment in Ford is the degree to which the company is exposed to both operational and financial leverage. Leverage on top of leverage on top of leverage is not generally a good recipe for long-term success in the markets, though short-term gains from this kind of layering can be breathtaking.

[For those of you who need a review of operational, financial, and option-based investment leverage, my (biased) view is that The Intelligent Option Investor, through its chapter on investment leverage and its appendix on operational and financial leverage, does this in a very readable, thorough, and understandable way.]

Several years ago, Ford management made a strategic decision to increase operational leverage that would allow them to be more competitive in a high oil price environment. I am sure that the huge drop in WTI has some people in Dearborn, Michigan on edge, and I also feel the need to consider how large an impact a prolonged low oil price environment will have on the likelihood of different IOI valuation scenarios for Ford.

Apple's Overseas Havens

Researching something about Delaware business registrations, I just stumbled upon a good article regarding Apple's various overseas subsidiaries. This relates to my recent Morningstar article entitled Apple's Conundrum. Not everyone uses Twitter, so I thought I would post the link here as well.

Interesting article regarding $AAPL tax liabilities related to my recent @morningstarinc article "Apple's Conundrum" http://t.co/rlSWJ487CA
— E. Kobayashi-Solomon (@IOI_Erik) December 16, 2014

A Picture is Worth 1,000 Words: General Electric's Revenue Growth

Source: Company Statements, IOI Analysis

In the heatmap above, the FY2013 revenue for each of GE's Industrial and High-Tech segments (in billions of USD) is shown below the segment name; below FY13 revenues is the 5-year CAGR. Box size represents revenue share; box color represents revenue growth rates.

It is obvious from this heatmap that GE's Oil & Gas segment has provided the most revenue growth over the past five years.