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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: deeno who wrote (6197)	3/5/1999 4:49:00 AM
From: Walter in HK	Read Replies (1) \| Respond to of 78470

Dear deeno, Orbital Sciences: I looked a little at the material and the three amended 10Q's. I can't judge the lawsuits mentioned somewhere, for hyping the stock. But I do know a little about “Percentage of Completion” Contract accounting as I ran a little engineering company for 18 years. The alternative method is the “Completed Contract Method” which we liked better but which the IRS makes almost impossible to use now. In it you post your profit on completion of the contract, when you passed the performance test and are sure you get all your money from the customer. Naturally, you only owe taxes on the profit at that time. The IRS likes to see your money earlier. In the percentage-of-completion method, if you have $ 1 000 000 profit and it takes 10 months to complete the job, you have to post $ 100 000 of your profit each month and pay tax, at least once a year. We built plants that took 2 years to build, and then fiddled some, with the punch-list (the customer withholds money until you fix) . So, the difference was substantial. Now, if during the time of executing the job, you find that your estimate was too low, then nothing happens under the Completed Contract Method unless you now project a loss on the contract. You post a “Provision for anticipated loss” but it has no tax effect until you actually spent the money. This is always so with provisions, and rightly so, because the temptation to postpone taxes would be too great. Under the Percentage-of-Completion Method, obviously, a lot fiddling has to be done. Reversing profits previously posted. Maybe that is what is going on here, although, what I saw is not as clear to me as it seems to the Merrill Lynch guys. But it is hard to read the stuff on the screen, I am too far away for hard copy. I looked at the 100-months Chart and ORB hung around $ 18 for years. Maybe they just want to keep it there :-) From a Value point, this stock is risky and I will study it some more with a view of trying to justify a buy at a lower number. Satellites and launches are still iffy and there may have to be a larger number with a good success rate to sort of see the space business the way you do those on the ground. Just look at what interest rate they have to pay for project-related borrowed money. Furthermore, as you may have gathered, in this kind of contract business, it all depends how honest and / or accurate your estimate was. You should never buy an engineering company unless you could check the estimates. And ORB themselves say under “Risks” that a lot of what they do is novel. I built plants where the original inventions happened in 1895 and 1907. A 10% tolerance in the estimate of the cost of turnkey contracts (with field construction) is normal there. Hell, I hope they have a lot bigger margin of pretax profit. Which brings up the “Tax asset” another gimmick. But they do have Retained Earnings, so it may be OK. I was impressed by the Board. Pretty seasoned guys. So, thanks for bringing it to attention. I hope the stuff above is of a little use. Walter in Hong Kong