I was wondering when this was going to finally sink in....
Market Broke Down as Options Expenses Hit
By Rev Shark
RealMoney.com Contributor
5/25/2006 1:28 PM EDT
Click here for more stories by Rev Shark
About two weeks ago, the major suppliers of earnings estimate data started adjusting their numbers to reflect stock-option expenses. If you have read any earnings reports recently, you know that it is now a requirement that option expenses be accounted for each quarter.
The numbers are not insubstantial. For example, Broadcom (BRCM:Nasdaq) had earnings estimates of $1.47 per share for 2006 and $1.66 for 2007 before option expenses. Reuters and First Call are now including option costs that reduced the estimates for BRCM to 90 cents for 2006 and $1.12 for 2007. There are plenty of other examples of companies where estimates have been similarly reduced.
Is it just a coincidence that this change in earnings estimates started to appear right as the market began to break down? I'm not sure there is a direct cause-and-effect relationship, but I would hypothesize that this has helped keep buyers on the sidelines. A stock like BRCM is not nearly as attractive when you go from a P/E of 22 on current earnings to 37.
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This will impact our small and micro-caps because many of them make extensive use of options to compensate senior executives. Something to keep in mind as we progress through the year...
Read those footnotes from last year; some of our stocks may be in for an earnings 'shock'.....
AI
