Go to Jeff Salisbury LWGate Home Page.From: "Robert Gammon" <rgammon51@yahoo.com>
Subject: RE: [CANSLIM] Now Xerox?
Date: Fri, 28 Jun 2002 11:12:55 -0500 (CDT)
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We tend to view the Worldcom/Xerox issues as black and white here in hindsight. I believe that knowledgeable, reasonable, honest people who are in the thick of the near real time information flow have to make thousands of decisions on which account bucket this expense belongs in. We are really dealing with issues that have thousands of shades of gray, not black and white, yes/no decisions. What appears to be happening is that a new set of individuals are now able to make themselves heard in the corporations, individuals who have different opinions, perhaps opinions that are a bit more conservative in allocation of expenses to accounting buckets. It is also useful to recall that accounting at Fortune 1000 companies happens in MANY rollup levels. By the time the bottom level expenses are rolled up to the top level, the outside accountants may have NO idea WHAT the company ACTUALLY did with the funds. TYC has had such INTENSE scrutiny of its books, it is NOT a candidate in my mind for future accounting explosions. I suspect that most of the action will focus on the companies that were the darlings of the 1999/2000 market boom. Even so, we are likely to find explosions emanating from unexpected areas of the economy as more conservative accounting and legal people take ofer the helm at Fortune 1000 cos. Robert On Fri, 28 Jun 2002 09:52:08 -0600, David Taggart wrote: >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 > > > >---------------------------------------------------------------- - ------------ > For your protection, this e-mail message has been scanned for viruses. > Visit us at http://www.neoris.com/ > > >---------------------------------------------------------------- - ------------ > > > - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". Do not use quotes in your email.
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