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To: Oeconomicus who wrote (142346)	5/17/2002 9:19:30 PM
From: H James Morris	Respond to of 164684

>>Second, I don't recall Bill ever discussing EBITDA, << Billy "the pump, and dump SI trader" declared Amzn EBITDA cash flow positive in 1998. It didn't happen until 2002. You keep betting on EBITDA results, and sooner or later you'll lose your ass. Have you noticed small cap stocks reporting in GAAP are on a tear?

To: Oeconomicus who wrote (142346)	5/18/2002 11:02:26 AM
From: H James Morris	Respond to of 164684

>>The earnings numbers that companies report are being treated with ever more suspicion these days, and justly so. It's not just the outright frauds like Enron--hundreds of otherwise perfectly respectable corporations have gotten in the habit of treating earnings reporting chiefly as an exercise in marketing and PR. In their press releases they peddle homegrown "pro forma" or "operating earnings" measures that leave out all the bad stuff. In their reports to the SEC they stuff the ever-growing cost of stock option grants to employees into a once-a-year footnote. "If nothing changes," said David Blitzer, chief investment strategist at Standard & Poor's, "investors will lose faith in the stock market." Blitzer isn't the only one who thinks so. There's been all sorts of talk lately--in the press, on Capitol Hill, at the SEC, even on Wall Street--about what should be done. A few months ago, Blitzer and his colleagues at S&P decided to do something on their own, and in a press conference Tuesday morning they announced the details of the new S&P approach to calculating what they are calling "core earnings." The idea is that the bottom-line net income calculated in accordance with generally accepted accounting principles (GAAP) just isn't that useful to investors, because it's full of one-time gains and losses and weird stuff like goodwill writeoffs that make it hard to discern a trend. At the same time, the "operating earnings" that S&P has kept track of in the past (when you hear people talk about the P/E ratio of the S&P 500, they're usually using operating earnings) is pretty much whatever companies define it to be and is thus susceptible to both innocent confusion and less-innocent fudging. To get core earnings, S&P will start with what it calls "as reported" net income, an already existing line on companies' income statements that is GAAP net income excluding discontinued operations, cumulative effect of accounting changes, and extraordinary items. Then you throw out pension fund gains and goodwill impairment charges, but leave in "restructuring" costs--which are usually excluded from measures of operating earnings but have become a near-annual event for many companies. It's hard to argue with any of this, and it's doubtful anyone will. But then comes the controversial part. S&P wants to include in core earnings the estimated value of the stock options that companies give their employees. "Stock options are part of employee compensation just like wages, benefits, and salaries," said Blitzer. Counting them as a cost would have reduced S&P 500 earnings by about 10% last year. And corporate America is current ferociously battling efforts by some in Congress to force them to subtract options expenses from their reported earnings. Companies have been disclosing their estimated options costs, calculated using options-pricing formulas such as the Black-Scholes model, in annual-report footnotes since 1996. But outside an incestuous little ghetto of value investors, accounting watchdogs, and journalists, nobody seems to have been paying any attention. S&P can only do so much to change that--it is quarterly earnings that markets pay attention to, and only a handful of companies report information on options grants quarterly. Blitzer says he and his colleagues thought about extrapolating options costs for quarterly core earnings, but decided there was no way they could do that reliably. So they were reduced to simply requesting that companies release the information every quarter, and publishing an annual core earnings numbers that does count options expense. That annual number may still have an impact, however, because S&P has a database division called Compustat that is pretty much the standard reference for data on corporate financial fundamentals. As of the end of May, investors and analysts will be able get 10 years of "core earnings" for the companies of the S&P 500 from Compustat. Which might help options-watching make the move from the ghetto to the investing mainstream. fortune.com