LSI LOGIC (LSI) 23 3/4. Profits don't matter anymore. Trading stocks has become a matter of anticipating splits, receiving timely upgrades or price target increases from a major broker, CEO appearances on TV, and most importantly, beating the quarterly earnings estimate from First Call. It doesn't seem to matter what level profits are at, just whether a company beats by one, two, or five cents. After the close Thursday, semiconductor firm LSI Logic (LSI) reported fourth quarter earnings. LSI operating earnings came in an nil. That is, breakeven. No profits. That, however, was better than the First Call average estimate, which called for a loss of two cents. So, LSI beat two cents. In fact, the press release right away says "EPS before special item and after goodwill was $0.00. First Call consensus estimate was a loss of $0.02." This indicates that this breakeven figure is what is the proper figure to compare to First Call analysts. It is operating income. However, there has been some confusion this morning, because LSI started off the press release with "Diluted, before special item and $10 million goodwill amortization: $0.05." Many in the market want to therefore conclude that LSI beat by five cents, not just two. This follows the recent trend that Amazon.com has had no trouble getting away with - that amortization costs should be excluded from earnings numbers. Amazon recently reported a loss of $0.14 per share on a pro-forma basis, which was widely reported as their loss. In fact, their own press release made it clear that the operating loss was actually $0.30 per share. Amazon is simply in the habit of excluding the amortization costs of having acquired a company. Yet, there is no one that questions that these costs belong in operating expenses. It is just that Wall Street bought into Amazon's argument that looking at pro-forma is a better gauge of performance. A critical point is that in Amazon's case, that is what analysts started to forecast. In LSI's case, the analysts were not forecasting "excluding amortization" costs. So,the proper figure to compare the LSI report to First Call is the breakeven number. LSI beat by two cents, not five. Who knows, though, perhaps LSI, Allied Signal, Merck, and all the other companies that make acquisitions will also start excluding amortization costs. That will start making everyone's profits look better. It also suggests that acquiring a company has no cost to shareholders. So, don't expect the accountants to ever agree. In any case, LSI is being played today. They beat earnings estimates and CS First Boston has upgraded the stock to "buy." LSI wasn't able to make any profits, even though they made $0.22 a share in the year-ago fourth quarter and revenues were 38% higher. But that won't matter. CEO Corrigan said LSI has a "growing belief that the long-awaited recovery of the semiconductor industry is about to begin." What could be better than a company that has a strong belief in the future? LSI stock, along with the entire semiconductor industry, has been on a roll lately. The fact that LSI is not profitable is hardly an impediment to a stock in today's market, but don't get carried away and think that LSI beat by five cents. Operating earnings were two cents better than expected, at breakeven.
from Briefing |
