Bush economy surging ahead

Corporate profit does translate into higher stock prices, yet, those gains are only realized when one sells their share. The employees who may have stock purchase plans will be realizing some paper gain ontheir holding but will also be buying new shares at a higher price.

The main reason for their higher profits is explained by the touts (bookmakers as I like to call tham) on Walls St, is the obvious higher price "at the pump" with high demand.

That seems counter intuative if you think about the "price of wholesale oil" being higher, $65./bbl. If the wholesale price goes up 10% and I raise the retail price 10%, is not my profit margin the same?

To me there is somehting else at work here that the "bookmakers" are not telling the public.

It is, as a percentage of the total price. But when Wall Street buys or sells your company's stock, they are interested in your profits. And if you raise the retail price you charge by the same percentage as the wholesale price you pay, your profit margine isn't the same in absolute terms; rather, it rises.

Actually earnings which may or may not be profit. Stocks are valued at what investors perceive to be their future earnings.

True.

Please help me understand your nomenclature here. I would have said that "earnings" is synonymous with "profits", and a look into Webster's online dictionary did not contradict this view. Perhaps you can give me an example of an earning that isn't a profit as you define those terms?

Have you not heard of EBITDA?

Gosh, Thonas, you should know better. Would you consult Webster's for legal definitions?

Or in other words, you can't give me any counterexample. It was foolish of me to ask; no further questions.

Huh??

Creative accounting methods to calculate "earnings" is what allows the Ken Lays and Jeffrey Skillings of the world to perpetrate Ponzi Scheme to bilk investors.


Types Of EPS
By Rick Wayman

Gertrude Stein said, "A rose is a rose is a rose," but the same cannot be said about earnings per share (EPS).

While the math may be simple, there are many varieties of EPS being used these days, and investors must understand what each one represents if they're to make informed investment decisions. For example, the EPS announced by the company may differ significantly from what is reported in the financial statements and in the headlines. As a result, a stock may appear over- or undervalued depending on the EPS being used. This article will define some of the varieties of EPS and discuss their pros and cons.

By definition, EPS is net income divided by the number of shares outstanding; however, both the numerator and denominator can change depending on how you define "earnings" and "shares outstanding". Because there are so many ways to define earnings, we will first tackle shares outstanding.


Shares Outstanding
Shares outstanding can be classified as either primary (primary EPS) or fully diluted (diluted EPS).

Primary EPS is calculated using the number of shares that have been issued and held by investors. These are the shares that are currently in the market and can be traded.

Diluted EPS entails a complex calculation that determines how many shares would be outstanding if all exercisable warrants, options, etc. were converted into shares at a point in time, generally the end of a quarter. We prefer diluted EPS because it is a more conservative number that calculates EPS as if all possible shares were issued and outstanding. The number of diluted shares can change as share prices fluctuate (as options fall into/out of the money), but generally the Street assumes the number is fixed as stated in the 10Q or 10K.

Companies report both primary and diluted EPS, and the focus is generally on diluted EPS, but investors should not assume this is always the case. Sometimes, diluted and primary EPS are the same because the company does not have any "in-the-money" options, warrants or convertible bonds outstanding. Companies can discuss either, so investors need to be sure which is being used.

Earnings
As has been evident in recent headlines, EPS can be whatever the company wants it to be, depending on assumptions and accounting policies. Corporate spin-doctors focus media attention on the number the company wants in the news, which may or may not be the EPS reported in documents filed with the Securities & Exchange Commission (SEC). Based on a set of assumptions, a company can report a high EPS, which reduces the P/E multiple and makes the stock look undervalued. The EPS reported in the 10Q, however, can result in a much lower EPS and an overvalued stock on a P/E basis. This is why it is critical for investors to read carefully and know what type of earnings is being used in the EPS calculation.

We will focus on five types of EPS and define them in the context of the type of "earnings" being used.

Reported EPS (or GAAP EPS)
We define reported EPS as the number derived from generally accepted accounting principles (GAAP), which are reported in SEC filings. The company derives these earnings according to the accounting guidelines used. (Note: A discussion of how a company can manipulate EPS under GAAP is beyond the scope of this article, but investors should remember that it is possible. Our focus is on how earnings can be distorted even if there is no intent to manipulate results.)

A company's reported earnings can be distorted by GAAP. For example, a one-time gain from the sale of machinery or a subsidiary could be considered as operating income under GAAP and cause EPS to spike. Also, a company could classify a large lump of normal operating expenses as an "unusual charge" which can boost EPS because the "unusual charge" is excluded from calculations. Investors need to read the footnotes in order to decide what factors should be included in "normal" earnings and make adjustments in their own calculations.

Ongoing EPS
This EPS is calculated based upon normalized or ongoing net income and excludes anything that is an unusual one-time event. The goal is to find the stream of earnings from core operations which can be used to forecast future EPS. This can mean excluding a large one-time gain from the sale of equipment as well as an unusual expense. Attempts to determine an EPS using this methodology is also called "pro forma" EPS.

Pro Forma EPS
The words "pro forma" indicate that assumptions were used to derive whatever number is being discussed. Different from reported EPS, pro forma EPS generally excludes some expenses/income that were used in calculating reported earnings. For example, if a company sold a large division, it could, in reporting historical results, exclude the expenses and revenues associated with that unit. This allows for more of an "apples-to-apples" comparison.

Another example of pro forma is a company choosing to exclude some expenses because management feels that the expenses are non-recurring and distort the company's "true" earnings. Non-recurring expenses, however, seem to appear with increasing regularity these days. This raises questions as to whether management knows what it is doing or is trying to build a "rainy day fund" to smooth EPS.

Headline EPS
This EPS number is the one that is highlighted in the company's press release and picked up in the media. Sometimes it is the pro forma number, but it could also be an EPS number that has been calculated by the analyst/pundit that is discussing the company. Generally, soundbites do not provide enough information to determine which EPS number is being used.

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Cash EPS
Cash EPS is operating cash flow (not EBITDA) divided by diluted shares outstanding. We think cash EPS is more important than other EPS numbers because it is a "purer" number. Cash EPS is better because operating cash flow cannot be manipulated as easily as net income and represents real cash earned, calculated by including changes in key asset categories such as receivables and inventories. For example, a company with reported EPS of $0.50 and cash EPS of $1.00 is preferable to a firm with reported EPS of $1.00 and cash EPS of $0.50. Although there are many factors to consider in evaluating these two hypothetical stocks, the company with cash is generally in better financial shape.

Other EPS numbers have overshadowed cash EPS, but we expect it to get more attention because of the new GAAP rule (FAS 142), which allows companies to stop amortizing goodwill. Companies may start talking about "cash EPS" in order to differentiate between pre-FAS 142 and post-FAS 142 results; however, this version of "cash EPS" is more like EBITDA per share and does not factor-in changes in receivables and inventory. Consequently, I think it is not as good as operating-cash-flow EPS, but is better in certain cases than other forms of EPS.

The Bottom Line
Caveat investor (investor beware)! There are many types of EPS being used, and investors need to know what the EPS represents and determine if it is a valid representation of the company's earnings. A stock may look like a great value because it has a low P/E, but that ratio may be based on assumptions with which you may not agree.


Source

I gave you an example. EBITDA.



If you don't understand the difference between profits and earnings, why not just admit it?

As related to Exxon's record earnings, one thing that troubles me are they "bookmakers" reaction to "accidential" profits and/or anticipated profits. We saw this during the "DOT COM" hysteria in the '90's when artifical or exagerated expectations were provided by the Analysts causing tempory spikes in companies that had not even shown any profits.

What happens next year when Exxon goes back to a more "traditional" earnings year and the "bookmakers" say "PROFITS ARE OFF 30%". Typically, the stock price tumbles.

So you don't understand Wall Street terminology either. That's fine. But don't try to make it look like I don't know what I am talking about.

It is silly to depend on a dictionary when discussing investment nomenclature.

I know EBITDA is a measure of a company's earnings. I fail to see is how EBITDA is not a measure of its profits. Nothing you posted tells me to me that it isn't.

Actually, we see it every day.

All the accounting methods and way of reporting are designed to show how profitable a company will be moving forward. In reality, earnings do not necessarily equal profits. The terms are not synonymous. It is only a fine point, you don't have to have a cow over the fact that I corrected a nuance.

I reserve judgment on who was having a cow here. But fair enough, let's drop the matter then.

there is no such thing as "WALL ST TERMINOLOGY".

Accounting is Accounting and US GAP is US GAP.

What you are trying to say is the Gross revenue is one measure, Earnings before Income Tax aka Net Revenue is another measuring stick which would account for most expenses, depending on your accounting "style" (cash / accrual).

Yet, none of this is relavant since the "bookmakers" use different "measuring sticks" before they make their "guess" as to the projections for a publicly traded corp.

It tumbles only if the fall in profits surprises investors. If it is certain that current profits are a transient windfall, a return to normal next years won't surprise investors, and the stock price will fall only moderately.

I agree with you.

This supports my theory the the "WALL STREET MARKET" is not a true "market" , but a re-distribution of "cash" from one hand to another. It is a zero sum game.

The real value of the Company (Exxon in our example) should not FALL when earnings are at a traditonal level.

All this said, IMO politics, Presidents have very little to do with how Wall St, operates, except in certain tax legislation (which is always temporary). Just a certain people say CLINTON DID SO AND SO, when the truth is Clinton did nothing to "screw it up". So we can conclude GW did little to engineer any current trend in the economy.

This is true if all the windfalls have already happened, and if all the dividends that those windfalls financed have already been paid out to stockholders. But if investors expect profits to remain high for some more time (maybe a year), or if they expect an increased dividend in the following year(s) because of past windfalls, it is rational to buy now until the price is a little higher.