Go to Jeff Salisbury LWGate Home Page.From: "Kelly Short" <kelly.short@neoris.com>
Subject: RE: [CANSLIM] Now Xerox?
Date: Fri, 28 Jun 2002 10:48:06 -0500
Previous Article (by Author): RE: [CANSLIM] Now Xerox? "David Taggart"
Top of Thread: RE: [CANSLIM] Now Xerox? "David Taggart"
Next in Thread: RE: [CANSLIM] Now Xerox? "David Taggart"
Articles sorted by: [Date]
[Author]
[Subject]
This is a multi-part message in MIME format.
- ------_=_NextPart_001_01C21EBB.31D9B220
Content-Type: text/plain;
charset="iso-8859-1"
Content-Transfer-Encoding: quoted-printable
Katherine,
=20
Thanks for the article (I haven't read it yet but I'm sure it will =
provide a nice distraction this afternoon). My cohorts and I are =
discussing which company will be the next whale to wash ashore with =
accounting scandal. Perhaps the group would like to predict which =
company will be next (because Xerox/WorldCom are not the last). I'll =
start:
=20
These are just hunches at this point- I'll be researching them later =
today:
1. Something in the telecom/media sector- AOL Time Warner maybe?
2. Something in the technology sector- Sun or Apple?
3. anything from the Andersen Top 20 Client list
=20
I'd enjoy hearing other's predictions. Perhaps we should start a pool- =
people could pick squares- at least somebody would make money!
=20
Kelly
- -----Original Message-----
From: Katherine Malm [mailto:kmalm@earthlink.net]
Sent: Friday, June 28, 2002 10:30 AM
To: canslim@lists.xmission.com
Subject: Re: [CANSLIM] Now Xerox?
Here's some background on earnings from Briefing.com for those less =
familiar with EBITDA, etc.
=20
- --Katherine
=20
PS Xerox's accounting woes go back *years*.... P-U....
=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D
=20
The Earnings Confidence Problem - Part I=09
25-Jun-02 14:18 ET=09
=09
[BRIEFING.COM - Robert V. Green] In the midst of the more scandalous =
market problems, the earnings confidence problem is not receiving the =
attention it should. Here is more on the topic.=20
The Market Problems
The current market suffers from the following ailments:=20
* Distrust of management - from excessive comp to outright fraud. Tyco =
is the best example.=20
* Distrust of accounting - Andersen=20
* Distrust of analysts - Blodgett
These three problems get all the press and attention.=20
But a deeper problem is afflicting the buy side - a growing concern =
about the validity of earnings reporting.=20
The Earnings Problem
Accounting rules have always been flexible enough to allow most =
companies a far amount of flexibility both in revenue recognition and =
expense recognition. Even when earnings reporting was somewhat =
standardized, some companies were criticized for how they recognized =
revenue and expense.
But in the last five years, the types of earnings that companies have =
driven Wall Street to focus upon have become questionable.=20
There are four different basic types of earnings today:
* GAAP earnings: Generally Accepted Accounting Principles - A standards =
board that publishes rules on how expenses should be booked. Generally, =
all types of expenses are deducted.=20
* As reported: Earnings excluding extraordinary items (as defined by =
GAAP), changes in accounting charges, charges related to discontinued =
operations (plant closings, etc.)=20
* Operating earnings: As reported earnings but excluding "one-time" =
charges which do not fit the GAAP definition of "extraordinary"=20
* Proforma earnings: Loosely defined "as if" analysis. Originally =
designed to provide comparison data for mergers.
GAAP accounting principles are guidelines for accountants, not =
investors. The GAAP standards are guidelines for how a company should =
keep its books, not how the company should report earnings.=20
For example, a basic principle behind GAAP is that revenue must be =
booked over the time period for which services and product are =
delivered. If a two year $200,000 contract is pre-paid in cash, up =
front, the entire $200,000 cannot be booked in the quarter in which the =
contract is signed. However, the revenue does not have to be booked as =
$25,000 per quarter for two years. A fair amount of flexibility, =
sometimes negotiated by auditors, is possible for how much of a contract =
can be booked in each quarter.=20
GAAP covers expenses as well as revenues, of course.=20
As reported earnings are the historical standard for earnings. Until the =
mid-eighties, in fact, there was little debate over how earnings should =
be reported as everyone used "as reported" earnings as a standard. For =
the most part, there was no difference between "as reported" earnings =
and any other methodology because one-time charges were not as common. =
Furthermore, companies did not actively seek, as they do today, to have =
certain expenses classified as "one-time."=20
Operating earnings are designed to allow comparisons between quarters =
and years for a company. One time charges in any quarter are excluded =
because these would distort the comparison. Operating earnings became =
important when it became clear that Wall Street would completely ignore =
any "one-time" charges, and focus solely on earnings growth. This =
provided a strong incentive for companies to classify large expenses as =
one-time charges.=20
An example of one company's aggressive attempt to get charges classified =
as one-time was Excite's 1997 $40 million marketing deal with Netscape. =
Now long forgotten, Excite paid Netscape up-front for a four-year deal =
to be the principal search engine at the Netscape web site. Excite tried =
to classify the entire $40 million payment as a one-time charge in a =
single quarter. By doing so, Excite was almost profitable. At Briefing =
we highlighted this event as an indicator of the times. The SEC later =
forced Excite to restate the payment as a four-year expense. But many, =
many companies were successful in getting major expense outlays =
classified as "one-time" which improved income statements.=20
The focus on operating expenses led to the development of the "EBITDA" =
concept, which is "Earnings Before Interest, Taxes, Depreciation, and =
Amortization." The EBITDA concept, which has to be calculated from the =
line items shown on an operating earnings report, was designed to show =
the basic business model of the company, without regard to =
cost-of-capital. If capital were free, then EBITDA would be earnings.=20
The focus on EBITDA has fallen from favor in recent times for one single =
reason: Interest. The interest payments on bonds, which are excluded =
from EBITDA calculations, has ruined many debt-ridden.=20
Only through focusing on EBITDA projections could a company like Exodus =
Communications raise so much debt that their interest payments exceeded =
their gross margin. That won't happen again for decades.=20
Pro-forma earnings are very hard to define today. The original purpose =
of pro-forma earnings calculations was to show the effects of a merger =
in a format that allowed a single income statement to combine only the =
operating models of each company, and exclude the actual costs of making =
the merger.=20
Under the pro-forma for merger guidelines, pro-forma calculations could =
only be used for one year, after which the company should start =
reporting as-reported earnings for the combined entities.=20
However, companies soon learned that as long as they made a new merger =
each year, they could continue reporting pro-forma earnings =
indefinitely. This "flexibility" in how earnings could be reported led =
to "pro-forma" meanings that were never intended, including stock option =
compensation expenses and R&D "in-progress" write-offs.=20
The Erosion of Earnings Confidence
The now long-departed CFO of Amazon.com, Joy Covey, was the unsung hero =
of bringing pro-forma earnings to the popularity they enjoyed. She did =
so by diverting attention away from standardized earnings reports.=20
Ms. Covey invented the concept of "EBITMA" which was defined "EBITDA =
plus marketing." She was successful in convincing Wall Street that =
marketing costs were equivalent to capital investment, a concept which =
looks ridiculous in retrospect. But in the early days of the internet, =
marketing and brand development was equated with capturing "territory" =
which, presumably, everyone thought could never be lost. (Tell that to =
investors in Excite.)=20
Nevertheless, Joy Covey was successful in convincing investors, =
particularly convertible bond investors, to focus on the EBITMA concept. =
It was a crucial element in selling the $2 billion in Amazon.com bonds =
that built the company. After all, if you ignore the interest payments =
on the bond, and you consider spending the bond principal on marketing =
as "not an expense," Amazon's income statement would look great!.=20
The problem, of course, is that bond holders don't care about earnings =
statements. They just care about the payments. The jury is still out on =
whether Amazon.com will eventually be able to pay the principal on their =
bonds. (See the Stock Brief of: 14-May-01 =
<http://www.briefing.com/scripts/sub/stocks/PowerAnchor.asp?varArticleID=3D=
SB20010514082806rvgreen> Amazon.com's Bond Problem.=20
After Joy Covey established the principle of EBITMA, internet companies =
began using all types of non-earnings related statistics to show growth. =
Page views, registered users, unique monthly visitors are just some of =
the meaningless examples that became popular. (Surely you remember.)
When "non-revenue statistics" becoming drivers of stock prices, (around =
1998) pro-forma earnings increased in popularity. After all, a pro-forma =
income statement that showed some kind of earnings progress looked a lot =
more "real" than the phony statistics being coughed up by internet =
companies.=20
But when the bubble collapsed, everyone began questioning earnings =
quality. It didn't happen overnight, and it didn't happen all at once. =
But as a long, slow evolutionary force, earnings confidence has eroded, =
and is still present today.=20
The Aftermath
The evolution of earnings focus over the past 10 years has led us to =
today's situation: a basic lack of confidence in many companies income =
statements.=20
Amazon.com still reports earnings on a pro-forma basis. In their Q1 =
income statement, you can take your choice of earnings:=20
* Pro-forma: $25 million profit=20
* Operating: $2 million profit=20
* Net (as-reported): $(23) million loss
The earnings format you choose is not relevant, frankly. It is far more =
important to the stock value what format the guy next to you chooses.
After all, value to you is primarily determined by what someone else =
will pay, not by what you pay.=20
Even GE
Even solid companies like General Electric have come under scrutiny =
because of the extremely complex financial situations. Unraveling a GE =
earnings report has now become a major task. Where GE only had to beat =
earnings estimates by $0.01 each quarter to count on an ever increasing =
stock price, today that is not enough.
GE stock is down 50% in the last two years despite having only missed =
one earnings estimate in the last four years and having continual =
year-over-year growth in earnings averaging 15%.=20
This bears repeating: GE, as representative a stock as you can get of =
the overall economy, is down 50% since September 2000. During that time =
period, they have grown earnings at over 11% (year-to-year basis) and =
beat or met earnings estimates every quarter except one. The one =
shortfall was October 2001, the quarter of the Attack on America and GE =
was only one penny short.=20
Why can't GE get any respect? The only definable long-term culprit is a =
decline in confidence in GE's earnings numbers. During the same eight =
quarter time-period, GE revenue growth rate has been consistently =
falling. From a growth rate of 24% and 20% in 00Q1 and 00Q2, growth has =
steadily fallen, and even was negative for most of 2001.=20
Flat or declining revenue combined with continuing increasing earnings =
leads to only one conclusion: you can't keep this up forever. =
Eventually, GE will be unable to book the earnings number higher than =
previous years. When (if), that happens, GE stock will be further =
devastated. Until then, the slow erosion of confidence causes the stock =
price to decline.
GE is just one good example of how confidence in earnings numbers has =
been eroding over time since the bubble collapse. Until greater =
confidence in earnings numbers is established, you can expect further =
difficulties in the market overall.=20
Standard & Poors is now pushing for a standardized calculation for =
earnings reporting, called Core Earnings. We will have more on this =
concept in Part II of this story, to appear later this week.
Comments may be emailed to the author, Robert V. Green, at =
rvgreen@briefing.com=20
- ----- Original Message -----=20
From: Winston <mailto:wlittle1@peoplepc.com> Little=20
To: canslim@lists.xmission.com=20
Sent: Friday, June 28, 2002 9:47 AM
Subject: Re: [CANSLIM] Now Xerox?
They all used EBITDA.. which Warren Buffett in May said is the currency =
of a
crook ... they all have a smell about them.
- ----- Original Message -----
From: "Kelly Short" < kelly.short@neoris.com>
To: < canslim@lists.xmission.com>
Sent: Friday, June 28, 2002 9:46 AM
Subject: [CANSLIM] Now Xerox?
Enron, WorldCom- nothing. Xerox off by $6B. (Yes- that's "B" as in boy!)
Kelly
_____ =20
For your protection, this e-mail message has been scanned for viruses.=20
Visit us at http://www.neoris.com/=20
_____ =20
- ------_=_NextPart_001_01C21EBB.31D9B220
Content-Type: text/html;
charset="iso-8859-1"
Content-Transfer-Encoding: quoted-printable
<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN">
<HTML><HEAD>
<META HTTP-EQUIV=3D"Content-Type" CONTENT=3D"text/html; =
charset=3Diso-8859-1">
<META content=3D"MSHTML 5.50.4916.2300" name=3DGENERATOR>
<STYLE></STYLE>
</HEAD>
<BODY bgColor=3D#ffffff>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2>Katherine,</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2></FONT></SPAN> </DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2>Thanks=20
for the article (I haven't read it yet but I'm sure it will provide a =
nice=20
distraction this afternoon). My cohorts and I are discussing which =
company will=20
be the next whale to wash ashore with accounting scandal. Perhaps the =
group=20
would like to predict which company will be next (because Xerox/WorldCom =
are not=20
the last). I'll start:</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2></FONT></SPAN> </DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2>These=20
are just hunches at this point- I'll be researching them later=20
today:</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2>1.=20
Something in the telecom/media sector- AOL Time Warner=20
maybe?</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2>2.=20
Something in the technology sector- Sun or Apple?</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2>3.=20
anything from the Andersen Top 20 Client list</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2></FONT></SPAN> </DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2>I'd=20
enjoy hearing other's predictions. Perhaps we should start a pool- =
people could=20
pick squares- at least somebody would make money!</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2></FONT></SPAN> </DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2>Kelly</FONT></SPAN></DIV>
<BLOCKQUOTE dir=3Dltr style=3D"MARGIN-RIGHT: 0px">
<DIV class=3DOutlookMessageHeader dir=3Dltr align=3Dleft><FONT =
face=3DTahoma=20
size=3D2>-----Original Message-----<BR><B>From:</B> Katherine Malm=20
[mailto:kmalm@earthlink.net]<BR><B>Sent:</B> Friday, June 28, 2002 =
10:30=20
AM<BR><B>To:</B> canslim@lists.xmission.com<BR><B>Subject:</B> Re: =
[CANSLIM]=20
Now Xerox?<BR><BR></FONT></DIV>
<DIV>Here's some background on earnings from Briefing.com for =
those less=20
familiar with EBITDA, etc.</DIV>
<DIV> </DIV>
<DIV>--Katherine</DIV>
<DIV> </DIV>
<DIV>PS Xerox's accounting woes go back *years*.... P-U....</DIV>
<DIV>=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D</DIV>
<DIV> </DIV>
<DIV>
<TABLE cellSpacing=3D0 cellPadding=3D4 width=3D"100%">
<TBODY>
<TR>
<TD class=3Dheader>The Earnings Confidence Problem - Part =
I</TD></TR>
<TR>
<TD><FONT class=3Ddate face=3DVerdana =
size=3D1><STRONG>25-Jun-02 14:18=20
ET</STRONG></FONT></TD></TR>
<TR>
<TD height=3D8><STRONG><FONT face=3DVerdana =
size=3D1></FONT></STRONG></TD></TR>
<TR>
<TD>
<P>[BRIEFING.COM - Robert V. Green] In the midst of the more =
scandalous=20
market problems, the earnings confidence problem is not =
receiving the=20
attention it should. Here is more on the topic. </P>
<H3>The Market Problems</H3>
<P>The current market suffers from the following ailments: </P>
<UL>
<LI>Distrust of management - from excessive comp to outright =
fraud.=20
Tyco is the best example.=20
<LI>Distrust of accounting - Andersen=20
<LI>Distrust of analysts - Blodgett</LI></UL>
<P>These three problems get all the press and attention. </P>
<P>But a deeper problem is afflicting the buy side - a growing =
concern=20
about the validity of earnings reporting. </P>
<H3>The Earnings Problem</H3>
<P>Accounting rules have always been flexible enough to allow =
most=20
companies a far amount of flexibility both in revenue =
recognition and=20
expense recognition. Even when earnings reporting was somewhat=20
standardized, some companies were criticized for how they =
recognized=20
revenue and expense.</P>
<P>But in the last five years, the <I>types</I> of earnings that =
companies have driven Wall Street to focus upon have become=20
questionable. </P>
<P>There are four different basic types of earnings today:</P>
<UL>
<LI>GAAP earnings: Generally Accepted Accounting Principles - =
A=20
standards board that publishes rules on how expenses should be =
booked.=20
Generally, all types of expenses are deducted.=20
<LI>As reported: Earnings excluding extraordinary items (as =
defined by=20
GAAP), changes in accounting charges, charges related to =
discontinued=20
operations (plant closings, etc.)=20
<LI>Operating earnings: As reported earnings but excluding =
"one-time"=20
charges which do not fit the GAAP definition of =
"extraordinary"=20
<LI>Proforma earnings: Loosely defined "as if" analysis. =
Originally=20
designed to provide comparison data for mergers.</LI></UL>
<P><B>GAAP</B> accounting principles are guidelines for =
accountants, not=20
investors. The GAAP standards are guidelines for how a company =
should=20
keep its books, not how the company should report earnings. </P>
<P>For example, a basic principle behind GAAP is that revenue =
must be=20
booked over the time period for which services and product are=20
delivered. If a two year $200,000 contract is pre-paid in cash, =
up=20
front, the entire $200,000 cannot be booked in the quarter in =
which the=20
contract is signed. However, the revenue does not have to be =
booked as=20
$25,000 per quarter for two years. A fair amount of flexibility, =
sometimes negotiated by auditors, is possible for how much of a =
contract=20
can be booked in each quarter. </P>
<P>GAAP covers expenses as well as revenues, of course. </P>
<P><B>As reported</B> earnings are the historical standard for =
earnings.=20
Until the mid-eighties, in fact, there was little debate over =
how=20
earnings should be reported as everyone used "as reported" =
earnings as a=20
standard. For the most part, there was no difference between "as =
reported" earnings and any other methodology because one-time =
charges=20
were not as common. Furthermore, companies did not actively =
seek, as=20
they do today, to have certain expenses classified as =
"one-time." </P>
<P><B>Operating earnings</B> are designed to allow comparisons =
between=20
quarters and years for a company. One time charges in any =
quarter are=20
excluded because these would distort the comparison. Operating =
earnings=20
became important when it became clear that Wall Street would =
completely=20
ignore any "one-time" charges, and focus solely on earnings =
growth. This=20
provided a strong incentive for companies to classify large =
expenses as=20
one-time charges. </P>
<P>An example of one company's aggressive attempt to get charges =
classified as one-time was Excite's 1997 $40 million marketing =
deal with=20
Netscape. Now long forgotten, Excite paid Netscape up-front for =
a=20
four-year deal to be the principal search engine at the Netscape =
web=20
site. Excite tried to classify the entire $40 million payment as =
a=20
one-time charge in a single quarter. By doing so, Excite was =
almost=20
profitable. At Briefing we highlighted this event as an =
indicator of the=20
times. The SEC later forced Excite to restate the payment as a =
four-year=20
expense. But many, many companies were successful in getting =
major=20
expense outlays classified as "one-time" which improved income=20
statements. </P>
<P>The focus on operating expenses led to the development of the =
"EBITDA" concept, which is "Earnings Before Interest, Taxes,=20
Depreciation, and Amortization." The EBITDA concept, which has =
to be=20
calculated from the line items shown on an operating earnings =
report,=20
was designed to show the basic business model of the company, =
without=20
regard to cost-of-capital. If capital were free, then EBITDA =
would be=20
earnings. </P>
<P>The focus on EBITDA has fallen from favor in recent times for =
one=20
single reason: <I>Interest.</I> The interest payments on bonds, =
which=20
are excluded from EBITDA calculations, has ruined many =
debt-ridden. </P>
<P>Only through focusing on EBITDA projections could a company =
like=20
Exodus Communications raise so much debt that their interest =
payments=20
exceeded their gross margin. That won't happen again for =
decades. </P>
<P><B>Pro-forma earnings</B> are very hard to define today. The =
original=20
purpose of pro-forma earnings calculations was to show the =
effects of a=20
merger in a format that allowed a single income statement to =
combine=20
only the operating models of each company, and exclude the =
actual costs=20
of making the merger. </P>
<P>Under the pro-forma for merger guidelines, pro-forma =
calculations=20
could only be used for one year, after which the company should =
start=20
reporting as-reported earnings for the combined entities. </P>
<P>However, companies soon learned that as long as they made a =
new=20
merger each year, they could continue reporting pro-forma =
earnings=20
indefinitely. This "flexibility" in how earnings could be =
reported led=20
to "pro-forma" meanings that were never intended, including =
stock option=20
compensation expenses and R&D "in-progress" write-offs. </P>
<H3>The Erosion of Earnings Confidence</H3>
<P>The now long-departed CFO of Amazon.com, Joy Covey, was the =
unsung=20
hero of bringing pro-forma earnings to the popularity they =
enjoyed. She=20
did so by diverting attention away from standardized earnings =
reports.=20
</P>
<P>Ms. Covey invented the concept of "EBITMA" which was defined =
"EBITDA=20
plus marketing." She was successful in convincing Wall Street =
that=20
<I>marketing costs were equivalent to capital investment,</I> a =
concept=20
which looks ridiculous in retrospect. But in the early days of =
the=20
internet, marketing and brand development was equated with =
capturing=20
"territory" which, presumably, everyone thought could never be =
lost.=20
(Tell that to investors in Excite.) </P>
<P>Nevertheless, Joy Covey was successful in convincing =
investors,=20
particularly convertible bond investors, to focus on the EBITMA =
concept.=20
It was a crucial element in selling the $2 billion in Amazon.com =
bonds=20
that built the company. After all, if you ignore the interest =
payments=20
on the bond, and you consider spending the bond principal on =
marketing=20
as "not an expense," Amazon's income statement would look =
great!. </P>
<P>The problem, of course, is that bond holders don't care about =
earnings statements. They just care about the payments. The jury =
is=20
still out on whether Amazon.com will eventually be able to pay =
the=20
principal on their bonds. (See the Stock Brief of: <A=20
=
href=3D"http://www.briefing.com/scripts/sub/stocks/PowerAnchor.asp?varArt=
icleID=3DSB20010514082806rvgreen">14-May-01=20
Amazon.com's Bond Problem.</A> </P>
<P>After Joy Covey established the principle of EBITMA, internet =
companies began using all types of non-earnings related =
statistics to=20
show growth. Page views, registered users, unique monthly =
visitors are=20
just some of the meaningless examples that became popular. =
(Surely you=20
remember.)</P>
<P>When "non-revenue statistics" becoming drivers of stock =
prices,=20
(around 1998) pro-forma earnings increased in popularity. After =
all, a=20
pro-forma income statement that showed <I>some kind of =
earnings</I>=20
progress looked a lot more "real" than the phony statistics =
being=20
coughed up by internet companies. </P>
<P>But when the bubble collapsed, <I>everyone </I>began =
questioning=20
earnings quality. It didn't happen overnight, and it didn't =
happen all=20
at once. But as a long, slow evolutionary force, earnings =
confidence has=20
eroded, and is still present today. </P>
<H3>The Aftermath</H3>
<P>The evolution of earnings focus over the past 10 years has =
led us to=20
today's situation: a basic lack of confidence in many companies =
income=20
statements. </P>
<P>Amazon.com still reports earnings on a pro-forma basis. In =
their Q1=20
income statement, you can take your choice of earnings: </P>
<UL>
<LI>Pro-forma: $25 million profit=20
<LI>Operating: $2 million profit=20
<LI>Net (as-reported): $(23) million loss</LI></UL>
<P>The earnings format <I>you choose</I> is not relevant, =
frankly. It is=20
far more important to the stock value what format <I>the guy =
next to you=20
chooses.</I></P>
<P>After all, value <I>to you</I> is primarily determined by =
what=20
someone else will pay, not by what you pay. </P>
<H3>Even GE</H3>
<P>Even solid companies like General Electric have come under =
scrutiny=20
because of the extremely complex financial situations. =
Unraveling a GE=20
earnings report has now become a major task. Where GE only had =
to beat=20
earnings estimates by $0.01 each quarter to count on an ever =
increasing=20
stock price, today that is not enough.</P>
<P><I>GE stock is down 50% in the last two years despite having =
only=20
missed one earnings estimate in the last four years and having =
continual=20
year-over-year growth in earnings averaging 15%. </I></P>
<P>This bears repeating: GE, as representative a stock as you =
can get of=20
the overall economy, is down 50% since September 2000. During =
that time=20
period, they have grown earnings at over 11% (year-to-year =
basis) and=20
beat or met earnings estimates every quarter except one. The one =
shortfall was October 2001, the quarter of the Attack on America =
and GE=20
was only one penny short. </P>
<P>Why can't GE get any respect? The only definable long-term =
culprit is=20
a decline in confidence in GE's earnings numbers. During the =
same eight=20
quarter time-period, GE revenue growth rate has been =
consistently=20
falling. From a growth rate of 24% and 20% in 00Q1 and 00Q2, =
growth has=20
steadily fallen, and even was negative for most of 2001. </P>
<P>Flat or declining revenue combined with continuing increasing =
earnings leads to only one conclusion: <I>you can't keep this up =
forever. </I>Eventually, GE will be unable to book the earnings =
number=20
higher than previous years. When (if), that happens, GE stock =
will be=20
further devastated. Until then, the slow erosion of confidence =
causes=20
the stock price to decline.</P>
<P>GE is just one good example of how confidence in earnings =
numbers has=20
been eroding over time since the bubble collapse. Until greater=20
confidence in earnings numbers is established, you can expect =
further=20
difficulties in the market overall. </P>
<P>Standard & Poors is now pushing for a standardized =
calculation=20
for earnings reporting, called Core Earnings. We will have more =
on this=20
concept in Part II of this story, to appear later this week.</P>
<P>Comments may be emailed to the author, Robert V. Green, at <A =
href=3D"mailto:rvgreen@briefing.com">rvgreen@briefing.com</A>=20
<!--(RVG)--></P></TD></TR></TBODY></TABLE></DIV>
<BLOCKQUOTE=20
style=3D"PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; =
BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
<DIV style=3D"FONT: 10pt arial">----- Original Message ----- </DIV>
<DIV=20
style=3D"BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: =
black"><B>From:</B>=20
<A title=3Dwlittle1@peoplepc.com =
href=3D"mailto:wlittle1@peoplepc.com">Winston=20
Little</A> </DIV>
<DIV style=3D"FONT: 10pt arial"><B>To:</B> <A =
title=3Dcanslim@lists.xmission.com=20
=
href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>=
=20
</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Sent:</B> Friday, June 28, 2002 =
9:47=20
AM</DIV>
<DIV style=3D"FONT: 10pt arial"><B>Subject:</B> Re: [CANSLIM] Now =
Xerox?</DIV>
<DIV><BR></DIV>They all used EBITDA.. which Warren Buffett in May =
said is=20
the currency of a<BR>crook ... they all have a smell about=20
them.<BR><BR>----- Original Message -----<BR>From: "Kelly Short" =
<<A=20
=
href=3D"mailto:kelly.short@neoris.com">kelly.short@neoris.com</A>><BR>=
To:=20
<<A=20
=
href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>=
><BR>Sent:=20
Friday, June 28, 2002 9:46 AM<BR>Subject: [CANSLIM] Now=20
Xerox?<BR><BR><BR>Enron, WorldCom- nothing. Xerox off by $6B. (Yes- =
that's=20
"B" as in boy!)<BR><BR>Kelly<BR><BR></BLOCKQUOTE>
<HR>
For your protection, this e-mail message has been scanned for viruses. =
<P>Visit us at <A =
href=3D"http://www.neoris.com/">http://www.neoris.com/</A>=20
<HR>
<P></P></BLOCKQUOTE></BODY></HTML>
- ------_=_NextPart_001_01C21EBB.31D9B220--
- -
- -To subscribe/unsubscribe, email "majordomo@xmission.com"
- -In the email body, write "subscribe canslim" or
- -"unsubscribe canslim". Do not use quotes in your email.
Previous Article (by Author): RE: [CANSLIM] Now Xerox? "David Taggart"
Top of Thread: RE: [CANSLIM] Now Xerox? "David Taggart"
Next in Thread: RE: [CANSLIM] Now Xerox? "David Taggart"
Articles sorted by: [Date]
[Author]
[Subject]