Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: Jim Mullens who wrote (125991)	12/12/2002 10:09:02 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 152472

the problem with PEG is that it is used mainly to justify high PEs. (this is also the main reason for pro forma figures.) e.g., a co growing earnings 300% can have a 300 PE and still have a PEG of 1, or be cheaper than the market according to you. the problem is, significantly above-par earnings growth does not persist for very long. this should be obvious to you given QCOM's poor earnings growth these last several years. you can come up with a low PEG if you like by linearly extrapolating from a good year or two (especially one that hasn't occurred yet!), but you are ignoring the zero-growth years that significantly reduce the annualized geometric average growth. hence i believe it is prudent to rely on much, MUCH lower assumptions than your 35%. i think QCOM will be VERY lucky to do 10% annualized geometric average growth for the decade of the 2000s. [edit: just as an example of a different set of assumptions by an informed analyst, the Wells Fargo analysis just posted says: "For FY04, we project revenue of $3.3 billion and EPS of $1.08, based primarily on our expectation of lower chipset sales in FY04 and slower growth in royalty payments." so they expect EPS to DECLINE from 03 to 04. hardly consistent with your 35% geometric gains but very consistent with my point that earnings growth tends to come in irregular spurts, with periods of flat to negative growth in between. their analysis may or may not turn out to be true, but it is an informed perspective that should be considered in making earnings projections and considering whether the current price is fully valued, imo.] What is the actual "out of pocket cost" to the company? Did the company go out on the open market and by these options to give to their employees? that is the wrong way to look at it. you are looking for an up-front cash cost. but you are starting with the wrong assumption (that is, the assumption that nothing is a cost unless it is an up-front cash cost). instead, you need to look at economic value. a co can theoretically issue any number of options or authorized shares from its "printing press" at zero up front cash cost. but zero up front cash cost is not the same as zero value transfer. the concept of value as distinct from tangible assets should be very familiar to QCOM investors, who like to harp on about how valuable QCOM's parents are. well, fine, they are valuable. but so are the options that QCOM gives away by the bucketful. if QCOM gave away patents to employees or other cos, would you say there's no cost? no, because QCOM is transferring something of value. the same goes for options, and they are easier to value than patents. Would it then be appropriate at the time management is including this “ongoing value transfer”- option expense on the income statement, to also inform the shareholders of the estimated increase to profits (“ongoing economic value”) of doing such in the form of increased employee productivity/ loyalty? i didn't answer this before because i thought you were joking. how the hell are they going to estimate this? and while you're at it, why don't they estimate it for every public co? what i would suggest is, the more options a co gives, the lower its earnings should be. because studies have shown that cos that rely heavily on options tend to underperform the more parsimonious cos out there. this is especially true among cos that overweight the amount of options given to top mgmt, as discussed in a recent article in the NYT or the WSJ (i forget which). i'm not aware if QCOM is one of those cos with a "top-weighted" options compensation structure, but i would consider that a minus rather than a plus if true.

To: Jim Mullens who wrote (125991)	12/12/2002 2:34:11 PM
From: hueyone	Respond to of 152472

I believe I previously stated that Value Line uses their own methodology for reporting earnings which EXCLUDES gains and losses from non-recurring activities and (IMO) as such more closely represents pro forma than GAAP accounting. So, I believe my analysis does provide an “apples to apples” comparison. Imo, regardless of whether the trailing earnings that Value Line is using are closer to Gaap earnings or closer to the seriously questionable pro forma earnings that many companies report today, the difference between using "growth of trailing earnings" and starting with trailing twelve month earnings to put your PEG multiple on versus using "estimated forward earnings" and putting your PEG multiple on forward twelve month earnings, is enough in itself to make your analysis equating a forward PEG to Value Line's trailing PEG an invalid analysis and a non apples to apples comparison. I would also echo Mucho's sentiment that many investors have come to ruin over the past few years developing PEGs on high, forward estimated growth rates of pro forma earnings as a valuation measure. Too often, the expected, high long term forward growth rates simply do not materialize. While it is possible that your forecast for QCOM performance may materialize, your analysis is far from a "conservative analysis" imo. Best, Huey

To: Jim Mullens who wrote (125991)	12/12/2002 2:45:00 PM
From: hueyone	Respond to of 152472

What you say may well be the case. But, as I’ve said before, IMO any serious investor should consider both GAAP and pro forma earnings when evaluating the potential investment value of a company. I am in agreement with you, and I would also say that any serious investor should also seriously consider Standard and Poors' Core Earnings measures, which purport to measure the earnings from Core Operations of a company according to specific standards as opposed to the pro forma earnings reports that companies give us which are not subject to any stock market wide accounting standards. Here is the home page for Standards and Poor's Core Earnings. The link incudes a flash presentation summarizing what Core Earnings are all about as well as links to other articles explaining the measures: www2.standardandpoors.com Best, Huey

To: Jim Mullens who wrote (125991)	12/12/2002 6:14:14 PM
From: hueyone	Respond to of 152472

I'm still having trouble with this. What is the actual "out of pocket cost" to the company? Did the company go out on the open market and by these options to give to their employees? I think Mucho was correct when he suggested that your question had been answered over the course of several posts, but I will answer this question again more directly. I am sure you are fully aware that the company does not go out and buy the options on the open market to give to their employees. And your point is? My point, as is explained below, is that it is irrelevant whether or not the company has cash output for the options. They still involve a compensation expense. From my post #125849, I wrote this: I believe any other share based payments get counted as an expense in accounting. The logic is simple. If a company sells shares to the public and uses the proceeds to pay employees with cash, there is a clear expense. If the company issues those same shares to the employee and the employee sells the shares, there is the same expense to the company for the value of the shares. The two types of transactions are economic equivalents. Options are a little more complicated but essentially should follow the same general logic. I believe stock options are the lone exception to the normal principles of accounting which apply to other equity instruments and only fell through the cracks because of lobbying by business and the added difficulty of deciding how best to value options and when to value them. Message 18302929 Dr. Pacter, a prominent research advisor to FASB and IASB, has posited the following conclusions which I posted below in #125849 Companies acquire all sorts of assets and services in exchange for equity instruments such as stock. Those assets and services are just as valuable as similar items acquired for cash. If a company's attorneys are compensated in stock, legal expense is recognized. If a building is acquired in exchange for stock, depreciation expense is recognized over the asset's service period. Acquiring employee services by issuing options (an equity instrument) is no different. Compensation expense results from using the employees' services, not from issuing the options. nysscpa.org From the Harvard Business School Professors in post # 125852, I posted this: First, some argue that grants of stock options do not involve cash outlays, and therefore no expense should be recorded. This reasoning violates the basic accrual principle of accounting. Not every cash outflow is recorded as an expense in the period in which it occurs, nor does every expense recognized in a period involve a cash outflow. For example, when a company compensates employees by making outright grants of stock or promising future pension benefits, no cash outflows occur. Yet the company would record, as compensation expense, the value of the stock granted or the present value of the pension benefit promised. Stock-option grants should receive comparable treatment. Message 18302990 Best, Huey

To: Jim Mullens who wrote (125991)	12/12/2002 6:27:02 PM
From: hueyone	Respond to of 152472

P.S. When a company issues shares to vendors, employees, attornies in exchange for assets or services and takes an expense on the income statement, there is no complaining about "double counting", that this expense is "picked up in dilution", and the expense should not be counted on the income statement. The well accepted accounting logic that allows share grants to be counted both as an expense and an impact on dilution is no less valid for stock options than it is for share grants (with the value of stock options at grant of course being recognized as considerably less valuable and a smaller expense than is an outright share grant). Best, Huey