NEW YORK (CNN/Money) - The perception on Wall Street appears to be that companies, chastened by all the scandals that broke last year, are finally playing straight with investors. But what's actually occurring is another matter entirely.
Speaking in London on Wednesday, Goldman Sachs U.S. strategist Abby Joseph Cohen gave reporters something like the party line when she said that S&P 500 third-quarter results are the cleanest we've seen in a decade.
"There is a change in tone in corporate suites throughout the United States," said Cohen, according to Reuters, and concluded that "[c]orporate balance sheets are not a concern."
Cohen (who wasn't available for comment for this column) said that, according to current estimates, writeoffs would come to just 16.7 percent of earnings per share -- a huge improvement over 2002 when companies had write-offs galore that they asked investors not to pay attention because they didn't reflect their "operating" results.
"I would definitely agree that numbers are cleaner than they've been in several years," said Howard Silverblatt, editor of quantitative services at Standard & Poor's. "But a decade? I don't know."
In fact, it looks like after a couple of quarters sobering up in the drunk tank, companies are back to their old tricks.
Consider the earnings release that Amazon put out Tuesday night. First off, the way the company leads by talking about operating cash flow, free cash flow and sales, you get the sense it doesn't want you to think about earnings at all. Then it tells you what its operating income was, and only then, income under generally accepted accounting principles (or GAAP) -- the earnings that it is required to report when it files with the Securities and Exchange Commission.
Finally, it gives you "pro forma" earnings -- the results that Wall Street analysts use. They came in at 11 cents a share versus GAAP earnings of just 4 cents a share. These numbers don't seem particularly "clean."
Nor do earnings numbers in general, when judged by historical standards. According to Standard & Poor's estimates, S&P 500 pro forma earnings will come in around 20 percent higher than earnings under GAAP. Over the past 15 years the median difference between quarterly GAAP and pro forma earnings has been 8.5 percent. Silverblatt points out that once you add in the effects of after-the-fact writeoffs, the difference would doubtless be larger. But it probably wouldn't be 20 percent.
 |
YOUR E-MAIL ALERTS
|
Follow the news that matters to you. Create your own alert to be notified on topics you're interested in.
Or, visit Popular Alerts for suggestions.
|
|
|
And before the mid 1980s there was very little difference between GAAP and pro forma earnings. It appears that when companies used to write off "extraordinary items" they were truly extraordinary -- like tornados -- as opposed to commonly recurring unfortunate things, like firing people. How quaint is that?
In a note to investors Wednesday, Merrill Lynch chief U.S. strategist Rich Bernstein suggested that the thing to do is disallow the use of pro forma altogether.
"We still question how the SEC can allow such non-GAAP reporting practices to continue given that the entire purpose of GAAP reporting is to increase corporate transparency," Bernstein wrote.
|
.
