Cogito

Who Has The Lowest EPS Variance in TSX?

Posted in CFA, finance by qmarks on June 27, 2011

Curiosity is my compass. In this post I will analyse the companies listed on TSX and try to find which one has the lowest earnings per share variance over the last 20 quarters (5 years). That study might be helpful for seeking LBO targets. Remember that a major characteristic of a strong LBO candidate is stable operating income. That is required to payback the debt burden.

Drum-roll please…

FIRSTSERVICE CORP. (TSX:FSV) Voila!

The company which has the lowest EPS variance with a ratio of 9.9*10^-6. or 0.0000099023279548525.

How did we get this number?

A simple stability calculation is the log-linear regression model. However if a series have a negative or zero value then the logarithms cannot be used. Instead I will calculate the stability as simple OLS (ordinary least squares) linear regression model on raw-score data. EPS Stability formula is the Standard Deviation of Raw EPS times the Square root of the one minus goodness of fit coefficient (R^2, r square) divided by the average EPS.

Stability EPS = Sigma EPS * Sqrt (1- RSQ)/ Average EPS

Who is First Service?

First Service Corporation provides specialized property and business services to corporate, government and residential customers throughout North America. These services include community association management, security ,lawn care, franchising, business outsourcing, and specialized trade material fulfilment.

Can this be manipulation?

After applying the Beneish Manipulation Index, I found that over the last five years, excluding 2008, the probabilities that company manipulated their earnings were less than 2% (in 2008, probability of manipulation was 10%)

So what?

I was expecting the lowest EPS variance to be either a Retail industry or Real Estate due to their nature of business. An industry with a low clock speed of product, sustainable demand, yet competitive landscape due to the low barriers to entry. First Service has captured a better position in Canadian landscape through their acquisition of Collins International Canada branch which is providing a better positioning in the competitive Real Estate sector.

In the next post, I will scrutinize business strategy of First Service Corp.

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