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Strategies & Market Trends : Stock Attack II - A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: plugger301 who wrote (34524)	4/20/2002 11:34:10 PM
From: Susan G	Read Replies (3) \| Respond to of 52237

More on the subject, looks like this weekend's hot topic? <g> A Little Wall Street Alchemy on Microsoft By Aaron L. Task Senior Writer 04/19/2002 02a:17 PM EDT Against the backdrop of Merrill Lynch's (MER:NYSE - news - commentary - research - analysis) interim settlement with the New York attorney general and the far-reaching implications of that case, the limits of Wall Street's spin cycle were on full display Friday morning. The immediate reaction to Microsoft's (MSFT:Nasdaq - news - commentary - research - analysis) earnings Thursday night was that the software giant's results fell shy of expectations. But on an operating basis, Microsoft's earnings actually bested expectations, and bulls were clambering onto that story. Seabreeze Partners' Doug Kass had the clearest description I've seen of this at RealMoneyPro.com, so I'm reviving it here: In reality, the consensus per-share estimate of 51 cents included an expected 10-cent gain from Expedia (EXPE:Nasdaq - news - commentary - research - analysis). So, operating earnings were expected to be about 41 cents. The gain on the sale of Expedia came in a nickel higher, at 15 cents. This was offset by a 14-cent nonoperating impairment charge for cable [specifically, Microsoft's investment in AT&T , which decided to sell its cable business to Comcast] . The company reported 49 cents a share, so -- adjusted for the gain and the charge -- stated operating earnings stood at 48 cents, a full 7 cents better than forecast! This helps to explain the recovery in Microsoft shares in the evening from the trading lows. Wall Street glommed onto this "operating earnings actually beat expectations" story. Merrill Lynch and First Albany separately upgraded recommendations on Microsoft. Several other firms issued positive comments, which in sum helped Microsoft recover from its after-hours dip last night to trade as high as $58 early Friday. Recently, Microsoft shares were up 2.3% to $57.67. Consensus Confusion A debate continues over whether the consensus for expected operating earnings for Microsoft was 41 cents or something higher. Moreover, confusion reigns over which consensus number investors should really focus on. Those perplexed about how to properly assess Microsoft's quarter may take a little solace that even the arbiter of consensus estimates is in the same boat. "In our minds, we think it's a downside, [but] the analysts are trying to find a way to make it work," said Joe Cooper, research analyst at Thomson Financial/First Call. "I can't follow the analysts. They're flip-flopping." Specifically, Cooper said the analysts were all including the Expedia charge in their estimates prior to Microsoft report. He said that alone is "insane" because asset sales haven't historically been included in consensus estimates. Similarly, the researcher noted that sell-side analysts were excluding the impairment charge two quarters ago but had it in the estimates this time around. "That's why there's such confusion. Nobody really knows what the bottom-line answer is," Cooper said. "It's very difficult." Again, if someone who follows the analysts for a living can't figure them out, how are we mere mortals supposed to? What isn't debatable is that Microsoft lowered its guidance for its fiscal fourth quarter and fiscal year 2003. The Redmond menace said it expects fourth-quarter revenue to range from $7 billion to $7.1 billion and earnings per share to range from 41 cents to 42 cents a share. Wall Street was expecting earnings of 44 cents a share and $7.65 billion in revenue. For fiscal year 2003, Microsoft forecast revenue of $31.5 billion to $32.4 billion and earnings of $1.89 to $1.92 per share. The consensus estimate was for earnings of $2.01 a share and revenue of $32.64 billion. The positive spin from the bulls was that Microsoft was expected to lower guidance. If it was expected, why wasn't the consensus lower? Merrill Lynch raised its recommendation on Microsoft to buy from market perform while simultaneously lowering its estimates for 2002 to $1.84 from $1.88 and its 2003 estimate to $1.92 from $1.95. Similarly, Goldman Sachs analyst Rick Sherlund lowered his 2002 earnings forecast to $1.81 from $1.88 and his 2003 estimate to $1.92 from $1.95. Still, after "sorting out" Microsoft's report, "we were pleased with the quarter [ly] results," Sherlund said. The stock remains on Goldman's recommended list. It's hard to believe New York Attorney General Eliot Spitzer is going to be pleased by any of this. Big Picture The trust issue aside, perhaps the most damaging thing is that Wall Street's eagerness to put a positive spin on the Microsoft earnings robbed the market of another opportunity to show its ability to withstand bad news. "If a Microsoft miss does not rock the market, then I believe you must conclude that there is far more resiliency and underlying strength than many of the bears are willing to admit," emailed Barry Ritholtz, market strategist at Ehrenkrantz, King Nussbaum, who is among those expecting a short-term rally. His email came in the aftermath of Microsoft's earnings -- when it looked like a miss. After rising as high as 10,270.88, the Dow Jones Industrial Average was recently up 0.5% to 10,253.37. The S&P 500 was up 0.2% to 1126.49 after trading as high as 1128.82 while the Nasdaq Composite was up 0.2% to 1805.96 after trading as high as 1816.62 and as low as 1804.47. Instead of cheering the market's resilience, the bulls must now explain why the market isn't faring better in the wake of Microsoft's "good" earnings. Oh, the irony. thestreet.com