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Structurals

Impact of the “Tax Cuts and Jobs Act of 2017” on our StockPointer® model

 

 

Impact of the “Tax Cuts and Jobs Act of 2017” on our StockPointer® model.

As part of the historic tax cuts, the new corporate tax law has a huge impact on corporations and the way the StockPointer® model calculates the intrinsic value. Inovestor is addressing this exceptional event by modifying the algorithm to take into consideration the new tax laws.

There are two major elements that impact the model. Firstly, the tax rate is reduced from 35% to 21% before deductions, and secondly, the repatriation tax is applied to earnings overseas prior to December 2017. For the non-recurring events:

  • For companies reporting as of December 2017, some companies will adjust their deferred tax amounts to reflect the new tax rate that will reduce the taxes for 2017 and sometimes will result in a negative value for tax paid. For example AT&T reported a deferred tax reduction, that in addition to the actual tax, has a negative tax of over 19 billion dollars, thus increasing the NOPAT accordingly.
  • The law allows corporations to repatriate overseas earnings at a reduced rate, varying from 8 to 15% depending on the number of installments taken. This will have a one time impact on the tax rate. For example, Goldman Sachs reported a tax hit of almost $5 billion as of December 31st that reduced the NOPAT accordingly.

For the recurring events, portions of the tax cuts will end in 10 years from now. The impact is positive and should increase the NOPAT in the future. For companies without non-recurring tax cuts, the model currently undervalues the the portion of future value of companies.

We believe that the NOPAT mirrors the real value of companies and should be reflected in their intrinsic value. However due to this unique event, the future value of the company is artificially inflated or deflated as we currently use the NOPAT’s trailing 12 and 36 months to calculate intrinsic value’s future position.

Currently we propose that you use the calculator in the EVA Executive Summary to adjust the intrinsic value based on the data available in the financial footnotes of the companies and the reduced tax rate. These fields are not available from vendors, hence, we cannot modify it for all companies.

As for a permanent fix, we have modified the algorithm to take into consideration the impact and are currently running tests. Finally, if they are conclusive, we will deploy the new algorithm quickly.

The Inovestor Team

Inovestor Inc.
1097 St-Alexandre, suite 400 – Montreal – Quebec – H2Z 1P8
T: 514-287-0011 – T: 1-800-596-9948 – F: 514-287-0015