From Briefing.Com this morning. My take on the whole issue is that some people thought they beat estimates, others didn't, and the net effect was a draw in yesterday's market. That past, as well as the negative news associated with the price reductions announced earlier this week by AMZN, the market can now focus on the IPO.
Normally, I hold stocks for a day or two, but I've had this thing for months, as I believe it is a fundmental value, IPO or not, that will eventually be realized by the market.
----------------------------------
BARNES & NOBLE (BKS) 33 7/16 CLOSED. They reported earnings yesterday before the open, but it remains an interesting story nonetheless. Here is a review of the situation, with a comment on how traders should view earnings reports. Barnes & Noble (BKS) reported a loss of $0.09 per share for the fiscal first quarter ended in April. The consensus estimate from both First Call and Zacks was for a loss of $0.05 per share. At first glance, they therefore missed estimates and that is how it was widely reported. However, there was a charge for accounting changes that totalled $0.07 per share. Much of Wall Street therefore changed their view, and corrections were run on news wires to say that BKS actually beat estimates by three cents because the loss really was $0.02 per share. It isn't that simple though. The charge was due to a new accounting rule that affects all companies and, as the BKS press release states, requires "the company to write-off store pre-opening costs as incurred, as compared to the previous practice of amortizing such costs over the respective store's first twelve months of operation." This is not a charge that can simply be ignored. First of all, there would have been an amortization cost that would have impacted operating earnings if they had not taken the change. Previously, these costs, as stated in the quote from the press release above, would have been spread over four quarters instead of one. That means that about two cents of this charge normally would have appeared in this quarter's number. Second, this is a permanent change. It illuminates previous amortization charges, but will charge all costs now each quarter. Third, this is a legitimate operating cost. BKS now has to "charge costs as incurred." Sounds reasonable to Briefing.com. So, to ignore the charge entirely is wrong. It (to an uncertain degree) reflects true operating costs that will be in the numbers in the future as well. How should the market therefore react? Most importantly, it shows the fallacy of the knee-jerk reaction of simply trading off of whether a company beats or misses earnings estimates. The logic behind that is supposed to be that the earnings estimates reflect what is priced in the stock. This is often just flat our wrong. The phenomenon of whisper numbers highlights the fallacy, as does the reality that Wall Street consistently lowballs estimates to make sure companies do "beat." Also, there are times when it is not clear whether the estimates reflect certain charges from some analysis, and not from others. The estimates should not be taken as a perfect standard. As to BKS, if it was truly priced for expectations of an operating loss of $0.05 per share, then BKS did not do better than that. That is about BKS really did in terms of operating losses (and the stock rose a modest 7/16 yesterday in response). The simple reaction of, "well, it is a charge, so let's ignore it" does not apply. Sometimes, analysis is needed. Briefing.com has long had a favorable leaning towards BKS, so don't take this as an attempt to disparage the stock. Rather, it is an criticism of the market's habit of looking for simple answers on how to trade a stock. If it "misses" is goes down, if it "beats" it goes up. It is too simplistic to take anything a company wants to call a charge and dismiss it, or to simply ignore amortization costs in the new fashion of "pro-forma" reporting. Charges do reflect costs to shareholders, and often are actually operating costs. And, traders should never take the published earnings estimates as the gospel for what the stock is fairly priced at. Step back and take a look at how the actual earnings relate to the overall stock price. Sometimes, as in the case of BKS, that is the only way for a trader to make a thoughtful interpretation of what a report really means.
|
