Go to Jeff Salisbury LWGate Home Page.From: "David Taggart" <dctag@mavericktrading.com>
Subject: RE: [CANSLIM] Now Xerox?
Date: Fri, 28 Jun 2002 09:52:08 -0600
Next Article (by Author): RE: [CANSLIM] Now Xerox? "Kelly Short"
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Well I have a few votes. I vote TYC it is still trading at around 14.
Emotionally I agree with AOL I cant stand them but I doubt they dissapear.
My biggest call is our government. One day all this debt will catch up to
them I have no idea when but we are now an empire so sooner or later we will
crumble like those of the past. It sounds doomy and gloomy but eventually
it will happen.
-----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Kelly Short
Sent: Friday, June 28, 2002 9:48 AM
To: canslim@lists.xmission.com
Subject: RE: [CANSLIM] Now Xerox?
Katherine,
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:
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
I'd enjoy hearing other's predictions. Perhaps we should start a pool-
people could pick squares- at least somebody would make money!
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.
--Katherine
PS Xerox's accounting woes go back *years*.... P-U....
==========
The Earnings Confidence Problem - Part I
25-Jun-02 14:18 ET
[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.
The Market Problems
The current market suffers from the following ailments:
a.. Distrust of management - from excessive comp to outright
fraud. Tyco is the best example.
b.. Distrust of accounting - Andersen
c.. Distrust of analysts - Blodgett
These three problems get all the press and attention.
But a deeper problem is afflicting the buy side - a growing
concern about the validity of earnings reporting.
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.
There are four different basic types of earnings today:
a.. 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.
b.. As reported: Earnings excluding extraordinary items (as
defined by GAAP), changes in accounting charges, charges related to
discontinued operations (plant closings, etc.)
c.. Operating earnings: As reported earnings but excluding
"one-time" charges which do not fit the GAAP definition of "extraordinary"
d.. 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.
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.
GAAP covers expenses as well as revenues, of course.
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."
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.)
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!.
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 Amazon.com's Bond Problem.
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.
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.
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.
Amazon.com still reports earnings on a pro-forma basis. In their
Q1 income statement, you can take your choice of earnings:
a.. Pro-forma: $25 million profit
b.. Operating: $2 million profit
c.. 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.
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%.
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.
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.
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.
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
----- Original Message -----
From: Winston Little
To: canslim@lists.xmission.com
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
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<DIV><SPAN class=3D486294915-28062002><FONT face=3DArial color=3D#0000ff =
size=3D2>Well I=20
have a few votes. I vote TYC it is still trading at around =
14. =20
Emotionally I agree with AOL I cant stand them but I doubt =
they=20
dissapear. My biggest call is our government. One day all =
this debt=20
will catch up to them I have no idea when but we are now an empire so =
sooner or=20
later we will crumble like those of the past. It sounds doomy and =
gloomy=20
but eventually it will happen.</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>=20
owner-canslim@lists.xmission.com=20
[mailto:owner-canslim@lists.xmission.com]<B>On Behalf Of </B>Kelly=20
Short<BR><B>Sent:</B> Friday, June 28, 2002 9:48 AM<BR><B>To:</B>=20
canslim@lists.xmission.com<BR><B>Subject:</B> RE: [CANSLIM] Now=20
Xerox?<BR><BR></FONT></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial =
color=3D#0000ff=20
size=3D2>Katherine,</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial =
color=3D#0000ff=20
size=3D2></FONT></SPAN> </DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial =
color=3D#0000ff=20
size=3D2>Thanks for the article (I haven't read it yet but I'm sure it =
will=20
provide a nice distraction this afternoon). My cohorts and I are =
discussing=20
which company will be the next whale to wash ashore with accounting =
scandal.=20
Perhaps the group would like to predict which company will be next =
(because=20
Xerox/WorldCom are not the last). I'll start:</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial =
color=3D#0000ff=20
size=3D2></FONT></SPAN> </DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial =
color=3D#0000ff=20
size=3D2>These 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=20
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=20
could pick squares- at least somebody would make =
money!</FONT></SPAN></DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial =
color=3D#0000ff=20
size=3D2></FONT></SPAN> </DIV>
<DIV><SPAN class=3D349173315-28062002><FONT face=3DArial =
color=3D#0000ff=20
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=20
less 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=20
scandalous market problems, the earnings confidence problem is =
not=20
receiving the 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 =
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=20
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=20
booked. Generally, all types of expenses are deducted.=20
<LI>As reported: Earnings excluding extraordinary items (as =
defined=20
by GAAP), changes in accounting charges, charges related to=20
discontinued operations (plant closings, etc.)=20
<LI>Operating earnings: As reported earnings but excluding=20
"one-time" charges which do not fit the GAAP definition of=20
"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,=20
not investors. The GAAP standards are guidelines for how a =
company=20
should keep its books, not how the company should report =
earnings.=20
</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 =
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=20
the contract is signed. However, the revenue does not have to =
be=20
booked as $25,000 per quarter for two years. A fair amount of=20
flexibility, sometimes negotiated by auditors, is possible for =
how=20
much of a contract 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. Until the mid-eighties, in fact, there was little =
debate=20
over how earnings should be reported as everyone used "as =
reported"=20
earnings as a standard. For the most part, there was no =
difference=20
between "as reported" earnings and any other methodology =
because=20
one-time charges were not as common. Furthermore, companies =
did not=20
actively seek, as they do today, to have certain expenses =
classified=20
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 became important when it became clear that Wall =
Street would=20
completely ignore any "one-time" charges, and focus solely on =
earnings=20
growth. This provided a strong incentive for companies to =
classify=20
large expenses as one-time charges. </P>
<P>An example of one company's aggressive attempt to get =
charges=20
classified as one-time was Excite's 1997 $40 million marketing =
deal=20
with 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=20
the times. The SEC later forced Excite to restate the payment =
as a=20
four-year expense. But many, many companies were successful in =
getting=20
major expense outlays classified as "one-time" which improved =
income=20
statements. </P>
<P>The focus on operating expenses led to the development of =
the=20
"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.=20
</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=20
original purpose of pro-forma earnings calculations was to =
show the=20
effects of a merger in a format that allowed a single income =
statement=20
to combine only the operating models of each company, and =
exclude the=20
actual costs 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=20
option compensation expenses and R&D "in-progress" =
write-offs.=20
</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.=20
She did so by diverting attention away from standardized =
earnings=20
reports. </P>
<P>Ms. Covey invented the concept of "EBITMA" which was =
defined=20
"EBITDA plus marketing." She was successful in convincing Wall =
Street=20
that <I>marketing costs were equivalent to capital =
investment,</I> a=20
concept which looks ridiculous in retrospect. But in the early =
days of=20
the internet, marketing and brand development was equated with =
capturing "territory" which, presumably, everyone thought =
could never=20
be lost. (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=20
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=20
interest payments on the bond, and you consider spending the =
bond=20
principal on marketing as "not an expense," Amazon's income =
statement=20
would look great!. </P>
<P>The problem, of course, is that bond holders don't care =
about=20
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=20
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=20
has 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=20
to today's situation: a basic lack of confidence in many =
companies=20
income 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=20
is far more important to the stock value what format <I>the =
guy next=20
to you 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=20
increasing 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 year-over-year growth in earnings averaging 15%. =
</I></P>
<P>This bears repeating: GE, as representative a stock as you =
can get=20
of the overall economy, is down 50% since September 2000. =
During that=20
time period, they have grown earnings at over 11% =
(year-to-year basis)=20
and beat or met earnings estimates every quarter except one. =
The one=20
shortfall was October 2001, the quarter of the Attack on =
America and=20
GE was only one penny short. </P>
<P>Why can't GE get any respect? The only definable long-term =
culprit=20
is a decline in confidence in GE's earnings numbers. During =
the same=20
eight quarter time-period, GE revenue growth rate has been=20
consistently falling. From a growth rate of 24% and 20% in =
00Q1 and=20
00Q2, growth has steadily fallen, and even was negative for =
most of=20
2001. </P>
<P>Flat or declining revenue combined with continuing =
increasing=20
earnings leads to only one conclusion: <I>you can't keep this =
up=20
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=20
has 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=20
this 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=20
href=3D"mailto:rvgreen@briefing.com">rvgreen@briefing.com</A> =
<!--(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=20
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=20
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.=20
<P>Visit us at <A =
href=3D"http://www.neoris.com/">http://www.neoris.com/</A>=20
<HR>
<P></P></BLOCKQUOTE></BLOCKQUOTE></BODY></HTML>
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