FYI. Here's an article which may help everyone understand my concern with continued options dilution, despite the company fundamentals being sound...
PT-Options accounting to cut earnings,raise PE ratios
Wed Oct 19, 2005 03:52 PM ET
(Repeats to fix literal in first paragraph)
By Chelsea Emery
NEW YORK, Oct 19 (Reuters) - Some technology companies that have not yet applied an employee stock option accounting change could appear more expensive as the rule takes effect and that may hinder stock gains for the sector, fund managers said on Wednesday.
Companies must start including options expenses as part of their regular income statement, a rule that hits those in the tech sector most since those companies have traditionally handed out stock options as incentives, but have not accounted for those options as an expense.
The regulation's impact will become noticeable soon since the rule applies to companies with fiscal years beginning after June 15 and this week brings a slew of earnings reports from such companies.
Some companies, including semiconductor chip maker Cree Inc. (CREE.O: Quote, Profile, Research) could appear more expensive since the cost of options will make their earnings appear to drop. That will, in turn, raise the closely watched P/E ratio -- a stock's price relative to a company's profits, according to Reuters Research.
"It's a problem here," said David Straus, a fund manager for Johnson Lemon Asset Management in Washington. "You've got energy stocks loosing leadership and tech is the key sector you'd expect to fill their shoes. It'll make this market more difficult than it would have been otherwise."
Cree expects the regulation to cut earnings by 4 cents per share to between 22 cents and 24 cents per share.
Microsoft Corp. (MSFT.O: Quote, Profile, Research) will not see much of an impact. The computer giant stopped using options about two years ago and the company has urged investors to concentrate on its finances using generally accepted accounting principals.
Cisco Systems Inc. (CSCO.O: Quote, Profile, Research) , one of the most vocal opponents of stock options expensing, has said it will see a 12 cent to 14 cent reduction in GAAP earnings per share for fiscal 2006.
Most analysts calculate Cisco's P/E on the basis of pro forma earnings, which do not include the options accounting, but many investors insist the new regulation is needed.
(The regulation) will make the numbers more clear," said Eric Thorne, a fund manager for Bryn Mawr Trust Co., which oversees about $2.2 billion. "It will level the playing field in terms of what their numbers actually mean and if the numbers show a healthy company."
Cree is expected to post earnings on Oct. 20, while Cisco is due to post its fiscal first-quarter results in the first week of November.
"(The regulation) is one part of why the large bellwether names haven't gained traction," said Tim Woolston, a portfolio manager with Boston Advisors Inc.
He added, however, that most investors had already accounted for the expected lower profit numbers.
Other companies that could appear to have more expensive PE ratios on a GAAP basis include audio equipment maker Harman International Industries Inc. (HAR.N: Quote, Profile, Research) , according to Reuters.
A list of companies reporting earnings this week that will see an impact from the regulation can be found at: about.reuters.com
"You should see some lower earnings numbers, primarily in tech where options have been used liberally to reward employees," said Woolston. "I have to side with regulators and accountants that this will be a more accurate representation of earnings." |
