Monday, May 14, 2012

So Inflating Your C.V. Is Worse Than Inflating Your Earnings…

 Poor Scott Thompson.  The world’s (currently) most famous accused-resume-inflator is gone from the C-Suite at Yahoo. 
 Oh, and he has thyroid cancer to boot.
 Meanwhile, Wall Street’s Finest are gearing up for next week’s earnings from Hewlett-Packard, and based on our perusals of various so-called research reports—not to mention a puff-piece on the company in this week’s Barron’s—all signs point to an “in-line” quarter from HP, although one analyst is suggesting “yet another restructuring plan/charge of about $1billion.”


 [Editor's Note: Tuesday morning, another of Wall Street's Finest came forth with an expected non-recurring-recurring-like-clockwork restructuring charge as high as $2 billion for HP.  Let the Palo Alto "non-GAAP" earnings games begin!]


 [This just in on Thursday afternoon: news is breaking that HP will lay off as many as 25,000 workers. In the perverse logic of one Wall Streeter, this "would enable investments in strategic, higher growth areas," as if HP has not been able to make those investments with its $3 billion R&D budget (perhaps the $10 billion share buy-back authorization has something to do with it).  Faulty logic aside, expect earnings estimates to start being ratcheted upwards... ]
 Now, we have, more than once, commented on the low quality of HP’s reported earnings.  You can read about it here and here, if you like.
 Suffice it to say, HP does what portfolio managers can only dream of getting away with: it reports “non-GAAP” earnings that include the good stuff from acquired companies (revenue and gross profit, for example) and excludes the bad stuff from those same companies (amortization and restructuring charges, for example), which serves to a) point out what silly prices HP pays for acquisitions in the first place and b) explain how such a theoretically profitable enterprise as HP came to possess a tangible book value of minus $7.84 per share, according to my Bloomberg.  (Yes, that's negative, not positive, $7.84.)
 Nevertheless, Wall Street’s Finest dutifully record those “non-GAAP” earnings from HP and set their clocks by them.

 Imagine if portfolio managers tried to report “non-GAAP” investment returns, booking only their winners.
 Or if baseball players tried to report “non-GAAP” batting averages.
 Or, most relevant of all, if Jamie Dimon had tried to call that $2 billion trading loss from his London Whale a non-recurring loss...
 Hey, HP does that stuff every year, and for some reason, Wall Street’s Finest buy HP’s “non-GAAP” earnings presentation lock, stock and barrel.
 We’re not sure why they buy it—after all, GAAP earnings surely exist for a pretty good reason, as investors discovered a decade ago when the tech bubble collapsed—but they do.
 Thus we have the strange contrast of Mr. Thompson being ridiculed and then run out of town for a modest (and still unexplained) bit of resume inflation, while just down 101 from Yahoo the folks at HP prepare to report yet another quarter of “non-GAAP” earnings, even though HP’s non-GAAP earnings appear to have less relationship to their GAAP earnings than Mr. Thompson’s “non-GAAP” resume had with the “GAAP” version that Dan Loeb’s detectives uncovered.
 The HP folks ought to hope Dan doesn't get his detectives to start asking questions about that...


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

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The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

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