|  | | 2005 News and Press Releases | | |
HEADLINE NEWS:
Accounting Red Flags Hide In Footnotes
Staff Writer – General Financial/ Business News
Securities Mosaic. December 17, 2005
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EXCERPT: Good times can hide a multitude of sins. Double-digit earnings growth over the past 14 quarters has prompted some investors to ignore the main lesson of the go-go years, which is that the nitty-gritty details of corporate finance are still the main story. Richard Bernstein, Merrill Lynch's U.S. strategist, has said investors remain "too sanguine on issues of corporate governance and financial reporting." David Bianco, head U.S. equity strategist at UBS, estimates that what he calls "accounting quality adjustments" will take $10 a share off the 2006 earnings per share of the Standard & Poor's 500 _ the same amount they've cost the stocks in that index for the past four years, he calculates. That leaves earnings per share of $81 across the index, he estimates.
"People often talk about how earnings quality has improved a whole lot," Bianco said. "And it has improved from 2001 and 2002, but that's not saying much." Distrust of corporate accounting has kept stock prices lower than they would be otherwise, he said. "If investors don't believe the earnings quality is good, they're going to put a lower multiple on the earnings, because they don't believe the accounting." Bianco focuses on three main areas of what he calls "earnings quality": One-time charges, employee stock options and pension assumptions. Let's consider them one by one: One-time charges. At some companies, one-time charges have become a way of life. Consider Eastman Kodak Co., which has taken one-time charges for each of the last 14 quarters. By treating the charges as extraordinary events, the company can say its earnings would be ever-so-much stronger without them. But, considering that the charges seem unrelenting, that argument looks wobbly. Bianco crunches 10 years' worth of one-time charges across the S&P 500 to "normalize" them. In 2006, one-time charges will cost the aggregate S&P 500 $5 a share in earnings per share, he estimates. |
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