2009.1 Forbes


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2009.1 Forbes

  1. 1. [FW '53 F ' . . *5 _ "'j», :I: r nu - z q i - . 5 . ø - . , | ; t I rd; 'w › -_ 1 di« i - g” u« 1 i: m' 'm a u 3 - v I ' I å M V' ELESSONS '. ?El"l'URE Cl-XPITÅI_IS'TS FROM THE $50 BILLION SCAM OVERPAID AND OVERHYPED r rrrr w 7 rv. _. EL50 I - HOW BUSINESS CROOKS CUT THEIR JAIL TIME 10 STOCKS WITH EARKHIWGS YOU CAN TRUST 7"* 7*' ' r. 'W E-: cm: m Etiam? FROM THE MISERY L. ) In. JANUARY 12, 2009 I WWW. FORBES. COM 32 CEO ROBERT GREIFELD
  2. 2. SMJN øumwooin who get paid based on what, and how much, they sell. That includes the legion of stockbrokers and insurance agents whose income takes the form of commis- sions on financial products. "You weed out so many problems if you remove the conflicts of interest, " says Mary Malgoire, president of Family Firm, a Bethesda, Md. fee-only financial adviser. BEYOND THE BALANCE SHEEWT sig, *i l' J' Among the nations 600,000 financial advisers, only l2,00() could potentially qualify as fee-only, according to Ellen Turf, chief executive of" the National Asso- ciation of Personal Financial Advisers. NAPFAs members charge by the hour (typically $ 180 to $300), work on retainer or charge a percentage ofthe assets they advise. Malgoire at Family Firm charges a faidy stan- TFI- f i r' ' (I N W; , mi. 'u r, r n -__ ___ LL. , dard 1% a year for first $1 million, with the rate falling to 08% for sums up to $3 million. Britain's Financial Services Authority last month announced it plans to require that investment advisers make a “distinc- tion between independent advice and sales advice. ” The FSAs aim: "removing the possibility of commission-bias. " Chalk one up for investors. F Tough times encourage weak companies to get creative in coming up with earnings gains. Knowing the tricks can save you a bundle By Jack Gage AN INVESTORS TRUST 'THE NUMBERS THROMW AT them? Evidently not, to judge from nearly simultane- ous accusations of fraud against a distinguished lawyer and a famous stock trader. But it's not just out- right speculations that you have to wony about. It's the risk that reported earnings are stretched or fudgcd. As tough times take a toll on corporate performance, pres- sure mounts on managers to fill the breach with creative account- ing. So, with help from the Los Angeles firm Audit lntegrity, we took a look at what makes for high-and low-quality in an earnings figure. M's analysis encompasses a range of numerical and qualitative assessments of whether a com- pany's earnings could be getting an artificial boost or are otherwise at risk of crumbling apart. All these are black marks in Als book: lots of good- will (which might get hit with an impairment charge), high deferred taxes (which drain cash down the road, when it's time to pay the IRS), pileups in receivables or inventory (which drain cash right now), executive pay tilted heavily to options (which provide temp- tations to inflate earnings) and unfunded pension liabilities. You don't have to be a short-seller to profit from M's analysis. Companies that get high marks for earnings quality and that * l are also trading at low multiples of those earnings can be unloved values plays. Among M's top-rated companies (see table p. 50) is CenterPoint Energy. Although the stock is off its October lows, the $11 billion (sales) Houston natural gas i; T” ' i * 'n ' *På , Å Points pension obligation as a proportion of total liabilities was 31% below the average reported by its utility peers. On a Nov. 5 earnings call with investors, CenterPoint committed to either maintaining or increasing its 57% dividend. Callaway Golf and Continental Resources also receive high marks for earnings quality and trade below the markets average 16 times 2008 eamings. Among the companies Audit Integrity has warned investors to steer clear of is faddish shoemaker Crocs. Audit Integrity noticed that Crocs inventory was piling up, flagging the trend in August 2008. Three months later Crocs announced it would give the value of its inventory a 30% haircut in the third quarter and slash fourth- quarter sales guidance 40% below analyst expecta- utility still trades at a modest ten times 2008 earnings, which is a 37% discount to the 58:? 500 multiple. As of Sept. 30 Center- tions. That sent its stock into a one-day 45% tailspin. even as the broader market rose 7%. One company raising Audit Integrityis suspi- cions these days is Eastman Kodak In lune the film manufacturer announced a stock buyback, which is often a sign of confidence. ln Kodaks case it looks more like a sign of desperation. The plan author- ized Kodak to repurchase up to $l billion of stock, with $581 million of the money coming from a ref und of taxes it paid in the 19905. lf carried through, the buyback will shrink Kodak's shares outstanding by 25% and thus lift EPS-but not add a penny in earnings. Quite apart from the Synthetic flavor to the EPS gains . ' is the matter of timing: Shares that Kodak bought back last year are now worth less than half of' what it paid. , ' l 'G Another red flag: As Kodak burned through more than a third of its cash in 2008. it lifted the rate of return it assumes its pension fund will earn from 86% to 9%, thereby lowering Callaway and Nu Skin: profit: through sales. not gimmicks. JANUARY 12, 2009 r= o n s E s 49
  3. 3. .Ridrsharesiooiçshares Companies with high earnings quality and below-market multiples are prime targets for value investors. Stay away from enterprises that are expensive and rated as having suspect earnings quality by financial sleuth Audit Integrity. One such firm: Atlas America; in December MARKET 2008 EST WQVEÅW, , VLLUEQW-l 7/3. ARCH cAmÅL iis4.1 7 c NEncv 4.4i (i T0 HESS Ti i ii 13.7 5 cnuawriv en; W 10 igrrms á _ i 3.9 T COMWENTAL RESpURCEiSWi* 3.4 i 9 KORNIFERRY INTERNAHONAL 0.i5i i i 11 i MANvoweii i g 2.6 7 , nu smi ii H i 0.6 T0 UlilililTEiI) Glitnir r0065 iii 0.7 ii (13 i KODAK 1.3 44 min GRiOUP T7 27 ioTLcorUTi 57.1 17 Novéititéf 1.5ii ii is i APPWLIEVD MAiriiEiuALisi 15? 40 Ever i i i . anfører-uncut i 1.1 16 ARTHUR J. GALtAGHea s. CE 2.3 16 exrness scmns 14.6 19 i Aruisgmsmcn NA 'Accounting and governance risk; 100 is best. 'Sellin Fundamental; via FactSet Research Systems. the amount it has to set aside. (A year earlier General Motors did the opposite, reducing its assumed rate of return from 9% to 85%. ) Unless Kodak proves to be an unusually savvy money manager, its pension funding needs tomorrow will be increased by its stinginess today. Insider selling, other than that taking place as part of scheduled diversification plans, is something else that Al watches. lt is not pleased by what is going on at natural gas company Atlas' America. On Sept. 9 Chief Executive Edward E. Cohen signed off on Atlas' plan to use $50 million to repurchase its own shares. The company quickly used $14,9 million from the buyback allocation, plus $20 million from a previous one, to acquire Atlas stock at $34.76 per share. The same day Cohen signed off on the repurcl-iase, the stock was trading between $31 and $34 and he transferred 53.2 million of his own shares to a charitable trust headquartered in his Philadelphia home. 50 F o n n E s JANUARY 112009 stumped analysts stopped following the company, yet it still trades at a rich 28 times trailing earnings. AGR , EFORF , SEMÆELTS m, ” 88 Cut ratio of other operating expenses to total expenses Å Cut ratioof CEO-toCFO compensation 86 ratio of goodwill to totaliaisisets i i i ig; Ciæäof goodwill to total assets T 85 ; ut ratio of intanigiiibleias; s to total assets i 84 i Separation of chairman and CEO re: :T Cut raitiio of intangible assets to total asfsrets A 83i i Low ratio of pension obiliigations to Iiabilities ii 81 iM-Cuitiratio oi aicciounts receivable to salesiii 80i ii ilow ratioiofi acgcciáuhgireceivable to sales , i 14 Upped pension retum assumptionii 17 Unusual jump in operating margin 18 Upped ratiio of woÆin-pirogressi to inventory ii* 20 Cut ratio of doubtluiliaicicounts allowance toireceivables i E iiLow ratio of SG&A1 to operating expenses T ii ii , ii 34 i Upped ratio of initangiblferassets to total assets 34 *Elpped ratio of iTScD to operating expenses i3S Unusual jump in operating margin i-i F low ratio of SG&A1 to operating expenses i 37 Qpâdgatio of deferreditaxes tt) operating expenseisi g. general and administrative expenses. NA: Not available. Sources: Audit Integrity; Reuters Audit lntegiiv; IK-rrays 7-1? i * l any signs om" possible weakness. By Oct. 10 Atlas' stock had fallen by half to $16.07. lt then tumbled another S5 in November after a Citigroup analyst warned clients that an Atlas pipeline subsidiary was at risk of violating its debt covenants if oil prices stayed below $60 per barrel over an extended period of time. If that wasn't reason enough to stay away from Atlas, Audit Lntegrity points to mount- ing deferred income taxes as a potential hit to cash flow from operations (net proñts plus depreciation and other noncash charges) as ; iccelerated depreciation and investment tax credits wear off. Another strike against Atlas: Cohen and Matthew A. Jones. Atlas' Chief financial officer, received more than ten times their salaries from stock-based incentives last year. The norm is more like two times, AI says. The elevated ratio "may indicate that company executives have incentives [to favor] short-term profits and stock gains over the longer-term health of the company, " Audit Integrity cautions. F 7 -ror