From: owner-canslim-digest@lists.xmission.com (canslim-digest) To: canslim-digest@lists.xmission.com Subject: canslim-digest V2 #2544 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 2544 In this issue: Re: [CANSLIM] Where do I put my cash? Re: [CANSLIM] Date: Fri, 28 Jun 2002 07:48:05 -0700 Re: [CANSLIM] Now Xerox? ---------------------------------------------------------------------- Date: Fri, 28 Jun 2002 19:40:16 -0400 From: "Bert Pesak" Subject: Re: [CANSLIM] Where do I put my cash? This is a multi-part message in MIME format. - ------=_NextPart_000_001B_01C21EDB.A117D540 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable Patrick, Schwab also has an Ultrashort Bond fund in 2 flavors SWYPX $2500 min in = regular account & $1000 in IRA YTD 1.27% return. SWYSX $50,000 Min in = regular & IRA accounts 1.33% YTD. The idea is that within a year or less = most of the holding will turn over so you shouldn't get hit to hard if = you are willing to wait. If interest rates start moving up you may = loose a few pennies, the price today is $9.81 and the 52 wk high is = $10.03. If you are a Schwab customer check them out on their web site = and talk to one of their broker/advisors. Bert ----- Original Message -----=20 From: Patrick Keeley=20 To: canslim@lists.xmission.com=20 Sent: Friday, June 28, 2002 6:52 PM Subject: Re: [CANSLIM] Where do I put my cash? Katherine, Thanks for the advice. That's what I did. I switched it from my money = market at 1.2% to SWVXX at 1.6 %. A nearly 50% increase. Not much = difference however at this low interest rate. Kris suggested ING Direct and that looks great. 3% return right now. = However my pension fund has to remain at Schwab until I retire.=20 Pat ----- Original Message -----=20 From: Katherine Malm=20 To: canslim@lists.xmission.com=20 Sent: Thursday, June 27, 2002 7:18 AM Subject: Re: [CANSLIM] Where do I put my cash? Hi Pat, Give Schwab a call and ask them this question, they're good about = giving you options. Also consider their high yield money market fund = (still not a great return, but better than 0%): SWVXX. I believe the = minimum to open is $25K, lower if the money is in an IRA account. Katherine ----- Original Message -----=20 From: Patrick Keeley=20 To: canslim@lists.xmission.com=20 Sent: Thursday, June 27, 2002 6:53 AM Subject: [CANSLIM] Where do I put my cash? About a year and a half ago the company I work for allowed us to = transfer our pension savings to a brokerage (Schwab) account? I want to = get into individual stock investing and decided to be a CANSLIMer. = However the M has kept me out of the market the entire time. My question now is where is a good place to accumulate interest? = The money market fund where my cash is now is almost worthless. I certainly enjoy the wealth of expertise on this board and can't = wait until the stock market turns around so I can invest. Thanks in advance for your help. Pat - ------=_NextPart_000_001B_01C21EDB.A117D540 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable
Patrick,
 
Schwab also has an Ultrashort Bond fund in 2=20 flavors SWYPX $2500 min in regular account & $1000 in IRA YTD = 1.27%=20 return. SWYSX $50,000 Min in regular & IRA accounts 1.33% YTD. The = idea is=20 that within a year or less most of the holding will turn over so you = shouldn't=20 get hit to hard if you are willing to wait.  If interest rates = start moving=20 up you may loose a few pennies, the price today is $9.81 and the 52 wk = high is=20 $10.03.  If you are a Schwab customer check them out on their web = site and=20 talk to one of their broker/advisors.
 
Bert
----- Original Message -----
From:=20 Patrick Keeley
To: canslim@lists.xmission.com=
Sent: Friday, June 28, 2002 = 6:52 PM
Subject: Re: [CANSLIM] Where do = I put my=20 cash?

Katherine,
 
Thanks for the advice. That's what I did. I = switched=20 it from my money market at 1.2% to SWVXX at 1.6 %. A nearly 50% = increase. Not=20 much difference however at this low interest rate.
 
Kris suggested ING Direct and that looks = great. 3%=20 return right now. However my pension fund has to remain at Schwab = until I=20 retire.
 
Pat
----- Original Message -----
From:=20 Katherine=20 Malm
Sent: Thursday, June 27, 2002 = 7:18=20 AM
Subject: Re: [CANSLIM] Where = do I put=20 my cash?

Hi Pat,
 
Give Schwab a call and ask them this question, they're good = about=20 giving you options. Also consider their high yield money market fund = (still=20 not a great return, but better than 0%): SWVXX. I believe the = minimum to=20 open is $25K, lower if the money is in an IRA account.
 
Katherine
----- Original Message ----- =
From:=20 Patrick Keeley =
To: canslim@lists.xmission.com= =20
Sent: Thursday, June 27, = 2002 6:53=20 AM
Subject: [CANSLIM] Where do = I put my=20 cash?

About = a year and a=20 half ago the company I work for allowed us to transfer our = pension=20 savings to a brokerage (Schwab) account? I want to get into=20 individual stock investing and decided to be a CANSLIMer. However = the M=20 has kept me out of the market the entire time.
 
My = question now is=20 where is a good place to accumulate interest? The money market = fund where=20 my cash is now is almost worthless.
 
I = certainly enjoy=20 the wealth of expertise on this board and can't wait until the = stock=20 market turns around so I can invest.
 
Thanks in advance=20 for your help.
 
Pat
- ------=_NextPart_000_001B_01C21EDB.A117D540-- - - - -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 21:18:20 -0400 From: "Tom Worley" Subject: Re: [CANSLIM] Date: Fri, 28 Jun 2002 07:48:05 -0700 This is a multi-part message in MIME format. - ------=_NextPart_000_006E_01C21EE9.5410DE00 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable sorry, I don't even have enough time to post here, but I don't post = normally in any case on my stocks, as I deviate personally too far from = CANSLIM rules for most. two days doesn't make a trend, but my piece of the small cap growth = market has had two nice days here. Real money accounts up over 10%, VR = Fund up over 5%. A few more days like this and I may start believing = small cap growth is back in favor.=20 at least it's not such big news when a little guy plays with his = accounting principles. - ----- Original Message -----=20 From: zillagirl=20 To: canslim@lists.xmission.com=20 Sent: Friday, June 28, 2002 10:46 AM Subject: [CANSLIM] Date: Fri, 28 Jun 2002 07:48:05 -0700 tom-I am trading a few small caps right now also. Do you go to the = boards at clearstation. Some pretty good advice sometime and a trader = called dynodino(who was written up in IBD a couple of weeks ago,) trades = small and has had good success. Please let me know if you start posting = on their boards-will follow. - ------=_NextPart_000_006E_01C21EE9.5410DE00 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable
sorry, I don't even have enough time to post = here, but I=20 don't post normally in any case on my stocks, as I deviate personally = too far=20 from CANSLIM rules for most.
 
two days doesn't make a trend, but my piece of = the small=20 cap growth market has had two nice days here. Real money accounts up = over 10%,=20 VR Fund up over 5%. A few more days like this and I may start believing = small=20 cap growth is back in favor.
 
at least it's not such big news when a little = guy plays=20 with his accounting principles.
 
----- Original Message -----=20
From: zillagirl
Sent: Friday, June 28, 2002 10:46 AM
Subject: [CANSLIM] Date: Fri, 28 Jun 2002 07:48:05 = - -0700

tom-I am trading a few small caps right = now=20 also.  Do you go to the boards at clearstation.  Some pretty = good=20 advice sometime and a trader called dynodino(who was written up in IBD a = couple=20 of weeks ago,) trades small and has had good success. Please let me know = if you=20 start posting on their boards-will follow.
- ------=_NextPart_000_006E_01C21EE9.5410DE00-- - - - -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 21:42:11 -0400 From: "Tom Worley" Subject: Re: [CANSLIM] Now Xerox? This is a multi-part message in MIME format. - ------=_NextPart_000_0110_01C21EEC.A8B5D840 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable good point, Winston, and one I had not considered. Investing thru a = mutual fund, and accepting a long term, cost averaging approach, does = insulate the individual investor from much of the fear. I see this at = work, where many only invest thru their 401K. In the past several weeks, = a number have been asking me what they should do with their 401K. First = time in two years I have been seeing that. - ----- Original Message -----=20 From: Winston Little=20 To: canslim@lists.xmission.com=20 Sent: Friday, June 28, 2002 4:27 PM Subject: Re: [CANSLIM] Now Xerox? "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_0110_01C21EEC.A8B5D840 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable
good point, Winston, and one I had not = considered.=20 Investing thru a mutual fund, and accepting a long term, cost averaging=20 approach, does insulate the individual investor from much of the = fear.  I=20 see this at work, where many only invest thru their 401K. In the past = several=20 weeks, a number have been asking me what they should do with their 401K. = First=20 time in two years I have been seeing that.
 
----- Original Message -----=20
From: Winston=20 Little
Sent: Friday, June 28, 2002 4:27 PM
Subject: Re: [CANSLIM] Now Xerox?

"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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