Thanks to wbmw of Intel thread:
S&P Unveils Earnings Benchmark
biz.yahoo.com
S&P Unveils New Way for Calculating Corporate Earnings
NEW YORK (AP) -- Responding to deepening skepticism about the way many companies report their financial performance, Standard & Poor's introduced a new benchmark Tuesday designed to more accurately gauge corporate earnings.
Under the new "core earnings" measure, the 10,000 U.S. companies analyzed by S&P will have some revenue that they use to boost profits -- such as pension fund investment gains -- stripped away.
The lucrative stock options that corporations typically grant to their executives will be deducted from per share earnings, because S&P believes that will help provide a better yardstick of the costs companies incur to pay their top managers.
The new way to assess company earnings comes amid widespread investor dismay over revelations -- many prompted by the Enron scandal -- that publicly traded corporations have used questionable accounting methods to inflate profits and mask costs in their quarterly and annual reports.
In a news conference, S&P officials said that their changes will benefit small-time stock market participants and institutional investors alike. The purpose is to provide a clearer picture of the revenues and costs associated with companies' primary businesses.
"If nothing changes, investors will lose more and more faith in the stock market," said David Blitzer, S&P's chief investment strategist. "They're going to start putting their money somewhere else."
He said S&P wants to improve the transparency and reliability of earnings information, which has taken a huge hit over the use of "pro forma" earnings numbers that exclude certain costs.
Pro forma earnings came into vogue in the 1990s, especially with new technology and Internet companies that made sometimes wild predictions on their earnings possibilities. Those predictions proved unfounded when the Internet bubble burst in 2000. Still, pro forma earnings remain popular among many larger, mainstream companies.
The new standards will be used first to calculate figures for the S&P 500 index of large American companies and other S&P indices, and will eventually apply to all the companies that S&P rates.
S&P also will use the core earnings method to help set its corporate debt ratings, which are carefully watched because they represent a key measure of the risk companies pose for investors.
While S&P can't force companies to use the new standard to report operating earnings, stock analysts at major brokerage firms are expected to use the measure to evaluate whether investors should buy or sell stock.
S&P president Leo O'Neill said S&P officials won't lobby for the core earnings measure to be mandated by regulators, but are willing to discuss the system with officials from the Securities and Exchange Commission and the Financial Accounting Standards Board, which set corporate accounting rules.
Under the new standard, price-to-earnings ratios will rise for most companies and for the S&P 500, adding to worries that the stock market is overvalued.
Price-to-earnings ratios, or PE ratios, are calculated by dividing a company's per share price by its earnings for the latest year. The higher the PE ratio, the more investors are paying to buy shares.
For example, General Electric Co.'s per share earnings for 2001 were reported at $1.41 excluding an accounting charge, but S&P calculated the conglomerate's core earnings at $1.11 -- a 21 percent difference.
S&P chopped 30 cents off per share earnings primarily to account for pension fund gains that were included in the earnings statement and stock option grants that weren't. The change lifted GE's PE ratio from 28 to 36.
GE spokesman David Frail said the new standard departs from generally accepted accounting principles, and raises questions about whether the method "can serve to clarify or whether it's going to confuse things further." The company, he said, is concerned that investors will be confused.
S&P's core earnings measure will also include writedowns of depreciable assets, purchased research and development and pension costs. Items to be excluded include gains and losses on asset sales, unrealized gains or losses from hedging activities, fees related to mergers and acquisitions and legal settlements.
The new method probably won't affect stock prices, said Chuck Hill, director of research for Thomson Financial/First Call. Many professional stock analysts, he noted, already make calculations about companies using the factors S&P will use.
Hill said the impact of the new standard could even muddy the waters for investors because S&P is adopting a standard that hasn't been endorsed as a uniform measuring tool.
"But I give them high marks for keeping the issue out there and putting pressure on FASB and others to get moving," he said.
S&P officials said they received an enthusiastic response from key Wall Street firms that employ legions of stock research analysts.
S&P said it started work on the project about a year ago, before Enron's collapse but after years of complaints about how companies were reporting their earnings.
"This whole effort is really about restoring confidence, investor confidence, in the stock market in America," Blitzer said.
S&P also wants companies to start reporting information each quarter on the stock options they grant, instead of the current yearly requirement.
But Blitzer acknowledged that there's no way of knowing whether companies will respond without a mandate by regulators.
"We will keep asking for it," he said. "I think it will come out over time."
wbmw |
