From: owner-canslim-digest@lists.xmission.com (canslim-digest) To: canslim-digest@lists.xmission.com Subject: canslim-digest V2 #2540 Reply-To: canslim Sender: owner-canslim-digest@lists.xmission.com Errors-To: owner-canslim-digest@lists.xmission.com Precedence: bulk Content-Transfer-Encoding: quoted-printable X-No-Archive: yes canslim-digest Friday, June 28 2002 Volume 02 : Number 2540 In this issue: Re: [CANSLIM] Next ExplodingCompany [CANSLIM] Beware of quarter-end rallies! [CANSLIM] Too much information in IBD Re: [CANSLIM] Now Xerox? Re: [CANSLIM] Now Xerox?Fear? Re: [CANSLIM] Now Xerox? ---------------------------------------------------------------------- Date: Fri, 28 Jun 2002 14:21:03 EDT From: Chazmoore@aol.com Subject: Re: [CANSLIM] Next ExplodingCompany - --part1_8e.2a2a0599.2a4e030f_boundary Content-Type: text/plain; charset="US-ASCII" Content-Transfer-Encoding: 7bit Kelly: That was a lot of work. Thank you for sharing. Charley - --part1_8e.2a2a0599.2a4e030f_boundary Content-Type: text/html; charset="US-ASCII" Content-Transfer-Encoding: 7bit Kelly: That was a lot of work. Thank you for sharing. Charley - --part1_8e.2a2a0599.2a4e030f_boundary-- - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". Do not use quotes in your email. ------------------------------ Date: Fri, 28 Jun 2002 14:17:18 -0500 From: "Fred Richards" Subject: [CANSLIM] Beware of quarter-end rallies! This is a multi-part message in MIME format. - ------=_NextPart_000_0006_01C21EAE.82C84160 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: 7bit The stock market this week has attempted to rally on the backs of the wise guys, the Plunge Protection Team and the mark-up wizards of the major funds. If it is for real, why is the number of "A" rated stocks in the Accumulate/Distribution schedule dropping? We have updated the charts and you may view them at: http://www.adrich.com/SI/Info/A's.htm - ---------------------------------------------------------------------------- - ---- Fred Richards Corruptisima republica plurimae leges. [The more corrupt a republic, the more laws.] - - Tacitus, Annuals III 27 www.adrich.com - ------=_NextPart_000_0006_01C21EAE.82C84160 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable
The = stock market=20 this week has attempted to rally on the backs of the wise guys, the = Plunge=20 Protection Team and the mark-up wizards of the major = funds.
 
If it = is for real,=20 why is the number of "A" rated stocks in the Accumulate/Distribution = schedule=20 dropping?
 
We = have updated the=20 charts and you may view them at:
 
http://www.adrich.com/SI/I= nfo/A's.htm
 
Fred Richards
 
Corruptisima republica plurimae = leges.  [The=20 more corrupt a republic, the more laws.]  - - Tacitus, Annuals III=20 27
 
www.adrich.com
 
- ------=_NextPart_000_0006_01C21EAE.82C84160-- - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". Do not use quotes in your email. ------------------------------ Date: Fri, 28 Jun 2002 14:41:57 -0500 From: "Kelly Short" Subject: [CANSLIM] Too much information in IBD This is a multi-part message in MIME format. - ------_=_NextPart_001_01C21EDB.DD514E40 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable I recently started reviewing the "Screen of the Day" on the IBD website = everyday. It's a lot of information to digest and certainly there are = too many companies to perform a detailed analysis of each one on each = list. I welcome any comments on how you personally find this, and other = lists, useful and how you prioritize the myriad information found on the = IBD site/print edition. =20 Kelly - ------_=_NextPart_001_01C21EDB.DD514E40 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable
I=20 recently started reviewing the "Screen of the Day" on the IBD website = everyday.=20 It's a lot of information to digest and certainly there are too many = companies=20 to perform a detailed analysis of each one on each list. I welcome any = comments=20 on how you personally find this, and other lists, useful and how you = prioritize=20 the myriad information found on the IBD site/print = edition.
 
Kelly
- ------_=_NextPart_001_01C21EDB.DD514E40-- - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". Do not use quotes in your email. ------------------------------ Date: Fri, 28 Jun 2002 15:36:31 -0400 From: Sam Funchess Subject: Re: [CANSLIM] Now Xerox? Canslim Members,

Been a while since my last post.

With that being said, I think the "scandal's" are very good for the long term benefit of CANSLIMers and the market.  Its been a while since I've read HTMMIS so I can't quote chapters or such, but I recall him talking a lot about the fear factor.  We have not had the "Fear" in the market yet.  I think that there is no sustainable upside to the market until the fear has hit the market.

Just my thoughts.

Sam

Katherine Malm wrote:

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: 
  • Distrust of management - from excessive comp to outright fraud. Tyco is the best example. 
  • Distrust of accounting - Andersen 
  • 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:

  • 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. 
  • As reported: Earnings excluding extraordinary items (as defined by GAAP), changes in accounting charges, charges related to discontinued operations (plant closings, etc.) 
  • Operating earnings: As reported earnings but excluding "one-time" charges which do not fit the GAAP definition of "extraordinary" 
  • 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: 

  • Pro-forma: $25 million profit 
  • Operating: $2 million profit 
  • 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 -----
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
 

- - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". Do not use quotes in your email. ------------------------------ Date: Fri, 28 Jun 2002 13:24:43 -0700 From: "Bill Triffet" Subject: Re: [CANSLIM] Now Xerox?Fear? Sam, Right you are. I see in today's IBD, the Puts vs. Calls ratio (one of IBD's "fear" indicators) has dropped back below .8 after having quickly popped to 1.2 last week. I guess fear is short lived - even in this market. - -Bill - ----- Original Message ----- From: "Sam Funchess" To: Sent: Friday, June 28, 2002 12:36 PM Subject: Re: [CANSLIM] Now Xerox? > Canslim Members, > Been a while since my last post. > > With that being said, I think the "scandal's" are very good for the long term benefit of CANSLIMers and the market. Its been a while since I've read HTMMIS so I can't quote chapters or such, but I recall him talking a lot about the fear factor. We have not had the "Fear" in the market yet. I think that there is no sustainable upside to the market until the fear has hit the market. > > Just my thoughts. > > Sam > - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". Do not use quotes in your email. ------------------------------ Date: Fri, 28 Jun 2002 16:27:41 -0400 From: "Winston Little" Subject: Re: [CANSLIM] Now Xerox? This is a multi-part message in MIME format. - ------=_NextPart_000_000F_01C21EC0.B9D6A040 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable "The market always climbs a wall of worry" is an old familiar saying. In 1965 only 10% of the population invested in the market.(Just over 50% = of trading volume was by individuals) The participation grew to 60% of the population in April 2002 (either = directly or through retirement/mutual funds). The volume due to = individuals fell to under 20%.=20 Fund managers may not have the same fear as an individual (it is not = HIS/HER money, but YOURS!) The larger population of individuals will also contain a larger number = of people who know no fear. Thus I wonder if the exhibition of fear will be as large or severe as in = the past.=20 ----- Original Message -----=20 From: Sam Funchess=20 To: canslim@lists.xmission.com=20 Sent: Friday, June 28, 2002 3:36 PM Subject: Re: [CANSLIM] Now Xerox? Canslim Members,=20 Been a while since my last post.=20 With that being said, I think the "scandal's" are very good for the = long term benefit of CANSLIMers and the market. Its been a while since = I've read HTMMIS so I can't quote chapters or such, but I recall him = talking a lot about the fear factor. We have not had the "Fear" in the = market yet. I think that there is no sustainable upside to the market = until the fear has hit the market.=20 Just my thoughts.=20 Sam=20 Katherine Malm wrote:=20 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....=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D =20 The Earnings Confidence Problem - Part I=20 25-Jun-02 14:18 ET=20 =20 [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 a.. Distrust of management - from excessive comp to outright = fraud. Tyco is the best example. =20 b.. Distrust of accounting - Andersen =20 c.. Distrust of analysts - Blodgett=20 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.=20 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:=20 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. =20 b.. As reported: Earnings excluding extraordinary items (as = defined by GAAP), changes in accounting charges, charges related to = discontinued operations (plant closings, etc.) =20 c.. Operating earnings: As reported earnings but excluding = "one-time" charges which do not fit the GAAP definition of = "extraordinary" =20 d.. Proforma earnings: Loosely defined "as if" analysis. = Originally designed to provide comparison data for mergers.=20 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 = 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.)=20 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 a.. Pro-forma: $25 million profit =20 b.. Operating: $2 million profit =20 c.. Net (as-reported): $(23) million loss=20 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.=20 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.=20 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.=20 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.=20 Comments may be emailed to the author, Robert V. Green, at = rvgreen@briefing.com =20 ----- 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=20 crook ... they all have a smell about them.=20 ----- Original Message -----=20 From: "Kelly Short" =20 To: =20 Sent: Friday, June 28, 2002 9:46 AM=20 Subject: [CANSLIM] Now Xerox?=20 =20 Enron, WorldCom- nothing. Xerox off by $6B. (Yes- that's "B" as in = boy!)=20 Kelly=20 =20 - -To subscribe/unsubscribe, email "majordomo@xmission.com" -In the = email body, write "subscribe canslim" or -"unsubscribe canslim". Do not = use quotes in your email.=20 - ------=_NextPart_000_000F_01C21EC0.B9D6A040 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable
"The market always climbs a wall of worry" is an old = familiar=20 saying.
 
In 1965 only 10% of the population invested in the=20 market.(Just over 50% of trading volume was by = individuals)
The participation grew to 60% of the population = in April=20 2002 (either directly or through retirement/mutual funds). The volume = due to=20 individuals fell to under 20%. 
 
Fund managers may not have the same fear as an = individual (it=20 is not HIS/HER money, but YOURS!)
The larger population of individuals will also = contain a=20 larger number of people who know no fear.
Thus I wonder if the exhibition of fear will be as = large or=20 severe as in the past. 
 
 
----- Original Message -----
From:=20 Sam = Funchess
Sent: Friday, June 28, 2002 = 3:36 PM
Subject: Re: [CANSLIM] Now = Xerox?

Canslim Members,=20

Been a while since my last post.=20

With that being said, I think the "scandal's" are very good for the = long=20 term benefit of CANSLIMers and the market.  Its been a while = since I've=20 read HTMMIS so I can't quote chapters or such, but I recall him = talking a lot=20 about the fear factor.  We have not had the "Fear" in the market=20 yet.  I think that there is no sustainable upside to the market = until the=20 fear has hit the market.=20

Just my thoughts.

Sam=20

Katherine Malm wrote:=20

Here's some background on earnings from Briefing.com for those less = familiar=20 with EBITDA, etc. --Katherine PS Xerox's accounting woes = go back=20 *years*.... P-U....=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D  =20
The Earnings Confidence Problem - Part = I
25-Jun-02 14:18=20 ET
[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. =20

The Market Problems

The current market suffers from = the=20 following ailments: =20
  • Distrust of management - from excessive comp to outright = fraud.=20 Tyco is the best example. =20
  • Distrust of accounting - Andersen =20
  • Distrust of analysts - Blodgett
These three = problems get=20 all the press and attention. =20

But a deeper problem is afflicting the buy side - a growing = concern=20 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=20 both in revenue recognition and expense recognition. Even when = earnings reporting was somewhat standardized, some companies = were=20 criticized for how they recognized revenue and expense.=20

But in the last five years, the types of earnings = that=20 companies have driven Wall Street to focus upon have become=20 questionable. =20

There are four different basic types of earnings today:=20

  • 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.  =
  • 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
  • Operating earnings: As reported earnings but excluding=20 "one-time" charges which do not fit the GAAP definition of=20 "extraordinary" =20
  • Proforma earnings: Loosely defined "as if" analysis. = Originally=20 designed to provide comparison data for mergers. =
GAAP=20 accounting principles are guidelines for accountants, not = investors.=20 The GAAP standards are guidelines for how a company should = keep its=20 books, not how the company should report earnings. =20

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. =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=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." =20

Operating earnings 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. =20

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. =20

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. =20

The focus on EBITDA has fallen from favor in recent times = for one=20 single reason: Interest. The interest payments on = bonds, which=20 are excluded from EBITDA calculations, has ruined many=20 debt-ridden. =20

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=20 decades. =20

Pro-forma earnings 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. =20

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. =20

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"=20 write-offs. =20

The Erosion of Earnings Confidence

The now = long-departed CFO=20 of Amazon.com, Joy Covey, was the unsung hero of bringing = pro-forma=20 earnings to the popularity they enjoyed. She did so by = diverting=20 attention away from standardized earnings reports. =20

Ms. Covey invented the concept of "EBITMA" which was = defined=20 "EBITDA plus marketing." She was successful in convincing Wall = Street=20 that marketing costs were equivalent to capital = investment, 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.) =20

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!. =20

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: 14-May-01=20 Amazon.com's Bond Problem.=20

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.)=20

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 some kind of = earnings=20 progress looked a lot more "real" than the phony statistics = being=20 coughed up by internet companies. =20

But when the bubble collapsed, everyone 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. =20

The Aftermath

The evolution of earnings focus over the = past 10=20 years has led us to today's situation: a basic lack of = confidence in=20 many companies income statements. =20

Amazon.com still reports earnings on a pro-forma basis. In = their Q1=20 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=20 format you choose is not relevant, frankly. It is far = more=20 important to the stock value what format the guy next to = you=20 chooses.=20

After all, value to you is primarily determined by = what=20 someone else will pay, not by what you pay. =20

Even GE

Even solid companies like General Electric = have come=20 under scrutiny because of the extremely complex financial = situations.=20 Unraveling a GE earnings report has now become a major task. = Where GE=20 only had to beat earnings estimates by $0.01 each quarter to = count on=20 an ever increasing stock price, today that is not enough.=20

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%. =20

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. =20

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. =20

Flat or declining revenue combined with continuing = increasing=20 earnings leads to only one conclusion: you can't keep this = up=20 forever. 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.=20

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. =20

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.=20

Comments may be emailed to the author, Robert V. Green, at = rvgreen@briefing.com=

----- Original Message -----
From:=20 Winston=20 Little
To: canslim@lists.xmission.com=
Sent: Friday, June 28, 2002 = 9:47=20 AM
Subject: Re: [CANSLIM] Now=20 Xerox?
 They all used EBITDA.. which Warren Buffett in = May said=20 is the currency of a
crook ... they all have a smell about = them.=20

----- Original Message -----
From: "Kelly Short" <kelly.short@neoris.com>=20
To: <canslim@lists.xmission.com= >=20
Sent: Friday, June 28, 2002 9:46 AM
Subject: [CANSLIM] Now = Xerox?=20
 =20

Enron, WorldCom- nothing. Xerox off by $6B. (Yes- that's "B" as = in=20 boy!)=20

Kelly
 

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