Greenspan slams credit rating agencies

WSJ Online link.

Strategy, financial analysis, credit crunch, and TPI

TPI's recent strategy has been driven by acquisitions. At the end of this year TPI have to refinance about $2.7bn of debt. Given recent events in the credit market, this could prove interesting. More from Adele Ferguson here. Key quote that backs up what we keep discussing in class:

The ride has been exciting, with the share price going on a roller-coaster ride, and profits going through the roof. But analysing a company that makes a lot of acquisitions is tough, particularly one that has reclassified some of its businesses into different divisions and created new divisions.

More on Coles' profit

Elizabeth Knight in the Herald follows up on the Coles profit, and makes the point that I've made in class repeatedly: pro forma earnings numbers are problematic in that it is not clear what has been included and excluded from GAAP income, which makes it difficult to compare with both previous earnings numbers from (in this case) Coles, or to compare Coles with other companies.
Key quote:

And it is fair to say that this week's results support their views to the extent of the rot within the all important supermarkets business is greater than even the harsher critics had expected.

The variance in the analysts' views on the underlying profit also suggests that there is a lack of transparency in the earnings numbers and a lack of trust in how they were presented.

They all came to the conclusion that they were poor but were at odds about degree.

It seems that creating confusion, rather than clarity, appears to be one motivation for using pro forma numbers. Not always, mind you.

Always check the audit report...

It's easy to assume that the financial statements are 'in the clear' simply because they have been lodged with the relevant regulators and distributed in an annual report. Not so: the financial statements can still be issued with a qualified audit report. It's a quick thing to check if you're evaluating a company. Here's an example where we might see a qualification. This sort of thing (i.e. internal control issues) has been a big issue in the U.S. following the implementation of SOX.

AIFRS - all OK so far. Mostly

Two years after the introduction of the International Financial Reporting Standards in Australia [thus AIFRS], the adjudicating body hasn't yet heard a case. This is similar to what happened in the UK, where it took a few years before cases came through. Seems a good start, though.

Earnings quality - Coles

Elizabeth Knight in the Herald has a look at Coles' recent earnings announcement (you can find both the profit announcement and the media release on the ASX website here). The "underlying profit' (i.e. pro forma income) for Coles is just under $45m higher than their net profit. No surprise there. Here's how Elizabeth Knight describes them:

But here come the adjustments. Take off $34.5 million for accounting changes, adjust $55.9 million for ownership review costs, add another $23.9 million in advisory costs and $51.5 million in redundancy costs, then take out $53.5 million in property gains, then tax-effect it and, bingo, the end result is a profit 1 per cent down on last year. And this is not too far off the amount the company has indicated.

A more cynical analysis could come up with a result that was 16 per cent below last year, even after the adjustments.

Yep. That can happen. From the perspective of the Wesfarmers board, it's probably best for Coles to get as much 'bad news' out in the accounts now, so that WES can document improved performance going forward. Assuming that WES can find good managers, improving performance of the Coles stores shouldn't be beyond them!

Profitability analysis - Ipod

Each time Apple releases a new Ipod, folks out there will tear it apart to work out the likely profits per unit. Here's the latest report in BusinessWeek. Nice business line, Apple!

ASX - regulator and profit-maker

In Australia, the ASX is both the regulator of the stock exchange, as well as a for-profit entity trading on the exchange. It's obvious that there is a conflict of interest in these two roles. The conflict is nicely canvassed here.

A sub-prime primer

If you were wondering what all this 'sub-prime' stuff was about, here's a useful little article from the Sunday Telegraph (the U.K one, not the Australian one).

UNSW email down

Just in case you are trying to email anyone at the Australian School of Business, our email server (and indeed webpage) is down, and has been since last week. That's (one) reason why we have not replied to your emails.