The tax is shown, but the gain being taxed is not.
From Elamex's simplified balance sheet, we don't know how much cash they are holding, but their current assets are listed at $53.5M. According to the release, the Mexican gov taxes the 'exchange rate gain arising from its net monetary asset position in dollars'. In other words, some of the $53M is cash in UDSs and some in pesos (but mostly in USDs, I believe). The company has to pay a tax on an exchange rate gain in the net USD position. The income statement doesn't show the exchange gain, since the statement is in USDs and per US GAAP. So we have the weird situation where the tax is shown, but the 'gain' isn't included in the income being taxed. But that is really the right way to account for it, since the tax will have to be paid, and there is no foreign exchange gain if the books are kept in dollars and the assets are in dollars.
Since we don't know the size of the gain, we don't know the tax rate. Its certainly a confusing situation, and not what we were lead to believe by management. They stated that a fall in the peso against the dollar faster than a certain rate, would help earnings. Well the peso fell faster than the rate forecasted by management, and reported earnings declined significantly. Somehow the guidance on this was less than could be desired.
All said and done though, the company would have earned 15 cents without the gain on the sale to GE, and with a 'normal' tax rate. The company is demonstrating an earnings run rate of about 60 cents per year, so the stock is trading about nine times the run rate. The analyst forecast for next year is 90 cents. Given this and the book of $8.00, the stock seems like a great value.
But in order for the stock to really move, we need to see growing revenues, and obviously a more predictable earnings stream.
Paul |
