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National Presto Industries Inc. Message Board

  • pmlljl pmlljl Mar 29, 2005 12:17 PM Flag


    Salton made new 52 week lows today. Bottom has been $2.10, now at $2.20. Anyone want to be a hero and buy it here? I am holding out for chapter eleven.

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    • no slappz: Your example is correct. The other $20 IS an EXPENSE. So why aren't companies required to account for the $20 of expense as such on their income statements?

      The corporate executives want the stock as their personal asset, but they don't want to reflect it as an expense in order to make earnings appear larger which tends to make their new asset more valuable.

      It is criminal when done in the scale that now is taking place. I say off with their heads!

    • pm, most of those I've known who have received company stock options were bound by various time constraints. However, when they were able to exercise the options, the stock was simultaneously sold, converting the options into nothing but a form of cash compensation.

      The problem here is how to account for options that are exercised only to provide cash compensation. If the company's stock is trading at $30 and the options are priced at $10, the company adds $10 to its "paid in capital" account. However, it foregoes collecting the other $20, which instead goes into the pocket of the lucky option holder. So rather than attract long-term equity capital to the company's balance sheet, the option exercise mainly distributes long-term capital in the form of a current expense. I don't know how to define this occurrence in accounting terms.

      Even a convertible security exchanges long-term debt for long-term equity. In other words, the two are balance sheet elements with some overlap.

      But giving away equity to pay current bills is not well defined. However, the net result is dilution.

    • no slappz: In my comparison of stock options to lottery tickets, I did not intend to imply the finer points that you referred to. I can not argue with you description however.

      I intended to imply that executive stock options frequently pay off like lottery tickets showering the recipients with enormous riches for which they have done nothing and with no cost to them. In most cases the options are free to them and have a relatively long life. Sure, if they are exercised, the recipient has to cough up some cash, but usually the options are deep in the money at that time so they have almost no risk. I recently read an article that said most employees exercise their options and almost immediately sell the stock. So much for making them long-term shareholders.

      Then there is the matter of boards re-pricing options for executives when the market price goes down. Outrageous!

      When do we shareholders get some benefit such as this. I don't know about you, but when I buy a stock, I have to put up after tax cash dollars for which I am at 100% risk.

      Certainly the executives have a better risk than me and then they have the nerve to say that employee stock options have no cost and don't need to be expensed. Ridiculous!

    • pm, I am not a fan of stock options. If every company decided to end the practice of dealing them out to undeserving managers, I wouldn't object.

      On the other hand, your presentation is not accurate. Lottery tickets -- in a true lottery -- have a "value" that is easy to determine. The odds against winning are understood exactly. The magnitude of the prize is known. Thus, we know precisely what a lottery ticket is worth. However, we also know the price to purchase the ticket exceeds its value. We also know only an insignificant number of lottery tickets will reward their holders.

      Stock options, on the other hand, are not bound by the same forms of chance. In fact, every stock option can pay off like a winning lottery ticket. Or maybe there is no payoff, at least for a while. Companies usually keep issuing stock options until all the recipients reap a big gain.

      If the stock price doesn't rise, the strike price on the options will drop. In other words, the stock option game is rigged.

      As for value, well, if an option isn't exercised before expiration, it can't have value. If it is exercised, the exercise occurs at a pre-determined strike price. Thus, the option holder -- at least theorectically -- puts up some cash and the company eats the difference between the strike price and the market price. That difference, at the time of exercise, equals capital the company does not receive from stock issuance. If you want to identify the amount of cash going to the option holder as compensation, fine.

    • no slappz:

      I have no problem with convertible securities. In my mind they are not the same thing as employee stock options. Particularly, the enormous grants to executives. These are merely lottery tickets that pay off occasionally in enormous amounts to executives who did nothing to deserve their new found fortunes. As an example, the DJIA is down over 400 points in the last three days. And that result has almost nothing to do with what corporate executives have recently done. Sometimes this kind of move goes in the opposite direction like the tech boom and enables executives to become very wealthy through no effort on their part.

      Lottery tickets have value. Measuring that value is difficult. If it was up to me, there would be no employee stock options. BRK does not offer them. If a person does something great for a company, pay him very well, but don't give him the company. There is no question that the benefits of stock options are compensation expense and that the proper place for expenses is on the income statement.

      Perhaps you should read Mr. Buffets comments on expensing stock options. He has included it in the materials with the latest annual report.

    • pm, with regard to your comments:

      1) I agree.

      2) Nonsense. It matters only that investors understand the extent and frequency of the dilution following the issuance of stock options to insiders.

      Companies have issued convertible securities for a couple of centuries without destroying the stock market. In other words, understanding and calculating the total number of fully-diluted shares outstanding is a breeze.

      Meanwhile, analysts of convertible securities (I have been one) have long searched for the holy grail of determining the "value" of the convertible securities, which boils down to calculating the value of the conversion "option". Valuing the conversion option of a convertible security is no different that valuing the stock options that worry you.

      Guess what? No one has ever agreed on the value of the conversion "option". And analysts with years of experience are often wildly wrong. Sometimes they are right, too.

      My point is simple. No brain-trust of accountants will create a model that will answer the question of "what an option is worth."

      3) Non-recurring charges. Investors with a little knowledge are aware of the hazards of "non-recurring items". However, I agree that these "non-recurring items" recur so often the label is deceptive. My mother might be fooled. But I wouldn't be.

      4)Goodwill. Yeah, it's a problem. I doubt there's an analyst anywhere who disagrees with you. Therefore, "goodwill" shouldn't be too big a problem since everyone who's expected to understand goodwill, is, in fact, knowledgeable. The current term for goodwill is "accounting lint".

      5) Con men. Non-cash expenses. Well. Both exist. Both will always exist. What can you do? Best advice -- suggest to those who want to buy individual stocks that they take a course in accounting and a course in economics.

      In the end, most people have no idea what they are buying into when they purchase an individual stock. No matter how many laws are passed, the ignorance factor will never improve.

    • no slappz:

      I am listing below the five biggest problems in the business and investing world today.

      1-Public company executive compensation-completely out of hand. Pay for performance-what a joke.

      2-Failure to expense stock options-the WSJ reported today that expensing will probably be delayed another six months. A complete rejection of the facts.

      3-Non-recurring extraordinary charges-many companies have them repeatedly in large amounts. The most used three word phrase in the english language-"excluding extraordinary items".

      4-"Goodwill and other intangible assets". The presence of these items on a company's books should indicate an ability of the company to earn above average rates of income. Instead, many of the companies that have the most goodwill have very poor rates of return, if any. Consider the cable companies, media companies, many tech companies and many serial aquirers. Instead of the caption goodwill it should say "the amount we overpaid when buying this company. Public companies fail to distinguish between accounting goodwill and economic goodwill.

      5-The failure of investors to spot con men talking about non cash expenses and other trashy accounting gimmicks.

      I think my shorts are in the money. Now if Greenspan and crew will only crank up interest rates and reduce liquidity, maybe the economic world will start making sense again. We might even put a dent in the real estate bubble.

    • pm, I would not suggest the problems of Adelphia and the activities of the Rigas family match the problems evident at NPK. But there is one telling point of comparison -- one family in control for too long. When corporate control is handed down like a throne in a monarchy, trouble of some kind is unavoidable.

      Beyond that point, the companies and managements have gone largely in different directions.

      NPK management is paid little for doing nothing. That's about right. Though they did finally move the manufacturing of appliances off shore.

    • no slappz:

      I would like to point out that there is no chance that the Cohens could leave a mess like the Rigas's or a risky business situation like any of the cable companies face. There is an enormous difference between having no debts and hundreds of millions of dollars in short term investments and a small amount of cash and many billions in debt while a company is also losing money.

      Secondly, NPK shows very little evidence that the management is trying to enrich itself at the expense. They do not get large salaries, big bonuses, stock compensation or other outrageous perks like many other companies.

      I admit that they haven't done a great job of growing the company. On the other hand, I don't know of another small appliance manufacturer that has been as successful over a long period of time and that has paid a lot of dividends and still has profitable operations and a lot of cash.

      Salton perhaps looked like it might be, but it hit the wall like most of the others. I understand that they paid George Foreman around $200,000,000. Unfortunately, Salton's shareholders didn't get very much if they didn't sell when the stock was high priced. I also anticipate that everyone who wants a George Foreman grill has one by now. Therefore, I wouldn't have much interest in Salton now or if and when it may go bankrupt and then re-emerge.

    • pm, as you know, capital expenditures fall into a couple of categories: maintenance is one, and building the business is another.

      Regarding the set-top box example: my initial box represents an expansion of Cablevision's business. If I receive another one -- either as replacement for a defective box or as part of a system upgrade -- that's maintenance cap-ex.

      No matter how you cut it, the payment for the boxes is an "expense". But whether a company chooses to record its outlays in a single year or stretched out over a period of years determined by a committee of accountants does not really demonstrate whether the operations are headed in the right direction.

      What if the corporate tax rate were 0%? I think in that scenario depreciation would mean very little.

      Though I haven't looked closely, I'll bet CVC would produce net income if it chose to stop expanding. If the company chose to function as a cable TV utility, I believe the bottom line would turn black. In other words, if CVC shifted away from capital expenditures to expand its activities beyond cable service and concentrated on only maintaining its cable plant and expanding into new buildings in its existing territory, the financial statements would look remarkably different.

      Meanwhile, if CVC chooses to expand and risks a downgrade from the credit rating agencies, CVC would know such a downgrade would be likely to occur before undertaking the expansion plan.

      Even if there were a downgrade, the investment bankers would have little trouble lining up plenty of capital for a refinancing. Maybe, if a lower rating would devalue CVC's bonds, the company would sell a few assets and paydown some debt. Happens every day.

      That aside, one of the major variables affecting investment decisions is management quality. In the case of CVC, I am not a fan of the Dolans and I think CVC stock is risky. Adelphia, it should be noted, was also run by a father and his sons. RiteAid was first run by its founder who was succeeded by his son. And then we have NPK, with its father/daughter succession.

      The trouble too often starts when the power remains in the hands on one person or one family too long. The ensuing trouble might not result in the catastrophe that struck Adelphia when it was discovered the father and sons had ripped off their company. But when a management becomes sclerotic and protects its own interests through special shareholder voting rights there's a problem.

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