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SOGEN FUNDS'
JEAN-MARIE EVEILLARD ET AL.
(continued from preceding
page)
And better disclosure doesn't speak to that difference. The difficulty - although it's not an exact science, as David Winters of the Mutual Series Fund acknowledged in your December 31st edition - is that while European accounting tends to be more conservative, it also tends to be less transparent And, therefore, one's task of making adjustments is much more difficult.
OID: Because it forces you to become something of a sleuth to deduce the reality behind the curtain.
Eveillard: Exactly. So Winters makes the same kind of adjustments we do. I liked how he laid it out because he's one of the very few who make all of those adjustments. As he says, most investors - including local institutions in the Netherlands - don't. They stick to appearances - which are deceiving. But the true reality of the business lies elsewhere. So some work has to be done. And he does it.
OID: One more comment like that and we'll probably lose him as a contributor - either for ego reasons or because Michael Price won't let him speak with us given what it might mean for his compensation....
Eveillard: That's the way to approach foreign equities. In Europe and Asia, you must make certain adjustments. But the local institutions and the local research firms are so mesmerized by the American approach - which is based on price-to-earnings and earnings-per-share growth - that they apply it to their own local securities without bothering to first ask themselves whether the accounting is the same or not.
OID: And based on your comments and those of other contributors, I gather you think it's generally not.
Eveillard: That's right. For example, companies in Europe and Japan tend to depreciate their fixed assets much faster on average than comparable companies in the U.S. and the U.K.
OID: That's what we keep hearing.
Eveillard: And that's one reason why we think it's so important to also consider price-to-cash-flow, (cash flow meaning after-tax earnings plus depreciation), rather than only price to after-tax earnings. That way, you eliminate the differences from one country to another and one company to another in accounting for depreciation.
OID: Gotcha.
Eveillard: However, even price-to-cash-flow ignores whether a company has lots of net cash or net debt on its balance sheet.
OID: It doesn't factor in the leverage or lack thereof.
Eveillard: Exactly. And that's why it's so important to go one step further and use enterprise value to EBITDA [earnings before interest, taxes, depreciation and amortization] as Winters did with Telegraaf. That way,
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