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Strategies & Market Trends : Anthony @ Equity Investigations, Dear Anthony, -- Ignore unavailable to you. Want to Upgrade?

To: Robert R. who wrote (71198)	5/10/2001 8:42:13 PM
From: Harvey Allen	Respond to of 122088

Homestore Costlier Than It Seems: Call of the Day New York, May 10 (Bloomberg) -- Homestore.com Inc. appears to have what investors are looking for: fast profit growth at a relatively low price. Still, that expected 2002 profit growth of 72 percent and price-earnings ratio of 36 aren't what they appear to be, says Merrill Lynch & Co.'s Henry Blodget. That's because Homestore.com makes ``liberal'' use of its own stock to pay operating expenses, the analyst said. Analysts' forecasts -- and the earnings highlighted by Homestore.com in its news releases -- are ``pro forma'' profits that exclude those non-cash expenses. The company thus looks more profitable than those that pay cash for expenses such as marketing and distribution, the analyst said. ``Investors should be careful to factor these expenses into valuation calculations,'' Blodget wrote in a note to clients. ``We do not believe that Homestore.com's pro forma results provide a good view of operating earnings.'' In Homestore.com's case, non-cash expenses total about $70 million a year, he estimated. When those costs are factored in, Homestore.com's loss last year widens 50 percent, to $1.38 a share, from the 92 cents the company featured in its news release. Estimated profits for this year of 53 cents a share become a loss of 10 cents. On that basis, Homestore.com shares trade for 114 times next year's expected operating earnings per share, compared to 36 times estimated pro forma earnings, Blodget said. Online auctioneer EBay Inc., which pays cash for its expenses, has a P/E of 60 times estimated 2002 operating earnings, Blodget said. The P/E reflects how much investors must pay for each dollar of earnings. Don't Get `Snookered' Homestore.com's earnings show that the statistics used by companies and analysts don't always give a true picture of a company's condition, investors say. Homestore.com is ``understating what it would cost to run this company if you paid the expenses in cash,'' said Christopher Ely, who owns the stock in his Loomis Sayles Aggressive Growth Fund. ``Some investors may be snookered.'' Shares of the Westlake Village, California, company jumped 18 percent on April 26 after Homestore.com reported pro forma earnings that exceeded estimates. ``We report our data in the manner we think is most relevant to the most number of investors'' said Homestore.com spokesman Gary Gerdemann. ``It's not done with respect'' to the P/E number. The first four paragraphs of Homestore.com's April 26 news release announcing first-quarter earnings dealt solely with pro forma earnings and revenue statistics. The company's results using generally accepted accounting standards appeared lower in the announcement. To be sure, Homestore.com fully discloses its practice, which ``is a legitimate, defensible, and even shrewd decision for a young company'' with a strong stock price looking to conserve cash, Blodget said. He maintained his ``buy'' rating on the company, which he said has ``excellent'' prospects. The stock gained 32 cents to $32.88 in late trading and is up 63 percent this year. Blodget didn't return a call seeking comment. He prepared his six-page analysis of how Homestore.com presents its earnings after receiving ``numerous questions about Homestore's liberal use of equity to pay for operating expenses, as well as the validity of excluding these expenses from pro forma (earnings),'' Blodget wrote. Said Ely of Loomis Sayles, ``From an investment perspective, if this stuff is fully disclosed and it meets with all rules and regulations, I don't have a problem with it.'' quote.bloomberg.com