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If you don't want to compare GAAP this year with GAAP last year, the only alternative is to compare to pro forma last year. As I said, that doesn't cut it anymore.
You can't start making up numbers to compensate for changes - reporting multiple sets of numbers is what got companies into trouble in the first place.
Because of the corporate scandals this past year, GAAP is the ONLY accepted way to compare earnings, and Intel is continuing to grow GAAP earnings at ~100% YOY.
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Actually, the only way to really do it is to lay down this year's fiancial statments side-by-side next to last year's and go through them line-by-line to understand what's changed.
If you do that, you would see that the big change is that last year's 2Q income statement included a $500m writeoff that wasn't repeated this year.
This allows us to understand several things:
1) The increase in reported earnings has almost nothing to do with anything that's changed materially at the company. The writeoff had an accounting impact, but realistically had no impact on the amount of money Intel took in, spent, or set aside as reserves for the future.
2) Q4 last year is the last quarter in which those big writeoffs occured. After the end of this FY, the unadjusted comps will get a lot harder.
And by the way, while the corporate scandals we've seen have justly discredited "pro-forma earnings," the reality is thos scandals also point out that GAAP, as well as every other set of accounting rules, has its limitations, and that relying on a single number that is spat out by some blessed formula is akin to sticking your head in the sand.
As my acquaintence Bob Olstein wrote in February after the Enron scandal: "First, let's set the record straight. Most companies utilize financial accounting and reporting practices to their advantage in an attempt to put their best foot forward. It is a portfolio manager's job to analyze the numbers contained in financial statements, and to adjust those numbers and assumptions to reflect the economic reality of the company's basic business. The adjusted numbers should then be used to value a company...
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Let me be intellectually honest...almost every company in our portfolio engages in some form of creative accounting including non-recurring write-offs, managing reserves, capitalizing expenses, etc. which in our opinion, should be written off. However we take pride in understanding and analyzing these creative management practices and adjust our valuations accordingly.
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Over the past 35 years, I have experienced creative accounting such as front-end land sales accounting, conglomerate accounting, full-cost oil accounting, technology accounting and internet accounting, to name a few. Each time you think the barn door has been closed new horses show up. The most recent financial accounting games such as venture capital sales, serial acquisitions, off-balance sheet transactions, pension income, recurring non-recurring write-offs have replaced the "old games" such as capitalized expenses [note: this was written before WCOM blew up] front end franchise sales, and all the other games of the past excessive periods. Stay tuned for the newest creations.
The only important lesson to be learned from the recent market conditions is that an inferential analysis of financial statements is required to determine the economic reality of a company's reported earnings. Generally Accepted Accounting Principles (GAAP) and economic reality can, at times, be worlds apart. Although the media and politicians are emphasizing fiancial reporting and the importance of looking behind the numbers in the current environment, we believe it is important to understand, evaluate and adjust financial statements in all environments.
If you do not understand how to look behind the numbers, you are playing at a competitive disadvantage.
You want to put your faith in a single number because it is has the GAAP seal of approval? As I said, be my guest. I prefer to look behind that number, understand what's driving it, figure out whether the drivers are sustainable business events or one-time accounting adjustments, and draw my own conclusions about the state of the business. I've made lots of money buying stock from people who didn't understand the numbers and selling it back to other people who also didn't.
mg |
