CoreLogic May Be Hiding Weakness

CoreLogic (NYSE: CLGX  ) carries $2 billion of goodwill and other intangibles on its balance sheet. Sometimes goodwill, especially when it's excessive, can foreshadow problems down the road. Could this be this be the case with CoreLogic?

Before we answer that, let's look at what could go wrong.

AOL blows up
In early 2002, AOL Time Warner was trading for $66.27 per share.

It had $209 billion of assets on its balance sheet, and $128 billion of that was in the form of goodwill and other intangible assets. Goodwill is simply the difference between the price paid for a company during an acquisition and the net assets of the acquired company. The $128 billion of goodwill in this case was created when AOL and Time Warner merged in 2000.

The problem with inflating your net assets with goodwill is that it can -- being intangible after all -- go away if the acquisition or merger doesn't create the amount of value that was expected. That's what happened in AOL Time Warner's case. It had to write off most of the goodwill over the next few months, and one year later that line item had shrunk to $37 billion. Investors punished the stock along the way, sending it down to $27.04 -- or nearly a 60% loss.

In his fine book It's Earnings That Count, Hewitt Heiserman explains the AOL situation and how two simple metrics can help minimize your risk of owning a company that may blow up like this. Let's see how CoreLogic holds up using his two metrics.

Intangible assets ratio
This ratio shows us the percentage of total assets made up by goodwill and other intangibles. Heiserman says he views anything over 20% as worrisome, "because management might be overpaying for the acquisition or acquisitions that gave rise to the goodwill."

CoreLogic has an intangible assets ratio of 53%.

This is well above Heiserman's threshold, and you should keep a close eye on just how the company is fueling its growth. It's also useful to compare it to tangible book value, which I explain below.

Tangible book value
Tangible book value, which is simply what remains after subtracting goodwill and other intangibles from shareholders' equity (also known as book value, see box). If this is not a positive value, Heiserman advises you to run away because such companies may "lack the balance sheet muscle to protect themselves in a recession or from better-financed competitors."

CoreLogic's tangible book value is -$373 million, which fails Heiserman's test.

Foolish bottom line
If you own CoreLogic, or any other company that fails one of these checks, make sure you understand the business model and management's objectives. You can never base an entire investment thesis on one or two metrics, but there is a yellow flag here. I'll help you keep a close eye on these ratios over the next few quarters by updating them soon after each earnings report.

Keep up with CoreLogic, including news and analysis as it's published, by adding the company to your free, personalized watchlist.

Rex Moore owns none of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 11, 2012, at 6:18 PM, TidyTomThompson wrote:

    A big property database compiled from government records--the rest is noise.

  • Report this Comment On January 11, 2012, at 6:24 PM, TidyTomThompson wrote:

    Spoiler Alert: CLGX has a ton of goodwill because they couldn't innovate a successful product if their life depended on it (and it does). Secondly, a good chunk of their revenue is pass through revenue or comes from (oligopolistic) suppliers with heavy license fees--which looks like they are going to be squeezed out on the supplier side for years to come. Thirdly, 4-5 clients basically make up ~85% of their total revenues--and these 4-5 clients have been hemorrhaging recently--so expect the high buyer power to create further margin compression on CLGX. Lastly, since their recent equity performance has been so miserable, and recently royally f'd their bond holders by missing revenue figures month's after a huge issuance, they are basically locked out of the debt & equity markets for some time. They will end up using their remaining cash to acquire more companies in dying industries (MLS software for example) and keep the revenue ship afloat, meanwhile by saving more cash by "transforming" (aka reducing) their employees, and all in all, they could eventually be dead in the water. Maybe if they stopped hiring incompetent CEOs and CFOs, and the board would stop putting in place stupid poison pills (which shareholder's end up swallowing when they get axed--not PE firms or other suitors)--then they might actually get somewhere.

    2012 Prediction: Write downs of goodwill and more window dressing (look at A/R as a % of sales in Q4 numbers vs. prior quarters). Write downs will continue each quarter from Q4-11 earnings announcement until CEO is out (most likely once they miss their revenue numbers in one of the coming quarters). Then expect the new CEO to take a big bath on the "rest" of the goodwill--however this won't solve the "revenue problem" as they still will not grow unless they have a major culture change--which a lot more pain and a complete shift in how they do business has to occur. Also, adjusted EBITDA line they will feed you is a crock--ignore this metric as the "adjusted part" will lead to an eventual rude awakening. Overall---don't count on the Goodwill delivering much additional revenue firepower in future quarters, which will only perpetuate the potential insolvency issues that may lie in store if they don't learn to innovate products that more customers want, and find more customers to buy instead of the big 4 of 5.

    Current Share Price: $13.25 / share

    Target Equity Value: $6.25 / share (at best)

  • Report this Comment On April 08, 2013, at 5:14 PM, darclegion wrote:

    Guess. you both were wrong...huh? Too bad.

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