Earnings Quality Dips at Pricey Fifth Third
By Herb Greenberg
01/16/2003 14:26
Thursday thwack:
Who's on first? On Wednesday Fifth Third Bancorp FITB reported fourth-quarter earnings of 72 cents a share, meeting analysts' estimates and helping the company boast more than four quarters of no disappointments.
"However," as one Fifth Third short reports, "the earnings, after adjusting for a nonrecurring gain, were not quite as good as the Street was expecting." Details, details!
According to our short source, while reported earnings rose 11% for the quarter, the growth "was enhanced" by one full percentage point due to repurchase of 4.5 million shares in the quarter. "It has become clear that FITB is increasingly relying on share buybacks as a tool to enhance per-share earnings growth," the short says.
But more important is earnings quality, including the role of the sale of an company's insurance sub, which added 3 cents to the bottom line. "In other words," the short says, "without the proceeds from the sale of the insurance sub, earnings in the quarter would have been 69 cents per share, not the 72 cents per share reported by the company." And a far cry from meeting analysts' estimates.
Also, mortgage banking revenue zoomed in the quarter, and even the company said the rise isn't sustainable.
Finally, the company's internal controls and acquisition-related accounting continues to be under regulatory review. Management said that an internal review was expected to be completed during the second quarter of 2003. "This, to our minds," says our born skeptic, "is somewhat surprising given that management had previously indicated that it was '97% complete,' with its review of the transactions in question."
He also notes that the company says a review by the Federal Reserve Bank of Cleveland and the State of Ohio remains ongoing. "Importantly," he says, "the company now admits that it expects some form of regulatory action to be taken as the result of these inquiries, although further clarity from management was not forthcoming on this issue. Management does, however, believe that this inquiry will be completed during the current quarter. Finally, management indicated that the SEC inquiry remains ongoing, but did not have further comment."
And for that this company is richly valued vis-a-vis its competitors.
Pre-Paid pratfalls : Surprise, surprise! On Wednesday Pre-Paid Legal PPD announced it was going deeper into debt to buy back more of its own stock. Good money chasing bad? Time will tell!
Speaking of buybacks : It's interesting how a quarter ago QLogic QLGC announced that its board had authorized a $100 million stock buyback over two years. Asked Wednesday on the company's third-quarter conference call if the company had bought any stock, CEO H.K. Desai said, "As of this date, no shares have been purchased." Well, if the company doesn't think they're cheap enough to buy, why should anybody else?
Finally, one down on Wall Street : As I noted earlier in the Columnist Conversation, I still can't get over Peter Lynch admitting in the current issue of Money that he went down with the ship on ACLN. Memo to Peter: Contrary to what you might think, the shorts really aren't the enemy! |
