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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: The Duke of URL© who wrote (82019)	5/7/2000 8:01:00 AM
From: Steven N	Read Replies (1) \| Respond to of 97611

Thanks for the link Duke. Here is an interesting article---- gains on security sales May 5, 2000 Nothing extraordinary When companies start arguing that gains on securities sales should be counted as regular income, investors have cause to worry. By Pablo Galarza You remember that annoying game companies play wherein they beat earnings estimates by a penny? Well that's last year's trick. Here's the new one, and it's being played by some of the biggest and best recognized companies in the tech world. Just because it's fresh in my mind, I'll tee off on Microsoft. At first glance, it looked like Microsoft handily surpassed, once again, Wall Street's target of 41 cents a share by 2 cents when the company released earnings last week. But on a closer look, Microsoft was actually 3 cents shy. The short fall was masked by a 5 cent (or a whopping $868 million) gain from the harvesting of investments in its $21 billion equity portfolio. Since Microsoft's business is making great software, as the company notes, not running a mutual fund, profits from selling stock in other publicly traded companies is usually treated as other income and footnoted as a one-time or non-recurring gain. But Microsoft's CFO John Connors, on the analyst conference call, suggested that profits reaped on sales of investments should be considered not as one-time gain, but as a source of recurring profits. He argued that since these investments were made to enhance Microsoft's business, they should be treated as operating profits. Over the past three quarters, Microsoft has been booking sales of equity at an accelerating pace--starting at $397 million, doubling or so in the second quarter (its fiscal year ends in June) to $773 million--and Connors said that he has locked in gains from its investment portfolio already for the next two quarters. At the current pace of nickel a quarter, 12% of next year's earnings would come from asset sale gains. Analysts are confounded by the treatment of these profits. "I would look at this gain as not being part of operations, even though management wants you to," says Melissa Eisenstat, with CIBC World Markets, who rates the stock a "hold." "If they argue that this is critical to the company's success, then, in that case, we deserve an explanation of what's in there. You can't just say, `we've made a lot of investments in a number of companies and sold some of the stocks for a profit.'" Eric Gerster, software analyst for T. Rowe Price, would cut the company a little more slack. "It is an asset of the company, and you do have to give them some credit for generating earnings from those assets." But, he says, "not 100%" credit. Microsoft isn't alone here. Intel, Texas Instruments and Compaq, to name a few, are all counting profits on sales of equity as operating income, not as non-recurring items. Does this matter? You bet. The segregation of nonrecurring items is intended to inform the investor how a company's core business is doing. So it's no wonder some analysts are starting to think that companies are insisting on booking these gains as operating profits to obfuscate deteriorating cores. After all, companies report quarterly earnings not to meet earnings expectations but to explain the condition of their operating health, right? "It's the sign of times. This kind of stuff usually goes on in the late stages of a bubble," says Chuck Hill, the president of First Call, which aggregates analysts' profit forecasts. "The issue is generating more concerns. I'm getting more calls from sell-side analysts for guidance on how to treat this." Among the first analysts to blow the whistle was Drew Peck, S.G. Cowen's semiconductor analyst, who took Intel to task in a research report. "In the note I put out on Intel, I didn't bother trying to guess how much of their equity portfolio they're going to sell. Instead, I wrote that my estimates exclude gains on sales of assets including furniture, vehicles and securities. I mean, why not sell their furniture if they could get a profit on it?" -------------------------------------------------------------------------------- Pablo Galarza is a staff writer for money magazine and writes a weekly column for money.com. money.com sn