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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (45188)	11/9/2005 2:49:37 PM
From: ild	Read Replies (2) \| Respond to of 110194

HERB GREENBERG Are companies lowballing estimates? Commentary: There's also Marvel, 1-800-Contacts, more By Herb Greenberg, MarketWatch Last Update: 2:44 PM ET Nov. 9, 2005 SAN DIEGO (MarketWatch) -- The other day on CNBC's "On the Money," I made a comment that suggested the market is rigged. The show's host, Dylan Ratigan, wondered whether I was saying stocks are merely puppets on a string. I told Dylan and I'll tell you: "Well ... yeah!" The game of investing for way too many people is just that -- a game. Maybe it's because so many hedge funds have so much to lose, especially at this time of year. Maybe it's because so many executives at so many companies have so much on the line, especially this time of year. Maybe it's because when it comes to money, all bets are off. Oh, I know: There are plenty of legitimate investors, executives and others on and associated with Wall Street who play it straight. But the reality is that outside of Washington, the combo of corporate America and Wall Street is the ultimate spin machine. Merrill Lynch strategist Richard Bernstein put it best in an Aug. 1 report, headlined "Three cheers for the IR officer." He noted the weirdness of so many upward estimate revisions at a time when profit growth appears to have decelerated. The only explanation, according to Bernstein, is that companies have been playing the "beat and raise" game, lowballing guidance so they can beat and give the impression of better performance. "The positive surprise," he writes, "has become ubiquitous, but that might not be a reflection of economic and corporate strength." Instead, Bernstein said, it's merely "the result of a secular trend by companies to put a positive spin on every earnings announcement. The end result is that these 'beat and raise' ploys skew investors' focus away from the fact that growth is slowing." Which gets us to the current round of earnings, which on the surface look mahvelous, simply mahvelous, dear! Yet a closer look, Bernstein added, shows that "the highest proportion of negative surprises in seven years." Bernstein, by the way, is often viewed as an overly gloomy permabear. My view is that he's simply being Toto, trying to pull the curtain away to show the "wizard" pulling the levers. But nobody wants to look. FinancialsMore MVLMVL, , ) reported a sharp drop in third-quarter profits and sliced 2006 guidance. The company blamed the lower guidance on "a difficult year for both toys and licensing." So suddenly, out of the blue, toy and licensing is expected to be bad? C'mon! What's really happening here? The answer may be tied to the way Marvel has historically accounted for long-term licenses and renewals, by booking the net present value of the minimums on those deals at the time of signing. The result is a big up-front payment, which is fine as long as there are deals to be done and at a rising rate. The minute there's a slowdown, the lack of big up-front payments hurts as much as it originally helped. The clue: Operating cash flow next year is expected to be $30 million less than this year "as the cash payments form licensing contracts recorded as revenue in 2005 and prior years are received by the company." No wonder at least one investor was questioning the company, on its conference call, about a $50 million video-game licensing fee that will be booked in the fourth quarter. Was that part of the company's original 2005 guidance? If not, it would appear that 2005 guidance, which has been revised to be a tad better than expected, would really be worse than expected without the extra pop. Without giving detail, the company conceded the number was more than it had originally expected. Not to worry. Zap! Pow! Zowee! Marvel will soon save the day for itself with its supposed risk-free entry into the movie business. (Oh, sorry, forgot that was the story that kept the stock elevated a quarter or two ago.) ... Herb Greenberg is senior columnist for MarketWatch, based in San Diego. He does not own stocks (except for shares of his employer), and he does not sell stocks short or invest in hedge funds. marketwatch.com{E1E7EA76-12A7-4037-A793-E0115F8808B8}&siteid=mktw&dist=nbc