Apple Inc (AAPL)

[langostino]

Microsoft's BOMBSHELL

While there was little reaction in the After Hours trading session, this is a big thundering earthquake. Perhaps it will be a while before people begin to fathom what Microsoft is telling market about its business, and before people begin to deconstruct the numbers and extrapolate a bit.

There will be a zillion articles on this, but here are a couple:
http://www.marketwatch.com/news/yhoo/story.asp?siteid=yhoo&dist=yhooquotenews&guid=%7B2865BA...
http://www.marketwatch.com/news/yhoo/story.asp?siteid=yhoo&dist=yhooquotenews&guid=%7B2D92B7...

Last year (FY 2002), Microsoft earned $0.86/shr. BUT, if you take out "special items" (one-time non-recurring), you wind up with $0.70/shr (fully diluted). But here's the real kicker, if options had been expensed, fully diluted EPS would have been $0.49/shr.

Consensus estimate for Microsoft next fiscal year (June '04) calls for revenue growth of 5.9% and EPS growth of 2.8%. With REAL EPS of somewhere in the range of $0.60/shr. So, people buying Microsoft today are buying at a p/e multiple of 45 for a stock that's growing mid-single digits. Even using the artificially padded EPS number, we're looking at p/e of 30. Absurd! And certainly not sustainable over the long haul. Not a chance.

Check this link for "Diluted EPS after Stock Based Comp. Exp." near the bottom.
http://yahoo.multexinvestor.com/IS.aspx?ticker=MSFT&target=%2fstocks%2ffinancialinfo%2fstatement...

Thus far, most of the discussion in the articles on the wire focuses on CASH FLOW, not Earnings. Because Microsoft has a lot of cash on the balance sheet, it can do this, seems to be the sentiment. But what will it look like on the Income Statement? Is there enough room in FASB for Microsoft to clear this from the Income Statement? I doubt it. More than likely, we will find out that Microsoft is going to lower total compensation, AND it is going to absorb a hit on EPS. Probably on the order of a 10% reduction.

Now the hypocricy of companies throughout tech-land (including Apple) will be under even further pressure. And Barbara Boxer and the rest of the pimps who are trying to undermine FASB's proposed rule change requiring expensing of options, have been dealt a serious blow to the integrity of their cry that a technology company simply couldn't survive if not permitted to slide wealth out of the shareholders' pockets and into management's pockets without accounting for it on the Income Statement.

In a nutshell, companies like Apple that get away with misrepresenting the real cost of doing business, and by essentially under-reporting their compensation expenses, lead the public to believe they are more profitable than they realy are, are going to be facing more and more pressure to come clean.


In addition .... there's a message from Microsoft that's at the very center of this decision. The implication is clear -- Microsoft doesn't think it's stock is going to be growing in the future. If it did, it wouldn't fear the house of cards collapsing on it and cave in to this much more expensive way of doing business.

Perhaps that, more than anything should be of concern to the capital markets.

Oh, BTW, while Microsoft would have to take a 10% hit to EPS, many tech companies would be in far more dire straights if they were forced to make a similar move. For instance, Intel would see 55% of its earnings vanish. Broadcom would see virtually ALL of its earnings go poof. And Apple would have been painting quarter after quarter with red ink..