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Options expensing and earnings confusion
First Call data may mean different kinds of yardsticks on Wall Street
E-mail | Print | | Disable live quotes By Dan Gallagher, MarketWatch
Last Update: 1:04 PM ET Apr 18, 2006

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B04FC4E2F%2D92E0%2D4463%2D9D5C%2DEC1256A0B29....

Last Update: 1:04 PM ET Apr 18, 2006


SAN FRANCISCO (MarketWatch) -- Investors tracking red-hot Internet search stocks may be forgiven some confusion surrounding the first-quarter results slated to be issued by sector leaders Google Inc. and Yahoo Inc. this week.
That's because the closely tracked analyst estimates that Thomson First Call compiles on the two companies will differ in one key respect: how they reflect employee stock options.
The published average estimate on Yahoo (YHOO : Yahoo! Inc.
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30.85, -0.12, -0.4%) includes the expensing of stock options; the figure for Google (GOOG : google inc cl a
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402.21, -4.61, -1.1%) doesn't.
That disconnect highlights an issue investors must grapple with as they assess the slew of first-quarter earnings reports that are out this week in full force. This marks the first earnings season in which all U.S. public companies are required to report employee stock options as an expense.
Wall Street analysts have adapted slowly to the rule, adopted in the wake of corporate accounting scandals, and many of them issue two sets of estimates for any given company.
Such cases create headaches for Thomson First Call and other tracking firms that compile the estimates and publish averages that many investors use to gauge a company's performance.
Many investor-oriented Web sites and news organizations cite the published First Call number as the benchmark of Wall Street's expectations. In addition, MarketWatch, the publisher of this report, provides exclusive news services to Thomson clients.
First Call has responded with a "majority rule" method that essentially leaves it up to the market to decide how to classify a company's results. If a majority of analysts covering a specific company decide to include options expensing in their final average estimate, First Call will publish an average of those numbers.
The spread between an earnings estimate that includes the effect of options expensing and one that doesn't can make the difference between whether analysts expect a company to post a profit or a loss.
If most analysts don't include options in their final numbers, however, First Call's published figure will reflect that.
This could make it difficult for investors to get an accurate reading of how Wall Street may react to a company's performance. Falling short or exceeding the average First Call estimate often figures heavily in trading action following a quarterly report.
For companies in the same industry, it may be particularly tricky. Take Yahoo, the online media giant slated to report first-quarter results after Tuesday's closing bell. First Call's average earnings estimate of 11 cents a share for Yahoo includes the expensing of stock options, following the lead of a majority of analysts covering the company.
However, many of those same analysts did not include the stock-options charges in their projections for rival Google, which reports results two days later. First Call has projected Google will earn $1.97 a share for the quarter, excluding options. The average estimate among analysts who did include stock options is $1.73 -- a difference of 12%.

In some cases, the gap can be much more significant. Take Broadcom Corp. (BRCM : broadcom corp cl a
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43.61, +0.93, +2.2%) . The semiconductor maker is scheduled to report results Thursday, and the average estimate including options expenses is 18 cents a share.
That's 50% below First Call's official published estimate of 34 cents a share, which excludes options.
In other instances, the spread can make the difference between whether analysts expect a company to post a profit or a loss.

This is true for two companies reporting in early May: Federated Department Stores Inc. (FD : Federated Department Stores, Inc.
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74.17, +1.02, +1.4%) and video-game publisher Electronic Arts Inc. (ERTS : Electronic Arts Inc
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56.00, +1.61, +3.0%) . The current First Call consensus figures include stock options for Federated but not for Electronic Arts.
To assist clients, Thomson issues a daily e-mail detailing earnings estimates for companies reporting the following day. The list highlights which methodology is used for the consensus figure for each company but only comprises components of the Standard & Poor's 500 for this earnings season.
Investors who rely on Web sites such as MarketWatch and Yahoo Finance may be more challenged in sorting out the results. All three sites publish the First Call consensus figures but for now don't indicate when the figure includes options expensing.
Representatives of both MarketWatch -- the publisher of this report -- and Yahoo Finance said they were still working out how to respond to the changes in the First Call methodology.