Jubak's Journal Recent articles: • Join forces to build a list of stocks to trust, 7/15/2003 • Can the rally survive earnings season?, 7/11/2003 • Today's high yield, tomorrow's headache, 7/10/2003 More... | Jubak's Journal Don't be fooled by earnings headlines When a company says its earnings cleared expectations or hit a record, it's worth digging into the numbers. Often you'll find that business isn't as good as the company wants you to believe. By Jim Jubak Its a great headline number: Bank of America Second-quarter income climbed to $1.84 a share from $1.40 a share in the year-earlier quarter, which crushed the Wall Street consensus estimate of $1.57 for the quarter. No wonder the bank's stock tacked on $2 a share in the hours after it reported earnings this week. But take a harder look at the numbers and the headline is deceptively positive. The bank sold $282 million in residential loans to reduce the risk of prepayment by mortgage holders. It also received another $296 million from the sale of other securities. Together the two accounted for about 23 cents a share of that $1.84 in quarterly earnings. Without that boost, earnings were $1.61 as share, better than the consensus figure but much closer to it.
If you read further down in the financials, youll note that the banks year-ago second quarter was an easy target to beat. A year ago, Bank of America set aside $143 million to cover bad loans. That dropped to just $3 million in the most-recent quarter. Theres nothing crooked about Bank of Americas numbers. Theyre just not as impressive as the headlines say. Neither are the headline numbers from Merrill Lynch Second best Heres the headline on the companys earnings press release: Merrill Lynch reports second-quarter net earnings of $1 billion, $1.05 per diluted share, second-best quarterly earnings ever. True enough, but also misleading to investors trying to decide whether business on Wall Street has recovered enough to make Merrill, Goldman Sachs Let's look at how Merrill made its numbers. It certainly didn't do it on commissions from investors buying stock or bonds: Commission revenue fell by 14% from the last year's second quarter. Revenue from asset management fell by 11% from 2002. But Merrill belted the ball out of the park when it came to trading for its own accounts, with trading revenue, the majority from bond trading, climbing 51% from the year-earlier period. Underwriting new stocks and bonds, especially bonds, climbed 13%. So reading beyond the headlines investors come to two conclusions: First, the bond market and falling interest rates were the source of the companys near-record earnings. Second, the individual investor hasnt yet returned to the markets. The choice The real test for Wall Street analysts is still to come when companies such as Microsoft Will Wall Street analysts focus on earnings minus these expenses? Or will they simply add the expenses back in and pretend that these expenses dont really count? Wall Street has flunked its initial test on options. Last year, Amazon.com But the company also kept reporting a second set of as if numbers that put those expenses right back into earnings. According to those "as-if" numbers, Amazon showed net income of $40 million in the first quarter. Subtract $27 million for stock and options expenses -- and use standard accounting for currency fluctuations and restructuring charges -- and Amazon shows a $10 million loss. Guess which number Wall Streets analysts chose to use? Yep, according to Wall Street, Amazon earned 10 cents a share for the first quarter. Wall Street could still do a better job when other options-heavy technology companies report their earnings. But dont hold your breath. Investors who want to take clean accounting into their own hands should check out the registry of clean stocks that I launched in my July 15 column. By using the Internet to harness the knowledge of all my readers, I hope to put together a list of companies that investors can trust. I posted the first three nominees on Tuesday and will nominate three more stocks each month for vetting by readers. Please join the effort. Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Microsoft. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||
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