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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Michael Burry who wrote (7456)	6/8/1999 12:38:00 AM
From: James Clarke	Read Replies (1) \| Respond to of 78648

You're right about options. They are just another negative to be counted. But your analogy to the "minutia" of operating leases misses the point. Operating leases are already accounted for in earnings. Options aren't. It's their invisibility to GAAP accounting that makes them so insidious. And they are hurting Microsoft - you just don't see it yet. When Microsoft finally collapses under its own weight, options will be in large part to blame. How to quantify the negative value of options? On Autodesk, my methodology was I believe to look at the cash flow statement and observe that they had bought back a lot of shares. But the share count had not gone down because of all the options exercises. So I simply said the cash used to buy back shares is compensation expense. I don't have the financials in front of me, but that is what I usually do - I think that was Autodesk. I've never heard of others using this methodology, but I find the disclosure in the annual report of options cost systematically low. I have several other methodologies to do this - I think about option accounting a lot - but this one is my favorite because it really gets to how much cash is this costing me. (and if they are not buying back shares, it shouldn't be too hard to figure out how much it would cost to buy back enough shares to keep the share count constant. That number is the cost of the options.) But Mike, I don't think you wanted to say that dilution of 5% a year is minutia, did you? I agree it is one of many negatives to take seriously, it is just much more difficult to quantify than other negatives. And it is much bigger than most people think. And I might add...Mattel executives have fed at the options trough much more than I would like. Their proxy statement is simply unacceptable for a Fortune 500 company.

To: Michael Burry who wrote (7456)	6/8/1999 12:53:00 AM
From: LauA	Read Replies (1) \| Respond to of 78648

ASDK and options: Munger went so far as to label companies that use off income statement equity compensation as Ponzi schemes. He noted that they are operating non-profit businesses. On the other hand he admitted that in the current environment to keep employees, it is expected that generous options will be given. He said that if he were operating a SW company, he would be tempted to do the same. I framed such questions recently to the CEO and CFO of HNCS - a direct competitor to FIC. They blew me off, saying that "everybody does it" and "it doesn't cost the company a thing". When I pointed out that from the shareholder's perspective you had to back it out as a cost, and the company was operating as a non-profit. They agreed, and ended the Annual Meeting. From Munger's point of view - he wants to buy and hold forever. Non-profit revenue growth isn't interesting. From a trading standpoint, it doesn't matter unless the music stops. In the ASDK situation, it appears to me that significant dilution from these options doesn't kick in until the high 20's, or 30's. Therefore as a trading vehicle from current level to that upper bound, the options may be irrelevant. The cash hoard they have is the result of a secondary floated in the $40's to get favorable tax treatment for their merger. Back it out, and the stock looks cheap on an historic basis. The reference universe I follow it in: DASTY (Solid Works), MNS, Bentley, SDRC, PMTC, EAII, and MDII is hurting across the board. Two months ago when it cratered on earnings worries and Joe Costello's hype of a new Singapore company that would relegate ASDK to the compost pile, I tried to nibble, but it ran away. Guess it's time to look again. Lau