Commentary > The Bottom Line  
Analyst makes the grade
CSFB analyst creates accounting report card; why Pitney Bowes got a B-.
March 15, 2002: 8:10 PM EST
By Adam Lashinsky, CNN/Money Contributing Columnist

SAN FRANCISCO (CNN/Money) - Let's take a break from beating up on Wall Street analysts long enough to praise one, Gibboney Huske of Credit Suisse First Boston. Huske follows 11 companies in the imaging business, and she's initiated an "Accounting Report Card" series in which she'll systematically grade each of them based on the information contained in their 10-K annual reports.

This is a positive development in the fallout over Enron, whose analysts were clueless about a company they were supposedly analyzing. By raising red flags, looking for problems and scrutinizing the details, analysts are doing their jobs. Investors need to know the problems, or potential problems, before they can invest.

graphic graphic
Huske employs a seemingly superficial letter-grade system in her reports, but that's just a way of making a report on accounting readable. Every company starts out with an "A." Deductions of fractions of a letter grade ("A" to "A-") follow bad accounting; Instances of admirably conservative accounting get a bonus.

Already Huske awarded imaging software maker Adobe an "A." Today, she slapped a relatively harsh "B-" on Pitney Bowes (PBI: up $0.19 to $40.68, Research, Estimates), the maker of mailing systems. These letter grades are more helpful than they seem. Huske's formal rating on Pitney is "buy." The accounting "B-" tells investors to be careful.

What's neat about Huske's project is that she's going to evaluate each company on the same exact criteria. For example, she praises Pitney on the value of its segmented information (making it easy to value the company) and its accounting for bad-debt provisions. Her main beef is over Pitney's restructuring charges, namely its use of inventory write-downs.  graphic

"To this day, we believe a major inventory charge that Xerox took in its 1998 restructuring resulted in margin expansion in subsequent quarters," she told clients after scrutinizing Pitney's newly released 10-K. Near-term margin expansion can mask future weakness, which is why Huske is awarding demerits for the write-downs. She also examines new litigation (there isn't any), Pitney's financing business (which she doesn't like), its pension accounting (which is trending in the wrong direction) and its operating cash flow (which is strong).

Bruce Nolop, Pitney's chief financial officer, praises Huske for highlighting Pitney's cash flow and the way it explains its businesses. But he wishes Huske had called to discuss the 10-K so he could have reminded her that the inventory write-down was mandated by government rules and of a few other nits.

All in all, kudos to CSFB for giving investors exactly what they need to make a buy-sell decision on a stock.

Baby boomlet

Good responses followed a query here for baby-oriented stocks that might benefit from the possibility of a surge in births following the tragedy of Sept. 11. An obvious suggestion was Huggies maker Kimberly-Clark (KMB: up $1.61 to $64.85, Research, Estimates), to match the suggestion of Procter & Gamble for its Pampers line. Another good idea was Newell Rubbermaid (NWL: up $0.21 to $32.76, Research, Estimates), whose Little Tikes/Graco group makes "toys, high chairs, infant seats, strollers, play yards, ride-ons and outdoor activity play equipment," according to Newell's annual report. The problem with Newell, like P&G and Kimberly, is that stuff for tots is just a portion of the overall business. Newell's kids stuff accounted for just 12.6 percent of 2001 revenues, or $872 million.

Is Intel's run over?
Making money on Netflix
The return of the tech IPO?

Other suggestions were for a handful of pure-play children's ideas, almost all of which are beaten-down or tiny stocks, which could mean good opportunities if this boomlet hunch is right. Premier toy retailer Toys R Us (TOY: up $0.32 to $19.25, Research, Estimates), in trouble for years, continues to trade for a multiple that's far less than one times sales. Mattel (MAT: up $1.21 to $20.04, Research, Estimates), a company that's still being restructured after a disastrous acquisition, has benefited from a couple of positive analyst comments recently. Hasbro (HAS: up $0.35 to $15.60, Research, Estimates), whose stock doesn't move very much, is another kids' play. The ultimate in pure plays are retailers that cater to young ones. Gymboree (GYMB: down $0.24 to $13.13, Research, Estimates), is one candidate. So is Mother's Work (MWRK: down $0.50 to $15.30, Research, Estimates), whose several stores and brands include the ubiquitous A Pea in the Pod.

Send in a few more, and we can create a Baby Boomlet Index, dated from this week or so. That way we can test the hypothesis in the months following June, which will be nine months after the horrible event.

Send e-mail to Adam at

Sign up to receive The Bottom Line column by e-mail.  graphic