Friday, August 23, 2013

A Question for Mary Jo: What Is Your Definition of Earnings?


“What is your definition of the dollar?”
—Rep. Ron Paul to Federal Reserve Chairman Ben Bernanke, March 2, 2011

 We have a simple question for the commissioner of the SEC, and it’s a takeoff on the question famously asked of Ben Bernanke by the take-no-prisoners crackpot otherwise known as Ron Paul.
 Our question for Mary Jo White is this: “What is your definition of Earnings?”
 We ask it on the heels of the recent Target Corporation quarterly earnings call, in which the company led each discussion of so-called “earnings” with the phrase “Adjusted EPS” rather than GAAP EPS.
 Here’s how they started their script:
 Target's second-quarter financial results reflect strong US profit performance in spite of soft traffic and sales…. As a result, we delivered second-quarter adjusted EPS of $1.19, at the high end of our expectation going into the quarter. Our GAAP EPS of $0.95 was in the middle of our expected range, reflecting higher than expected dilution of $0.21 from our Canadian segment. As we monitor the economy and consumer sentiment, we continue to see a mix of signals in which emerging optimism is balanced with continuing challenges.
And here’s how they concluded before taking questions:
 For the full year, we've become incrementally more cautious in our US sales outlook, given our own recent results and those of our competitors. … Even with our more tempered sales expectation we believe full-year adjusted EPS will remain in the $4.70 to $4.90 range we provided previously, although our expectation has moved to the low end of that range. We expect full-year GAAP EPS will be approximately $0.95 lower than adjusted EPS reflecting $0.82 of dilution from the Canadian segment combined with a net $0.13 of dilution from the credit card portfolio sale and associated debt repurchase.
 By way of background, Target recently entered the Canadian market after buying a bunch of store leases from Hudson’s Bay two years ago.  The newly opened Canadian Target stores are losing money at the moment.  Quite a bit of money—something like half a billion dollars in their first year. 
 Target management, not wanting to spook the easily-spookable analyst community on Wall Street, simply subtracts those losses, along with some other stuff, from its GAAP EPS (readers may recall that “GAAP” accounting means, to be clear, earnings in accordance with Generally Accepted Accounting Principles) to create something it calls “Adjusted EPS.”
 And Wall Street’s Finest dutifully report what Target gives them.
 In fact, in my inbox following the call were half a dozen Wall Street analyst reports using the “Adjusted EPS” figures in their earnings—and Price/Earnings—tables.
 Not the GAAP EPS figures.
 Readers will recall that it was the bastardization of GAAP earnings into non-GAAP, made-up, adjusted earnings that fooled Hewlett-Packard’s investors into thinking the company was doing better than it was doing for so many years.
 In its defense, of course, Target will argue that investors want to see the “underlying” earnings from the company’s core business, and that certainly has an appealing sense of logic to it.
 However, the company’s investment in Canada is not a one-off.  It is not a science experiment.   It is not, yet, a “discontinued operation.”
 It is, in fact, part of the company’s core business.  
 Indeed, hundreds of public companies across America right now are investing in things that may or may not pay off, yet they do not exclude the expense of those things in “Adjusted earnings.”
 Worse, Target includes expected earnings from Canada in the out-years of their financial forecasts, as they bragged on their call:
 We’re still very confident in our Canadian strategy, stores and team and continue to believe the segment will generate $0.80 or more of EPS in 2017.
 So, as with Hewlett-Packardwhich routinely excluded the bad stuff from acquisitions (goodwill amortization and restructuring costs) in its “Adjusted” earnings while including the good stuff (sales, gross profit and operating income, such as it was) from acquisitions— we have a retailer that wants Wall Street to exclude the bad stuff (upfront costs of entering Canada) and include the good stuff (future earnings from Canada).
 That sort of freeform, highly elastic notion of “Adjusted Earnings” ended badly for HP and the Wall Street analysts who bought into it, not to mention the poor shareholders who couldn’t fathom why HP’s stock kept going down even though the “Adjusted” earnings looked so good.
 Now, we’re not suggesting Target is ever going to look like HP. 
 It’s just that your grey-haired editor can’t help but recall when Target’s nemesis, Wal-Mart, opened its first stores in Canada back in 1994, using the same technique of buying existing stores (in Wal-Mart’s case they were old Woolco stores) and turning them into Wal-Marts.
 And we recall that, unlike Target, Wal-Mart did not reported “Adjusted EPS.”
 But for those who weren’t around back then, here’s a copy of Wal-Mart’s earnings report the first year after it entered Canada:


 If Wal-Mart could report earnings without “adjusting” them, why can’t Target?
  And, what, Madam Chairman, is your definition of “Earnings”?

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

© 2013 NotMakingThisUp, LLC              
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.

Thursday, August 15, 2013

Corporate Raiders 2.0: When Carl and Bill and George Met Mary Jo


Carl Icahn @I_Make_Money_You_Have_A_Problem_With_That? Have taken large position in APPLE.  See BIG GAINS soon.
Bill Ackman @Never_Shorting_Again.  You don’t use ALL CAPS, Carl.  This is Twitter, not Facebook.  And we have taken a bigger position in Air Products than you have in Apple.
Icahn:  My Apple is bigger than your Air Products.
Ackman:  Show me.
Icahn:  I don’t have to show YOU, punk. 
Ackman: What’s your thesis on Apple, Carl?
Icahn: Talked to Tim Cook.  Very nice chat.  Says they are coming out with a “smart” phone in September. 
Ackman:   They already make a smartphone.  Like, their fifth iteration.
Icahn:  Oh, Mr. Big Words.  Tim Cook says it will read fingerprints.  That would save police time doing stop & frisk.  IT WILL BE BIG.
Ackman: Fingerprints?  It’s biometric, Carl, not for fingerprinting.
Icahn: It’s biotech, too!  A “smart” phone AND biotech drug.  APPLE WILL BE BIG.
Ackman:  There’s those caps again.  Who types for you, old man?  Your great-great-great grandson?
Icahn:  Punk.  Your mother was a camp-follower.
Ackman:  Don’t know what that means.  Translate.
Icahn: Look it up in the dictionary.
Ackman:  Dictionary!  Okay Carl, getting my Webster’s down from the shelf right now…
Icahn: You are a punk.  A snotty, wise-guy punk.
Ackman:  Is that the only adjective you know?  I’ll give you my thesaurus, too.  You can put it on your bookshelf next to the Encyclopedia Britannica collection.
Icahn:  A wise-guy punk.
Ackman:  Anyway, “punk” is good.  The Ramones were punk, Carl.   But you were probably more a Vic Damone guy, right?
Icahn: A spoon-fed, daddy’s boy punk.
Ackman: ‘Danke Schoen,’ was that your song, Carl?
Icahn: Wayne Newton sang that, not Vic Damone.
Ackman:  Sorry, Carl.  I was trading stock options between classes in junior high while you were out there bankrupting airlines.
Icahn:  I didn’t bankrupt any airline!
Ackman:  Ever hear of TWA?
Icahn:  I rescued TWA!
Ackman:  Like the Godfather rescued Moe Green.
Icahn:  [Very bad language] Punk!  So today you’re bankrupting department stores.  Give me a break.
Ackman:  Ever been in a Penney’s?  They needed all the help they could get.  We tried.
Icahn:  I shop at TJ Maxx. I never pay retail, Bill. You know that.
Ackman: You paid retail for DELL.  How’s that working out for ya?
Icahn: Better than Penney’s for you.  Think I’ll short Penney.  Right now.
Ackman: Go ahead.  I’ll loan you my stock.
Icahn: Serve you right, you punk.  Better yet, gonna buy more Herbalife right now.
George Soros @George_Swings:  Good idea Carl, I’m going to buy more HLF too.
Ackman:  Hi George, didn’t know you were on this thread
Soros:  No, I’m not on the treadmill.  
Ackman:  I said, “thread.”  That’s what this is called.
Icahn:  He’s a little deaf, Ackman:  Give him some respect.
Soros:  I just had sex with a very pretty young supermodel from Belarus.  I met her in Davos shopping with my 5th ex-wife.  Thought I would say that.
Ackman:  Save it for Facebook, George.  This is Twitter.
Soros:  My assistant is putting the video up on YouTube.  Then she will leak it to the New York Post.
Icahn:  You might not want to do that, George.
Ackman:  Are we done here, gentlemen?
Icahn:  Not with you, punk.  I’m buying more Herbalife right now.
Ackman:  Go ahead.  I’ll sell you mine.
Icahn:  ??? Thought U were short HLF.
Soros: #$%@#$%@  I thought so too.  Carl, you told me Ackman was short $1B HLF.
Icahn: That’s what he told everybody at that stupid conference, George.  So I went long. 

Soros: My face is not as wrinkly as it appears in the New York Post.
Icahn:  George, what are you talking about?
Soros:  I am watching the video in my private nightclub.  It’s midnight in Switzerland.  Or St. Barts.  Wherever we are.
Ackman:  Sorry to tell you guys, but we actually covered the HLF last week.  Went long.
Icahn: U r such a kidder.  Am buying 1mm right now, market not held.
Ackman:  I am not kidding.  We’re long.  1 million shares of HLF, sold to you.
Soros:  This HLF is going down now, Carl.  What did you do?
Icahn: I just bought 1mm and it hasn’t had an uptick yet.
Soros:   I can’t concentrate on the video.  What is happening, Carl?
Icahn:  [Bad word] This [very bad word] punk [bad word] us.
Soros:  I fired my pilot for less, Carl.
Icahn:  U can’t fire me, George, I don't work for U.
Soros:  U will if Herbalife keeps going down.  Can’t U twit something?
Ackman:  It’s ‘tweet,’ George.   You want Carl to ‘tweet’ something.
Icahn:  I’ll tweet U right in the East River, U punk.
Ackman:  You and what army, Carl?
Soros:  I want no armies involved.  I am devoted to peace.  And sex.   Sex and peace.
Mary Jo White @Better_Late_Than_Never:  Excuse me, gentleman, good afternoon.  We at the SEC have been monitoring these conversations.
Ackman:  I was wondering when you would get around to it.
Icahn:  Holy [bad word].  Ms. White.  What are you doing on this thread?
Soros:  Is that a woman who joined us?
White.  We are monitoring all these conversations. 
Icahn:  How the $$#@ do you do that?
White:  Ever hear of an agency called the NSA?
Soros:  She’s from the agency?  I wasn’t expecting her so soon.  Let her in, fellows.
Ackman:   Not that kind of agency, George. 
White:  We are getting worried that unscrupulous billionaires may be using social media to promote their stocks after they build a position.
Soros:  Position?
Icahn:  Not that kind of position, George.  Keep quiet.
Ackman:   You’re in trouble, Carl.
Icahn:  What’s the difference between me tweeting I buy Apple and you telling a conference you’re short Herbalife?
Ackman:  I laid out the facts as I saw them.  You promoted a stock price.
Icahn:  This HLF keeps going down.  Why didn’t you tweet that you covered your Herbalife and went long?
Ackman:  It was my way of saying ‘Danke Shoen’ Carl.
Icahn:  Punk.
White:  Mr. Icahn, we need to get together.  You too, Mr. Soros
Soros:  A three-way!  I will send the jet to pick you all up…


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

© 2013 NotMakingThisUp, LLC              
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.


Friday, August 09, 2013

This Just In: Hedge Fund Billionaire Now Advertising in “I’m Desperate” Magazine


 First, let’s just say right up front that Bill Ackman is a genius.  That’s how you generally get to be a billionaire, Donald Trump notwithstanding.
 But his gambit yesterday—leaking on CNBC a letter to the board of JC Penney, of which his hedge fund is the largest shareholder, that urges pushing out the same CEO he just brought back (Myron Ullman) after pushing him out once before in favor of ex-Apple genius Ron Johnson, who pretty much destroyed the JC Penney as we knew it in favor of a slicker, more upscale thing called ‘JCP’ (the stock ticker, get it?) which JCP’s customers did not get at all, and from which they left in droves—smacks of desperation.
 Doubly so because Ackman floated the name Allen Questrom, a true retailing genius (whose name we here at NotMakingThisUp previously floated as the one guy who could have turned around Sears) and whose name was almost certainly calculated to get JCP (the stock ticker) turned up, owing to Questrom’s high standing on Wall Street, after so many days of JCP (the stock ticker) turning down.
 So flagrantly desperate does Ackman’s gambit appear that the first thing that came to mind was the scene in Arrested Development where good son Michael Bluth discusses resorting to asset sales to rescue the family business, prompting valley-girl sister Lindsay to protest for all she’s worth (which is not much):
 Michael Bluth: “I’m even selling the company jet.”
 Lindsay Bluth F√ľnke: “Great, so now we don't have a car or a jet?  Why don’t we just take an ad out in I’m Poor Magazine?”
 Seeing Ackmanwho has been lashing out like there’s no tomorrow at Herbalife short-squeeze engineer, Carl Icahn and Herbalife short-squeeze pile-onner George Sorosadd poor Myron Ullman to his hit list, you wonder, “Why doesn’t he just take an ad out in I’m Desperate Magazine?”
 And unfortunately for Ackman, desperation is the last thing any investor wants to advertise.
 A far better model from popular culture for investors would be the Godfather: 
 “Never tell anybody outside the Family what you’re thinking…”

Indeed.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

© 2013 NotMakingThisUp, LLC              
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.