This inept piece of research is not even Mr. Olstein's original work. These accusations originally arose in a document written by a hack outfit called the Center for Financial Research and Analysis (CFRA) which purports to do detailed analysis of financial statements.
These so called analyses, which I will debunk in a moment (with the help of a very sharp piece of analysis from Sanford Bernstein), were widely circulated amongst big hitter buy-side shops, and were the main reason why the stock tanked so badly after the first quarter. Most buy-side shops have come to terms with this assasination attempt - hence the exceptional recovery of the past two weeks.
1. "Lucent wrote off $2.5 billion over two years" - This is less than 4% of revenues, less than a half a percent if amortized over 10 years. Find a high tech company worth its salt that hasn't written off a similar amount. Successful communications companies must make acquisitions - I'm sure OG will back me on this one - and GAAP has allowed companies to write off the in process R&D. Even if the rules change, it will only be for acquisitions made after the rule change and will not be made retroactive. This complaint is plain silly.
2. "Lucent revenues rose only 3% YoY in Q1" - The biggest reason for this is shifting seasonality. In every year of Lucent's existence December has been the slowest YoY growth quarter. In 1998, Lucent shifted all sales force incentives and employee bonuses to the fiscal rather than calendar year. As a result, alot of business was closed in September that might have otherwise closed in October or November. It is little wonder that December was light for revenues. Management has repeatedly promised 30% YoY growth in Q2, which more than makes up for the supposed shortfall in Q1. Furthermore, I notice that Olstein wants to subtract the $200 revenue from LU's results, but doesn't also credit them for the 2 to 3 cents per share loss realized by the business unit. LU was required by GAAP to reconsolidate the business.
3. "19 cents of the 20 cent YoY EPS increase were from non-operating credits" - Utter load of crap. 5 cents, as explicitly stated by LU, came from pension benefits. 2 cents came from a reversal of an allowance for doubtful accounts that was actually paid by the customer. The rest of his "adjustments" come from ridiculous assumptions such as - the allowance for doubtful accounts should remain at a steady percentage of AR. This is just wrong - allowances for doubtful accounts are made on a case by case basis. LU makes a very conservative 3% allowance for ordinary receivables with higher levels for more risky accounts (vendor financing, risky geographies, etc.) If the allowance for doubtful accounts declines, the expected value of the receivables has increased. Finally, Olstein should have done the same analysis about Q1FY1998, in which there were 3 cents of non-operating earnings. So the ratio should have been 7 cents out of 23 cents EPS growth came from non-operating items. So operating earnings rose nearly 20% YoY, not bad in a quarter that is becoming a smaller proportion of total annual earnings.
The CFRA report contains additional shoddy analyses which suggest 27% FY1998 EPS growth came from pension benefits (WRONG - CFRA "forgot" to balance out a $400 million charge for post-retirement benefits). Most of the street is beginning to see through these half-assed analyses. 2Q results will be exceptional and the rest of the shorts will be forced to cover. |
