Skeeter, read the following very carefully from the Gateway second quarter earnings announcement:
<As a result of favorable gross margins being offset by the abnormally high marketing expenditures in the quarter, operating income increased only 5.2% over the second quarter of 1997. Other Income increased to $10.9 million in the quarter, up from $9.3 million in the first quarter of 1998 and $6.4 million in the second quarter of 1997, due to additional interest income generated by increased balances of cash and marketable securities.
Pre-tax income increased 10% to $94.9 million dollars and net income increased 8% to $60.7 million compared to $56.5 million in the second quarter of 1997. The Company's effective tax rate for the quarter was 36.0%, consistent with the first quarter rate, but an increase over the 34.5% effective tax rate in the second quarter of last year. The effective tax rate has increased over 1997 due to shifts in the geographic distribution of the company's earnings.
Working capital management continued to improve as the Company's cash conversion cycle was reduced to just under 5 days. Inventory turns improved to over 30, an increase from the 26 achieved in the first quarter and an all time high for the Company. Accounts receivable days sales outstanding increased to 29 days due to a seasonal shift in the customer mix, but this was more than offset by an increase in accounts payable days outstanding. Cash and marketable securities were $892 million, a new record for the Company.>
Even backing out the Interest Income, Gateway still reported a 5.2% increase in operating income (See first paragraph).
As for interest income NOT being a part of EPS, I guess I understand now why you have so many stock pick losers. Gateway's model is to limit inventory and receivables, which is why they adopted the direct method of selling PC's. They strive continuously to increase turnover in inventory and thus increase their cash. If they are successful (and they were not last 3rd quarter), they get a double benefit - less risk of inventory writedown loss plus more interest income.
But feel free to use your special brand of looking at EPS, and take all interest income and expense out of the companies you analyze. I'm sure many companies on the brink of bankruptcy show reasonable "operations eps" if you ignore their huge debt loads.
Kory |
