DJIA 8891.24 -31.13 (-0.35%) S&P 500 1093.03 +2.05 (+0.19%) Nasdaq 1761.78 +14.96 (+0.86%) Value Line ndx 944.12 -0.30 (-0.03%) 30-Year Bond 104 21/32 -8/32 5.79% Yield
The world's biggest automaker, General Motors, <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>, raced ahead $1 7/8 to $73, while Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> sped up $3 1/2 to $56 3/8 on optimism over increased car sales in May. Both companies will release sales figures tomorrow. Added incentives in the Big Three's coupon war may have made last month the strongest for car sales since last December. Today Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> reported that U.S. sales of cars and trucks jumped 27% in May -- from a strike-weakened month a year ago -- which made it the best sales month in Chrysler history. Other news also helped to drive up GM and Ford shares. GM Chairman John Smith, Jr. said the company won't spin off its satellite unit, Hughes Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %>, because of its "tremendous" importance to GM's growth plan. Meanwhile, word that Ford and its Mazda Motor Corp. affiliate are looking to form a consortium to acquire a controlling stake in the insolvent South Korean carmaker Kia Motors Corp. also added fuel to Ford's run. Ford already owns about 9% of Kia, and Mazda has roughly a 7% stake.
Restaurant chain owner and operator Spaghetti Warehouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWH)") else Response.Write("(NYSE: SWH)") end if %> surged $2 1/4 to $8 3/16 after Dallas-based private investment firm ConQuest Partners announced yesterday that it will raise its acquisition bid from $8.50 to $8.75 a share in cash, matching a rival stock-for-stock bid from what Spaghetti Warehouse has called a "similarly sized public company." ConQuest, which advises and acquires food-service companies, first approached Spaghetti Warehouse in April. The pasta chain rejected the offer as well as two other written indications of interest, saying the offers undervalued the company. Last week, the company announced the resignation of Philip Ratner, its chairman, president, and CEO, "to pursue other interests," and in a sudden about-face, today it announced it will "investigate the company's valuation in the open-market through an auction process." In other words, Spaghetti Warehouse is officially up for sale. With at least three possible bidders, the auction could turn out to be quite a food fight.
QUICK TAKES: Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> regained $4 5/16 to $82 5/8 after what some called an overreaction yesterday to Intel's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> announcement that it will delay the launch of its next-generation 64-bit Merced chip... Internet content aggregator Excite Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> jumped $5 1/4 to $56 5/8 after announcing that it has signed agreements for $21 million in advertising revenues in connection with its two-year partnership with Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %>... Telecommunications equipment company Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> connected for $2 3/4 to $71 11/16 after announcing that it signed multiple contracts in China, Japan, and South Korea to supply high-capacity optical networking transmission technology. The company also announced an alliance with Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> to develop next-generation Digital Signal Processor (DSP) technology and to cross-license existing DSP architectures.
Printing and imaging products company Xerox <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> picked up $2 13/16 to $102 1/8 after announcing plans to invest $270 million on a European operations center in Ireland... BMC Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BMCS)") else Response.Write("(Nasdaq: BMCS)") end if %> moved up $1 1/2 to $45 1/4 after announcing an alliance with Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> to make an advanced operating system and platform management for Microsoft's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> Windows NT product... Broderbund Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %> tacked on $1 1/4 to $16 3/4 on reports that the entertainment software company may be acquired by Hasbro Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAS)") else Response.Write("(NYSE: HAS)") end if %> or by another software company... Voice response system developer Intervoice <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTV)") else Response.Write("(Nasdaq: INTV)") end if %> rose $1 1/4 to $14 11/16 after First Albany raised its rating on the company to "buy" from "neutral."
Networking equipment and services company Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> gained $1 5/16 to $27 13/16 after announcing it will acquire privately held wireless local area network (WLAN) company Netwave Technologies Inc. for about $10 million... Electronic interconnect products maker Sigma Circuits <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIGA)") else Response.Write("(Nasdaq: SIGA)") end if %> jumped $1 to $10 1/4 after announcing that it has agreed to be acquired by diversified manufacturing and service company Tyco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TYC)") else Response.Write("(NYSE: TYC)") end if %> for about $10.50 a share in cash -- a 13.5% premium to Sigma's closing price yesterday... Life sciences company Rhone-Poulenc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RP)") else Response.Write("(NYSE: RP)") end if %> rose $15/16 to $55 15/16 after announcing late yesterday that the Oncologic Drugs Advisory Committee to the FDA has recommended approval of expanded use of Taxotere for Injection Concentrate for treating patients with locally advanced or metastatic breast cancer after failure of chemotherapy.
Information technology consulting firm Whittman-Hart <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WHIT)") else Response.Write("(Nasdaq: WHIT)") end if %>, which will replace Showboat Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBO)") else Response.Write("(NYSE: SBO)") end if %> in the Standard & Poor's SmallCap 600 Index after the close of trading today, picked up $1 7/16 to $39 7/16. Showboat was acquired by Harrah's Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HET)") else Response.Write("(NYSE: HET)") end if %>... Personal communications services (PCS) provider Aerial Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AERL)") else Response.Write("(Nasdaq: AERL)") end if %> leapt $7/8 to $7 after announcing that Finnish wireless telecommunications operator Sonera Corp. will take a $200 million equity stake in a wholly owned Aerial subsidiary and become its largest independent investor... Copper and copper alloy tube manufacturer Wolverine Tube <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLV)") else Response.Write("(NYSE: WLV)") end if %> added $1 3/4 to $38 9/16 after announcing yesterday that it has acquired a 240,000-square-foot welded tube manufacturing facility in Jackson, Tenn., and selected assets and technology from a subsidiary of Korea-based Poongsan Corp. Prudential Securities upgraded its rating on the company to "buy" from "hold."
Russian shares recovered on hopes of a Western aid package. Long-distance company Rostelecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROS)") else Response.Write("(NYSE: ROS)") end if %> jumped $1 7/16 to $16; mobile phone company Vimpel-Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VIP)") else Response.Write("(NYSE: VIP)") end if %> rose $5 7/8 to $49 7/8; oil company AO Tatneft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TNT)") else Response.Write("(NYSE: TNT)") end if %> gained $1 7/16 to $11 15/16; and Templeton Russia Fund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRF)") else Response.Write("(NYSE: TRF)") end if %> added $1 5/8 to $25 1/2... Marine container lessor and passenger transport and hotels operator Sea Containers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCR.A)") else Response.Write("(NYSE: SCR.A)") end if %> cruised ahead $4 to $44 1/4 after announcing that it expects 1998 earnings to be 60% to 80% higher than last year. It predicted that basic EPS would be between $3.25 and $3.75, compared with $2.07 in 1997. Diluted EPS would be between $0.22 and $0.34 less than basic earnings... Document management software company Mobius Management Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MOBI)") else Response.Write("(Nasdaq: MOBI)") end if %> climbed $7/8 to $15 1/8 after Goldman Sachs added the company to its "recommended list."
Advanced Radio Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARTT)") else Response.Write("(Nasdaq: ARTT)") end if %> leapt $2 7/8 to $12 7/8 on rumors that WinStar Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCII)") else Response.Write("(Nasdaq: WCII)") end if %> will buy the wireless telecommunications company. WinStar gained $2 15/16 to $40 1/2... Biotechnology company Matrix Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MATX)") else Response.Write("(Nasdaq: MATX)") end if %> climbed $1/2 to $5 3/8 after announcing the resignation of chief operating officer and CFO James R. Glynn, who will join a privately held San Diego-based biotech company as senior vice president and CFO... Cancer treatment producer Theragenics Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THRX)") else Response.Write("(Nasdaq: THRX)") end if %> jumped $2 9/16 to $28 5/8 after announcing that the first European TheraSeed implant took place successfully in Milan, Italy on May 27.
American Eagle Outfitters <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AEOS)") else Response.Write("(Nasdaq: AEOS)") end if %>, which sells casualwear aimed at teenagers and young adults, was knocked down $2 3/8 to $33 1/8 after rival Abercrombie & Fitch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> sued the firm in federal court. The lawsuit accuses American Eagle of "an intentional and systematic copying of the Abercrombie & Fitch brand, its images, and business practices, including the look of [Abercrombie's] merchandise, marketing, and catalog/magazine." American Eagle vice chairman George Kolber defended his company in an interview with Reuters. "We follow sound business practices," he said. "We're not in the business of copying Abercrombie & Fitch." Abercrombie, which became independent last month when Limited Inc. NYSE: LTD) divested its 84% stake, looks like it means business. It is looking not only to enjoin American Eagle's business practices, but wants a slice of the firm's profits as well as punitive damages.
High-speed wide area network (WAN) access equipment supplier Larscom Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LARS)") else Response.Write("(Nasdaq: LARS)") end if %> was whacked $3 1/16 to $6 after saying that reductions and delays in new orders from MCI Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %> and another unnamed but "major" client will result in "near breakeven" fiscal Q2 earnings per share. The Street estimate had called for earnings of $0.12 per share. The firm said it is also experiencing longer-than-expected sales cycles for its EDGE line of access concentrators, which were picked up by the company when it bought NetEDGE Systems last December. Larscom CEO Deborah Soon said she was "disappointed" with the firm's financial outlook for the quarter. Apparently, she is not alone, as the firm was downgraded today by no less than four brokerage firms.
KEMET Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KMET)") else Response.Write("(Nasdaq: KMET)") end if %>, a major producer of ceramic and solid tantalum capacitors, shorted out $23/32 to $14 23/32 after stating that bookings and orders have fallen about 20% since the beginning of April as original equipment manufacturers (OEMs) and contract manufacturers correct their inventories. As a result, KEMET is making a preemptive move to "limit internal inventory accumulation and quickly lower period costs to offset margin decline" by eliminating 190 salaried employees, 450 contract employees, and 800 hourly employees in the U.S. and Mexico. The firm will take a $1.6 million charge in the current quarter related to the staff reductions, which are expected to trim its annual expenses by $14 million.
QUICK CUTS: Drug maker American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %> slid $1 1/4 to $48 and life sciences firm Monsanto <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> dropped $1 3/8 to $53 1/8 after the two companies unveiled a proposed $34.4 billion merger yesterday... Several railroad operators were down today after Merrill Lynch reduced their long-term ratings to "accumulate" from "buy." Union Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNP)") else Response.Write("(NYSE: UNP)") end if %> lost $1 1/8 to $45 1/4, CSX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSX)") else Response.Write("(NYSE: CSX)") end if %> lost $1 to $46 1/4, Norfolk Southern <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSC)") else Response.Write("(NYSE: NSC)") end if %> slid $5/16 to $31, and Burlington Northern <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BNI)") else Response.Write("(NYSE: BNI)") end if %> dropped $2 9/16 to $95 3/4... Aircraft manufacturer Boeing Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> fell $1 3/4 to $45 7/8 after a federal judge said plaintiffs could sue the company and Trans World Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %> for nonmonetary damages, such as stress and emotional loss, in lawsuits related to the crash of TWA Flight 800 in 1996. TWA lost $1/4 to $10 1/16.
German pharmaceutical giant Hoescht A.G. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOE)") else Response.Write("(NYSE: HOE)") end if %> slipped $2 to $47 11/16 as speculation that either German rival Bayer A.G. or Swiss drug group Roche Holding would make a bid for the company died down... Medical products manufacturer Baxter International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAX)") else Response.Write("(NYSE: BAX)") end if %> lost $1 7/8 to $54 7/8 after suspending the clinical trials of its HemAssist blood substitute in Europe to analyze the data it has already gathered. The company said stopping the trails will delay the product's approval process by regulators in the U.S. and Europe... TV and radio network CBS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBS)") else Response.Write("(NYSE: CBS)") end if %> fell $1 11/16 to $29 3/4 after analysts told the Wall Street Journal that the company may have a difficult time attracting additional TV advertisers for its upcoming fall season... Video security products developer Macrovision Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MVSN)") else Response.Write("(Nasdaq: MVSN)") end if %> declined $2 1/8 to $19 5/8 after filing a public offering of 1.5 million shares.
Novamerican Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TONSF)") else Response.Write("(Nasdaq: TONSF)") end if %> dropped $2 to $9 3/8 after Salomon Smith Barney downgraded the metal products processor and distributor to "hold" from "buy"... Local and wide area network connectivity software and hardware provider Cabletron Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %> slipped $11/16 to $11 11/16 after the company reduced the prices of its GIGAswitch/ATM line of asynchronous transfer mode (ATM) modules by up to 42%... Wireless communications systems manufacturer Telxon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLXN)") else Response.Write("(Nasdaq: TLXN)") end if %> fell $2 7/8 to $30 1/8 after rejecting yesterday's takeover bid from bar code transaction systems maker Symbol Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBL)") else Response.Write("(NYSE: SBL)") end if %>. Symbol was offering either $40 per share in cash or $42 per share in cash and stock for the company.
Computer disk array and small computer system interface (SCSI) controller maker Ciprico Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPCI)") else Response.Write("(Nasdaq: CPCI)") end if %> lost $1 9/16 to $10 1/8 after revising its fiscal Q3 earnings estimate downward to between $0.01 and $0.17 per share, which is below the First Call mean estimate of $0.24 per share... EFTC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EFTC)") else Response.Write("(Nasdaq: EFTC)") end if %> slipped $13/16 to $13 15/16 after the contract electronic manufacturer sold 3 million common shares in a public offering at a price of $14 per share, which was below the stock's closing price of $14 3/4 per share yesterday... MCN Energy Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCN)") else Response.Write("(NYSE: MCN)") end if %> lost $2 1/2 to $33 /16 after the oil and gas distribution and exploration firm said falling energy prices and unusually warm weather will result in fiscal 1998 earnings coming in below analysts' expectations. The First Call mean estimate called for earnings of $2.05 per share.
Property and casualty insurer Vesta Insurance Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTA)") else Response.Write("(NYSE: VTA)") end if %> was crushed $24 15/16 to $27 3/4 after not trading yesterday. The firm is conducting an internal investigation of possible accounting irregularities that may result in downward revisions to its earnings in Q1 of fiscal 1998 and Q4 of fiscal 1997. Also, the company said its president and CEO resigned... Independent Bank Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INDB)") else Response.Write("(Nasdaq: INDB)") end if %> slid $1 5/8 to $20 1/8 after the holding company for Rockland Trust Co. was downgraded by Gruntal & Co. and Advest Inc... Young women's apparel direct marketer dELiA*s Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DLIA)") else Response.Write("(Nasdaq: DLIA)") end if %> slid $1 15/16 to $21 1/16 after saying its acquisition of 24 Jean Country and Screeem! retail stores from privately held American Retail Enterprises for $23.4 million in cash and stock will result in "substantial expenses" in fiscal Q2.
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
Fully Taxed
Continuing on with Alex Schay's piece on quality of earnings, there is one thing that I would like to add to the discussion that might help newer investors adjust an income statement to reflect a company's economic earnings rather than its reported earnings.
Over the last couple years, companies have gone to great lengths to point out to investors in earnings press releases what earnings would have been "before extraordinary items" or "before merger-related charges." The appropriateness of such charges and the skullduggery that can accompany such accounting treatments is an item in and of itself that we'll deal with here at some point, but for the time being, the purpose here is to help someone figure out how to adjust things for himself or herself, rather than relying on the company's presentation of the financials (or the media's presentation).
One of the best examples among Foolish holdings where investors have an opportunity for adjusting earnings is with Fool Portfolio holding 3Dfx <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %>. I wrote about the company's earnings earlier this year when it came out with an EPS number that totally blew away earnings estimates. One of the reasons why it did is because some of the analysts were reporting their estimates in a different manner than the company was reporting earnings. To wit, at least one of the analysts was estimating EPS on a fully taxed basis, or without the boost to earnings that came from the tax-loss carryforwards the company was using to reduce or wipe out its current income tax expenses.
Not that 3Dfx was doing something shady, because it wasn't. But one should make some effort to look through temporary and non-operational boosts to net income to really assess the earnings power of a corporation one is looking at. For example, you wouldn't want to treat as ongoing earnings the gain that an airline realizes when one of its planes crashes and the company receives an insurance settlement that is $5 million above the cost at which the plane was carried on the airline's books. To treat that as ongoing income that is the result of the company doing something right will lead to disappointment. Similarly, the boost to 3Dfx's net income that came from the tax loss carryforwards should be totally discounted by investors. That boost comes about because the company has generated losses in the past. Unless you're actually investing in the company because you feel good about losing money and then claiming the deduction later on, you should make an adjustment to the company's earnings.
Let's look at the company's first quarter income statement:
(in thousands)
Revenues.....$50,008
Cost of revenues.....24,278
Total operating expenses.....15,464
Income (loss) from operations.....8,814
Interest and other income (expense), net.....514
Income (loss) before income taxes.....9,328
Provision for income taxes.....1,866
Net income (loss).....$ 7,462
EPS.....$0.50
On an average sharecount of 15.012 million shares, the company reported EPS of $0.50. Without international operations (pre-tax income from which would be taxed at a lower rate than U.S. operations), the company's tax rate should be in line with statutory tax rates. Depending upon a company's base of operations in the U.S., total statutory tax rates here vary from around 33% to 40%. In general, one can assume a 35% tax rate on U.S. earnings to estimate a company's economic earnings. Last quarter 3Dfx generated pre-tax income of $9.329 million and recorded an income tax expense of $1.866 million, resulting in an effective tax rate of 20%. An investor wanting to assess the true earning power of the company would adjust the income tax line as follows:
(in thousands)
Income (loss) from operations.....$8,814
Interest and other income (expense), net.....514
Income (loss) before income taxes.....9,328
Provision for income taxes.....3,265
Net income (loss).....$6,063
EPS.....$0.40
The income statement now reflects an effective tax rate of 35% and EPS thus becomes $0.40, ten cents lower than reported.
The reason we do this is because we want to look down the road and estimate how well the company can do in the future. If I think it can do revenues of $100 million per quarter somewhere down the line (I have no idea whether it can or not, this is merely to illustrate a point) and generate the same sort of operating margins, then we would be looking at an income statement somewhat like this:
(in thousands)
Revenues.....$100,000
Income (loss) from operations.....17,630
Interest and other income (expense), net.....514
Income (loss) before income taxes.....18,144
Provision for income taxes.....6,350
Net income.....11,794
EPS.....$0.78
If this is, in fact, what earnings will look like three years from now, an investor would be modeling the investment proposition on a 25% compound annual EPS growth rate, using Q1 1998 EPS of $0.40. That's the base EPS number at which we arrived after making adjustments. If we took the reported $0.50 as the base EPS number, we would be modeling EPS growth of only 16% per year. Depending on one's investment objectives and the current price of the stock, the real growth rate you assume will make a difference in your go/no-go decision on this investment. It's tempting to say, "3Dfx is trading at only 10 times annualized earnings based on last quarter's earnings" if you assume $0.50 to be the economic earnings of this company last quarter. But three years down the line, your perspective will be different. Will you look back at the company's three-year compound growth of 16% or 25%? The management of the company should be judged based on the latter growth rate, not the former, because it was their strategies that resulted in real growth of 25% per year. The lower 16% growth rate came courtesy of the tax laws.
In any case, an investor should always look at the relationship between pre-tax earnings and net income when looking at an earnings press release. If there isn't a significant gap between those two, then something's going on with the company's tax situation. The 10-Q will tell the story when it comes out. Adjusting net income to a tax rate that is more in line with statutory rates, making a note of it in your files, and using the resulting adjusted EPS as the base case for assessing the company's future progress -- and for its current return on equity and other return on capital measures -- will give the investor a better picture of what's going on with the company.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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