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Peter - very interesting excerpt from Peter Bernstein's paper.
Just yesterday, there was a bit of controversy across the ditch when St George
bank reported a 25 per cent jump in net profit. Why the controversy?
St George decided against writing down its Internet investments - check out this
Sydney Morning Herald article for the full story:
This article in the AFR also details the profit announcement:
As far as I can see, St George fits Bernstein's thesis perfectly - why ruin
an excellent profit result with having to write down some pesky Internet
investments? Indeed, investors choose to look at the good news, and St
George's shares surged 50 cents the day of the announcement.
Still though, it was good to see the Aussie press giving the issue some
airing.
Best Regards
Ben Dutton
----- Original Message -----
Sent: Thursday, May 10, 2001 9:17
PM
Subject: Re: [sharechat] The Numbers Game
- not just a recent happening
Ben - that was a really good
article you linked us to.
Is truely frightening when
Cisco report quarterly earnings of 3 cents a share and everybody is happy -
but real losses are 37 cents a share or $2.69B
It is also
a bit of a concern how more and more NZ companies are using EBITDA as the
measure of profitability - especially those that have undertaken a series of
acquisitions. Last year ADV got into trouble with their 'confusion' over
EBITDA and real earnings (losses) . I note that RMG are stressing EBITDA now
when in all probablity, due to high intangibles to be written off, they are
trading at a loss.
What was reported in the
Business Week article has been going on for years. Author Peter
Bernstein recently did a paper on corporate earnings in the USA over the last
15 years - and found that on the average 20% of earnings in any one year had
vanished five years later due to write-offs etc
An excerpt
from a review of his paper -
Peter Bernstein's analysis also
takes a look at the quality of earnings. He compares year-on-year changes in
operating earnings to write-offs and finds that "write-offs tend to
deepen in years when earnings growth slows down or goes negative".
Conversely, write-offs decline in years when earnings growth is more
vigorous. Bernstein explains that "this correlation does suggest that
managements are more inclined to disclose the consequences of bad decisions
when things are rotten anyway, rather than divulging these unhappy facts when
they are originally discovered. Making lousy earnings look even worse is
likely to do less damage to a stock whose price is probably already depressed
than the damage an elevated stock price could suffer when a potentially good
earnings report is spoiled with a dose of bad news."
Bernstein further comments that
write-offs seldom relate to recent decisions, but are usually "the
consequence of unfortunate moves taken some time in the past". When
he analysed each year's write-offs as a percentage of reported earnings five
years earlier, he found that "over this fifteen-year time span, an
average of 20% of reported earnings in any one year vanished five years later
due to write-offs; the figure exceeded 30% on three occasions"
(emphasis in original).
Bernstein concludes that it is
therefore questionable how much confidence we can have in reported earnings
and in reports of how well these companies are doing at any particular time.
He also finds that the probabilities do not favour an extension of the
impressive earnings gains of the last few years into the next few years
despite the breathtaking pace of technological changes.
Pretty scary stuff - and there is
eveidence that the same thing happens with many NZ corporations.
Cheers
Peter
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