Here is the bit from Individual Investor (June issue, p. 14)
"Sometimes , net income is not the bottom line. Earnings from continuing operations exclude onetime charges and costs, the idea being to ignore onetime events in order to make meaningful comparisons with past and future results. In Lucent Technologies' second quarter, for example, the company booked $6.16 billion in revenue and incurred costs of $6.13 billion. Lucent was left with $23million in net income, or $.02 a share (assuming 1.3 billion shares outstanding) a decline from $.05 a year ago. But in January Lucent had acquired a networking company called Prominet, and assigned a value of $1.57 million to the company's "in-process" research and development. So Lucent subtracted that from its own R&D expenses, and boldly announced earnings of $180 mllion, or $.14 a share-a gain of more than 100%. Investors gobbled it up.
Such nonrecurring entries come in many stripes, but they arent always taken well by the Street. Throughout the 1990's, Digital Equipment repeatedly took charges to pay for being too optimistic. It spent millions developing new technologies, and counted that money as an asset on its balance sheet. When those technologies didn't bear fruit, as expected, Digital was able to wipe the loss out of charging it against earnings. Investors, however, lost all faith in management and punished the stock.
Any comments? (this was an answer to a letter about earnings, not an article about Lucent)
Best wishes and happy Monday bull market tomorrow.
Freeus |
