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Mobileye: Too Many Accruals, Not Enough Cash

Summary

Using the tools provided by professor Richard Sloan, our analysis suggests that Mobileye's earnings are made up of a dangerous level of accruals.

In addition, the stock remains very richly priced.

We believe the combination of rich valuation and relatively poor quality of earnings is dangerous for investors. We must continue to advocate avoiding Mobileye.

In 1996, professor Richard Sloan of the University of Michigan analyzed the relative performance of stocks of companies that had high accruals in their earnings versus those with relatively more cash earnings. In the course of his research, he developed a ratio that has been dubbed the Sloan ratio. Sloan found that companies with low levels of accruals in their earnings massively outperformed a group of high accrual firms. Over a 40-year period between 1962 and 2001, a strategy of buying the lowest accrual companies and shorting the highest accrual companies produced a CAGR of ~18% versus 7.4% for the S&P 500 over the same period.

Thus, investors need to be mindful not only of the high or low levels of earnings but also the quality of those earnings. It's with that in mind that we want to talk about Mobileye NV (NYSE:MBLY). The fact is that a high percentage of Mobileye's earnings are accruals. That fact, plus the relatively lofty valuation at these levels...


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