Before we get to Yahoo and Microsoft, a word about the real news yesterday.
One of the truly great corporate streaks came to an end yesterday. Emerson ended its record of 43 years of uninterrupted growth with an earnings warning. A stunning development from one of the most consistent performers in stock market history. As far as we know, that now makes Automatic Data Processing
the longest-running growth story. ADP should make it 40 consecutive years this quarter.
EMR got hit by the telecom spending slowdown and by investor demand for faster growth, but the news from such a steady, proven performer deserves investors’ attention. The company cited “a customer demand issue of unprecedented magnitude,” no small statement from a company that has grown through six recessions. EMR’s stock took its biggest hit yesterday since the crash of 1987. A quote from the company’s classy statement:
“After careful consideration, our management team made a proactive decision to not continue Emerson’s record 43 consecutive years of increased earnings per share. We could have pared back restructuring and other investments, or taken other operating actions as we have done in the past, to continue the record. Doing so would not have been in the best interest of the company and our shareholders, who have clearly expressed a preference for faster growth. We have no intention of changing the way we manage operations for consistent performance, and taking this action now should position us to return to double-digit earnings per share growth sooner than would otherwise be possible.”
And now on to Microsoft and Yahoo
. First of all, Microsoft’s ability to hit the high end of revenue estimates is great news. Revenues are the hardest number to fudge, and Microsoft’s continued ability to deliver on the top line in the midst of the tech wreck is a big plus for MSFT shareholders. But Microsoft’s relatively strong performance this year has so far meant nothing for other tech stocks’ bottom lines, so the good news for Microsoft will likely not be the catalyst for a lasting, broad-based rally in the Nasdaq. Still, stranger things have happened.
But these continuing shenanigans with “pro forma” earnings are starting to get downright silly. Microsoft said it will meet expectations for 42-cent earnings on a pro forma basis, but will take a whopping $3.9 billion charge for bad investments. What this means – besides from making it a bad idea to take investment advice from Bill Gates – is that the diluted accounting earnings the company will report to the SEC next month should come out to about a penny a share. That should increase Microsoft’s price-to-earnings ratio from 37 to 43.5 without any increase in share price. Something to keep an eye on when the company’s 10-Q is filed next month.
Yahoo’s use of pro forma accounting masked a loss for the quarter. The company topped pro forma estimates by a penny with 1-cent earnings ($8.7 million), but actually lost $48.5 million in the quarter due to hefty one-time charges. $40.7 million of that was for severance packages for the company’s April layoffs. The 9 cent per share loss under GAAP accounting won’t help the company’s valuation, which is already showing modest red ink over a trailing twelve month period.
Yahoo topped revenue estimates by $9 million with $182 million in revenues. That number is down 33% from a year ago, but up $2 million from the first quarter, which is a hopeful sign. But like DoubleClick yesterday, Yahoo sees no recovery in online advertising for another year. However, Yahoo has advertising clout that few Internet companies can match, and has been doing creative things to get online ads noticed. The company is also developing other revenue streams, but will have to do more. But all in all, considering the current environment, it was a pretty good report. Now if only they could produce the same numbers under GAAP accounting…
