The Forecast on Options
Barrons online - Sept 19th
STOCK OPTIONS BECAME AN EXPENSE this quarter for tech companies with June fiscal years, under the generally accepted accounting principles set by our principal bean-counting regulators. But none of this amounts to a hill of beans if Wall Street forecasters ignore option expenses. Merrill Lynch did good, therefore, when it said Wednesday that its analysts will include option expenses in their earnings forecasts. Other brokers should follow Merrill's lead.
Silicon Valley firms like Cisco Systems (ticker: CSCO) fought bitterly to stave off option expensing, but failed to sway the Financial Accounting Standards Board and the Securities and Exchange Commission. Firms like semiconductor capital-equipment maker Applied Materials (AMAT) are still trying to beat the system, by accelerating the vesting of past option grants.
Willy and/or nilly, the expense of employee stock options will start showing up in fiscal years that began after June 15. Unless tech companies pull back on their option awards -- as has Microsoft (MSFT) -- their earnings will get a buzzcut of almost 50%, in some cases.
David Trainer, of the Franklin, Tenn., research boutique New Constructs, figures that expensing options would've cut Cisco's 2004 profits by 21%, from pre-option $0.62 to a post-option $0.49 a share. At Analog Devices (ADI), the drop would've been 46%, from $1.45 to 78 cents.
snip ..... |
