CSCO Earnings Misleading in the past?
William Fleckenstein wrote:
Standard options practice. . . In April's edition of bloomberg Magazine, Loren Steffi wrote an article entitled "The Option Charade." It puts Cisco under the microscope to discuss how much option issuance has helped the company's bottom line. I've talked about this before, but folks need to remember that a company's employee expenses are reduced when employees get paid in options, but the company also gets a tax break to increase its profits.
Believe it or not, U.S. tax law allows companies to deduct as a corporate expense the capital gains paid by their employees when they exercise their options. It's completely absurd, but it is what it is, and this is another reason why tech earnings are overstated. Last year, for example, Cisco got a boost of $837 million to its July 1999 fiscal year using that tax benefit, which represented 40 percent of its $2.1 billion net income. Of course, that wasn't in the earnings announcement - you had to go to the cash flow table in the 10k to find that out. Safety in numbers. . . In this case we're using Cisco as an example - in other cases we've used Microsoft - and this is not to pick on either of those, but this is going on all over corporate America, especially in technology. These behemoth tech stock earnings are dramatically overstated, while at the same time their valuations are completely absurd, which is why they're going to have so far to fall. I know some folks don't like to read about this stuff, but I continue to believe that being forewarned is better than not knowing. |
