Shift from non-GAAP bottom lines could be good for stock prices

Posted by: Admin | Posted on: August 19th, 2017 | 0 Comments

SAN FRANCISCO (Reuters) – Investors worried about lofty stock-market valuations may take comfort in signs that companies in the benchmark SP 500 index are padding their bottomlines less than they have in previous years.

Recent changes to accounting standards and a crackdown last year by the Securities Exchange Commission are encouraging many companies to be more cautious about reporting metrics that do not adhere to Generally Accepted Accounting Principles (GAAP).

The difference between SP 500 companies’ GAAP net incomes and the adjusted versions of net income that they play up to Wall Street is expected to significantly shrink in 2017 for a second year, after hitting a high in 2015, according to a Thomson Reuters analysis.

Such a decline may be good news for investors worried that stock prices have risen too far.

“The closer reported earnings are to GAAP, the more confident I’d be that investors are getting a fair characterization,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

On their income statements, companies often exclude “extraordinary” items, like charges associated with layoffs that they believe give investors an unclear picture of their performance. Those adjustments tend to make their profits appear stronger.

After an 8-percent rise in 2017, the SP 500 is trading at 17.8 times expected earnings, a level many investors consider expensive and increases the risk of a market selloff. But the expected earnings in that valuation are adjusted, not GAAP.

To the extent that companies use non-GAAP accounting less this year than in recent years, investors may feel more comfortable paying higher valuations for their stocks.

“You’re getting more conservative in your earnings approach rather than more aggressive,” said Phil Blancato, head of Ladenburg Thalmann Asset Management in New York. “That’s exactly why I don’t think current PEs are very expensive.”


Following new accounting standards covering the taxation of stock-based compensation, Google parent company Alphabet Inc. (GOOGL.O) stopped excluding stock-based compensation from its costs in the first quarter. Facebook Inc. (FB.O) said it would no longer emphasize non-GAAP expenses, income, tax rate or earnings per share.

Responding to a new standard on revenue recognition, Microsoft Corp. (MSFT.O) recently said it will switch to GAAP revenue reporting.

Analysts expect SP 500 corporations in 2017 to report a total of about $1.06 trillion in GAAP net income, according to Thomson Reuters data. But allowing for non-GAAP adjustments made by many companies and analysts, total net income is expected to reach around $1.17 trillion.

Still, that 10-percent difference between GAAP net income and the net income companies and many investors focus on is much smaller than in 2015, when the difference was 33 percent, the largest gap since at least 2009. Last year, the difference shrank to 22 percent. (

Thomson Reuters analyzed 494 SP 500 companies and adjusted some of their fiscal years to reflect calendar years. In cases where companies and analysts focused on GAAP, that number was counted as adjusted net income.

Adding to pressure on U.S. chief financial officers, the SEC last year sent comment letters to corporations questioning their accounting methods. It warned companies not to produce misleading quarterly reports using larger fonts and bolded type to emphasize non-GAAP metrics.

“The SEC was upset about how non-GAAP was being used, and I think people have tried to listen to that. Nobody wants an SEC comment letter,” said Takis Makridis, chief executive of Equity Methods, which advises companies on equity compensation.

Silicon Valley’s technology giants have additional reasons to start emphasizing GAAP results.

“The biggest companies who, earlier in their evolution needed to show numbers that put them in a more favorable light, no longer need that advantage,” said Pivotal Research analyst Brian Wieser. “It raises greater contrast with companies that are just emerging.”

Reporting by Noel Randewich; Editing by Bernadette Baum

Elliott lawyer says third bidder may top Buffett’s Oncor bid

Posted by: Admin | Posted on: August 19th, 2017 | 0 Comments

(Reuters) – An unidentified utility could pay $9.3 billion to buy Texas power transmission company Oncor Electric Delivery Co, topping Berkshire Hathaway Inc’s $9 billion bid, a lawyer for the largest creditor of Oncor’s parent told a U.S. bankruptcy judge on Friday.

Such a bid would add to the competition that Warren Buffett, Berkshire’s chief executive, faces for Oncor and could cause the Texas company to slip from his grasp.

It could also scuttle plans of billionaire Paul Singer’s hedge fund Elliott Management Corp, the largest creditor of Oncor’s bankrupt parent, Energy Future Holdings Corp. Elliott has been trying to block Oncor’s sale to Berkshire and put together its own consortium to buy the company.

A source close to Energy Future, speaking on condition of anonymity, said it had already received a $9.3 billion offer for Oncor, but would not disclose the bidder’s identity or other details.

An Elliott spokesman declined to comment on the identity of the utility, which the firm’s lawyer referred to in a public conference call with the judge, ahead of a scheduled Monday court hearing.

Energy Future did not immediately respond to a request for comment.

Berkshire has said its deal represents the best chance for Oncor to emerge from more than three years of bankruptcy, but that it will walk away if the takeover does not win court approval at the Monday hearing.

On Wednesday, Berkshire said it stood by its $9 billion offer and would not raise it.

On Friday evening, after news of the third bidder surfaced, Berkshire said its offer had won support from five more Texas stakeholder groups. It said these included staff of the Public Utility Commission of Texas, a regulator whose approval is needed for an Oncor takeover.

Any approval would likely involve ringfencing, restricting a buyer’s ability to tap Oncor’s cash and place more debt on it.

Earlier this year, the regulator shot down the sale of Oncor to NextEra Energy Inc because it considered the proposed financial structure too risky for ratepayers.

A separate plan to sell Oncor to a group of creditors and investors led by privately held Hunt Consolidated Inc of Texas collapsed in 2016, after hitting obstacles at the regulator.

Berkshire’s all-cash bid has won praise from the commission’s executive director, Brian Lloyd.

Reporting by Jessica DiNapoli and David French in New York; Additional reporting by Jonathan Stempel; Editing by Tom Brown and Leslie Adler