One of the most descriptive financial metrics, the Piotroski F-score gives a strong indicator of a company’s financial strength. Developed by accounting professor Joseph D. Piotroski, the F-score grades companies on a scale of 0 to 9 based on information from the company’s balance sheet.
Part 1 of the study discussed how the F-scores are interpreted and the distribution of current F-scores for companies traded on the Standard & Poor’s 500 index. Part 2 compared the current distribution of F-scores to the historical distribution of F-scores. This article will discuss the historical trendline of Piotroski F-scores for six major U.S. companies: Apple Inc. (AAPL, Financial), Berkshire Hathaway Inc. Class A (BRK.A, Financial), Berkshire Hathaway Inc. Class B (BRK.B, Financial), General Electric Co. (GE, Financial), Alphabet Inc. (GOOG, Financial), Microsoft Corp. (MSFT, Financial) and Exxon Mobil Corp. (XOM, Financial).
Apple Inc.
Incorporated in California, Apple manufactures mobile devices and portable computers globally. The company’s margins and returns outperform over 96% of global consumer electronics companies, likely due to a highly sustainable competitive advantage. With a profitability rank of 8, the computer hardware company has high growth potential. Additionally, Apple has a financial strength rating of 7, suggesting a healthy and sustainable business operation.
While the hardware company had below average F-scores from 2012-2014, Apple experienced increasing F-scores during the past two years, reaching a five-year high of 8 in November 2015.
During the first half of 2016, the hardware company’s F-scores reverted to its median of 6 despite high margins and returns. As of March, Apple has a five-year asset growth of 35.7% per year, which is higher than its five-year revenue growth of 28.7% per year. This likely led to an increase in long-term debt, reducing the company’s financial strength.
As the company’s F-score decreased during the first half of 2016, Spiros Segalas (Trades, Portfolio) trimmed 6.31% of his position in Apple.
Berkshire Hathaway Inc.
Berkshire Hathaway engages in various business operations in property and casualty insurance, finance and other common industries around the world. Headed by Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio), the conglomerate holding company historically had decreasing Piotroski F-scores. While both Class A (BRK.A, Financial) and Class B (BRK.B, Financial) historically had high F-scores, the scores have decreased during the past two years. This suggests that Berkshire Hathaway, despite its complex financial structure, experienced weakening business operations during the two-year period.
Despite the weakening F-scores, Berkshire Hathaway has expanding operating margins and consistent per-share revenue growth. Buffett’s conglomerate company currently has operating margins that outperform 76% of global insurance – diversified companies.
General Electric Co.
Diversified industrial company General Electric Co. manufactures various infrastructure and financial services products around the world. Although the company has high Piotroski F-scores, GE has poor financial strength. Additionally, the firm experienced contracting operating and gross margins during the past eight years, despite current operating margins outperforming 73% of global diversified industrials companies.
The industrial company’s F-scores dropped to its 10-year low of 4 during 2006 but sharply increased to 7 in 2007. Since then, GE has had a Piotroski score of either 7 or 8.
While a strong F-score usually suggests a strong business operation, other financial metrics, especially the Altman Z-score, disagree. During the past 10 years, GE’s Z-scores languished in distress zones, implying increased bankruptcy risk. As the company’s business outlook deteriorates, Steven Romick (Trades, Portfolio) knocked off 8.83% of his position in GE during the second quarter.
Incorporated in California, online media company Google facilitates the way people connect with social, technological and everyday information through its products and services. With a financial strength rating of 9 out of 10, Google has a strong and sustainable business operation. Since 2014, the company’s Piotroski score increased from a 10-year low of 4 to its 10-year high of 7. The company’s current F-score is 6, which is still above its median score of 5.
Among the six stocks discussed in the article, Google likely has the strongest business outlook. With interest coverage of 187.55, the online media company seldom had trouble paying off its debt. While it only outperforms 58% of global Internet content and information companies, Google’s interest coverage is significantly higher than Ben Graham’s required ratio of 5. Additionally, Google’s Altman Z-score is a strong 13.76, implying little or no bankruptcy risk. With a combined weighting of 74.09%, Google has the third-highest combined weighting among gurus, according to the aggregated portfolio.
Microsoft
Like Apple, Washington-based tech company Microsoft designs application software and operating systems for personal and business use. Despite having a financial strength rating of 7, Microsoft currently has a Piotroski score of 4, implying satisfactory business operation. The company’s F-scores have decreased since 2013 but remained at 4 since May 2015.
As mentioned in an earlier article, Microsoft’s 15-year financials suggest that the company is likely a value trap. The company likely lost competitive power to Apple and Google, resulting in contracting profit margins. As the company experiences declining profitability, Romick cut 3.12% of his position in Microsoft in the recent quarter.
Exxon Mobil
While the standard deviation of Exxon Mobil’s F-scores is slightly lower than that of GE, Exxon Mobil’s F-scores had the highest number of trend changes. Exxon Mobil’s F-scores decreased from 2006-2010, and then increased to its 10-year high October 2012. Since then, the scores decreased to its 10-year low of 4 in 2014, before increasing to its current value of 6.
Likely due to decreasing oil prices, Exxon Mobil has a modest profitability rank of 5. The New Jersey-based energy company has contracting operating margins, gross margins and per share revenue, three warning signs that the company’s business outlook is weakening. The company’s three-year revenue growth and three-year EBITDA growth underperforms 78% and 83% of global oil and gas – integrated companies, respectively. Almost all of its profitability metrics are near 10-year lows, suggesting that Exxon Mobil could potentially go into distress.
Conclusions
Not surprisingly, the chart outputs displayed in the article closely match up to the Piotroski F-score charts generated using Interactive Charts.
You can access Interactive Charts by clicking the “Interactive Chart” tab or selecting the “(stock name) Interactive Chart” option from the search dropdown box. By default, the Interactive Chart graphs the company’s stock price from inception. You can have the chart graph data for three months, six months, YTD (year to date), one year, three years, five years, 10 years or since inception (all). Additionally, the chart can graph annual, quarterly or trailing 12-month (TTM) data.
In addition to the price, you can graph the historical trend of any financial metric that GuruFocus tracks for the company stock, including the Piotroski F-score. Additionally, you can compare a company’s F-score with other companies’ F-scores by adding their ticker symbols using the “Compare Symbol” box.
GuruFocus also implemented predefined charts, including the famous Peter Lynch chart. This chart automatically graphs the company’s stock price and the price at a P/E ratio of 15. Additionally, the “Peter Lynch chart with estimates” expands the chart by showing analyst estimates of the company’s earnings.
Premium members can download the interactive charts to an Excel spreadsheet. If you are not a premium member, please sign up for a seven-day free trial.
See also
You can also explore the All-in-One Guru Screener and the Buffett-Munger Screener, the list of stocks that the heads of Berkshire Hathaway prefers in their portfolios. Earlier articles further detail these screeners: all-in-one, Buffett-Munger.
This article explains Romick’s recent buys in the second quarter.
Disclaimer: The author currently does not own any of the stocks discussed in the article.
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