Monday 22 April 2013

Capital Cost Allowance in need of reform says CGA

A camel is a horse created by a committee goes the old saying ... or is it the other way round? It doesn't matter because the point still applies. Something that started out in 1949 being a nice simple method for the income tax system to take account of and treat capital depreciation fairly has transmogrified into a complicated mess doing things it wasn't designed or suited to do.

It's not dumb ole me saying this, it's the Certified General Accountants of Canada, which has just released a study that describes the problems - Is the Capital Cost Allowance System in Canada Unnecessarily Complex?. 

Among the particular issues:
  • proliferation in the number of classes from 12 originally to 56 in 2012
  • more complex and confusing wording for the classes
  • changing rates from year to year for the same thing e.g computers (I've encountered this myself trying to do my taxes in claiming computer equipment and it is frustrating and time consuming to figure out.)
  • special classes that misuse the CCA system to achieve industrial policy or economic incentives for certain industries

The end result, according to the CGA press release quoting Rock Lefebvre, FCGA and vice president of Research & Standards at CGA-Canada: “... it has added increased complexity to the tax system and the many changes introduced weakened the system’s equity and neutrality.” 

Good on the CGA for raising the issue. It's a little bit altruistic considering that the more complicated the tax system is, the more we have to pay accountants who know all the infuriating gotchas.

Let's hope that the federal government folks in Ottawa are listening and that if they act they do not give rise to a new saying going something like "a naked mole rat is an improved rat created by a government reform". See photos of the naked mole rat here.

Wednesday 17 April 2013

WaterFurnace Renewable (TSX:WFI) 2012 Results Show Disappointing Weakness

In mid-March, WaterFurnace published its 2013 Annual Report along with the Annual Information Form and the Information Circular. The results were disappointing for investors, though we should not have been too surprised, as the last quarter exhibited a continuation of significantly slowing sales (down 13% for the total of 2012) and earnings (down 27%) that had been evident through earlier quarters.

Among the not so impressive details:
  • Inventory rose 15% and the finished goods portion was up 29%
  • Operating expenditures as a percent of sales rose from 18% to 20%
  • Employee compensation was up 4% (i.e. more than inflation) and executive compensation rose 49%, or 60% if director compensation, which stayed constant, is excluded; much of the exec comp came from shares issued, which diluted earnings per share a full penny; what in heaven's name justifies that sort of increase?
  • Warranty claims expense had a big jump up due in part to rising claim rates, not just additional units under warranty, which makes me wonder if management is building a warranty cookie jar in this non-cash item so that later the claim can be reversed with wonderful instantaneous effect on earnings.
A few positive notes:
  • the joint venture in China seems to have got underway quickly and successfully, being relatively close to breakeven despite a bunch of one-time startup costs
  • the Hyper subsidiary acquired a few years ago, contributed more to the bottom line, though it's still not large
  • Cost control on the manufacturing side partly offset the Opex rise
On the conference call, CEO Huntington and CFO Andriano were predictably optimistic. However past calls have conveyed the same "the light is just beginning to dawn and we are now facing an upward trend" message without coming to pass as we know.

Should we believe this optimism? A supposed key driver of sales in the USA doesn't seem to be working as the WFI managers think and say:
  • Housing starts - this is said to be the key for residential sales which have dropped steadily. How does falling sales jive with this YCharts graph which shows US housing starts going up slowly for the past two years.
Instead I believe it's that low natural gas prices have kicked the bottom out of the economic argument for installing a ground source heat pump system as opposed to one based on natural gas. There are a few brief comments here and there in the documents and the call about natural gas competition. Interestingly and perhaps tellingly, the AIF does not include natural gas a risk factor. Does management of the Board not believe or want to admit it? In the call, Huntington predicts natural gas prices will go up as everyone adopts it and says they have already started to firm up. Huh? Doesn't look much like it in this chart from the US Energy Administration Administration.

WFI was not alone in its 2012 difficulties as competitor LSB Industries' climate control division suffered lower sales and income, though not as much.

Bottom line: Unless the joint venture in China pays off big time and quickly, we investors (yes, I still own the stock) need to be prepared for falling sales and earnings, or stagnation at best, and probably a dividend cut from the $0.96 per share to something like $0.60. In 2012, the dividend per share was 17% more than earnings.

On that basis,
- Middle estimate: with no future growth at all and a cut in dividend to $0.60, the stock is worth around its current $16 market price.
- Low estimate: If earnings fall 5% a year on average for 5 years, WFI is only worth about $13.50.  
High-estimate: With no growth for ten years, then 3% per year growth after that for ten years, WFI's value is $20.70 or so. (figures calculated using the discount model in this downloadable spreadsheet from McGraw Hill Investments book that I used in my original post on WFI in September 2010)

Which is more likely? Maybe the China venture will offset the US sales decline. Don't really know. Maybe I need to face sober reality, but like the alcoholic who keeps saying just one more drink, I'm still hangin' in.

Saturday 13 April 2013

TurboTax Giveaway Winners!

The random draw for the TurboTax web version has been done and the two winners are:

  • Erick
  • SWT
Would these lucky winners please contact me by the email link in the right hand column of this blog page so that I can send you the access code. Congratulations!

Monday 8 April 2013

TurboTax for Canadians Giveaway

The April 30th deadline for filing a tax return for 2012 is fast approaching and to help procrastinating readers take that final step of actually filling in the numbers we are offering a giveaway.

Thanks to Intuit, makers of TurboTax, I am giving away two codes for the online web version of their personal tax preparation software for Canadians. That's a value of $17.99. With the online version of TurboTax you can use the Canada Revenue Agency's NETFILE online tax submission service instead of mailing paper forms. It's quick and convenient.

Here are the details of the giveaway:

  • To enter submit a comment on this post below - use a unique name (Anonymous won't suffice!) so I can distinguish people
  • One entry per person please
  • Entries close Friday, April 12th midnight EST
  • I'll do a random draw of two (2) names from amongst the entries after the deadline
  • Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the TurboTax software (your email will not be used for any other purpose than to contact you as a winner)
Best of luck everyone!

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