From Barron's short idea CNC and view on analysts repeatedly shared by us here at Rogers:
>>Back in late July, we noted Ray's apostasy from raging bull to growling bear on Conseco, a company whose accounting practices Barron's has taken exception to over the years. We also noted that Ray has been embroiled with the company over a fee, but ventured our belief the row didn't inspire his bearishness on the stock (we're still of that mind).
At the time, Ray had just put out a detailed report on Conseco and why it should be sold. And late last month, he followed up with another extremely detailed, extremely negative and (to these jaundiced eyes) extremely persuasive report. Ray, incidentally, is decidedly in the minority among insurance analysts, most of whom are bullish on the company (but, then, most analysts are bullish on most companies, particularly if the companies do a lot of acquisitions and stock offerings).
We were especially impressed by Ray's dissection of third-quarter earnings. Ostensibly, Conseco had a strong quarter, exceeding analysts' projections. Ray, however, suggests that it did so only by dint of some deft accounting maneuvers. He cites, for example, a $62.4 million increase in loss reserves and writeoffs of deferred acquisition costs. Labeled nonrecurring operating items, these nonetheless are placed under net income rather than operating income and then are offset by realized capital gains on insurance-company bond holdings. Ray insists this is decidedly not the way it's supposed to be done. But had Conseco followed the usual procedure, he reckons, reported earnings would have been clipped by 19 cents a share. All told, Ray figures, Conseco's operating earnings in the third quarter were no more than 39 cents a share.
He sees operating earnings falling from an estimated $1.75 a share this year to $1 next year and vanishing in the years beyond. For that matter, he sees the stock pretty much vanishing, too. From their current price of 45 1/2, within a year, he predicts, Conseco's shares will fall to between 1 and 2.
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