On a valuation basis of 1.68 book Brk has been a buy for some time.Now at a PE of 15 or so compared to 30 for the S&P 500,is a bargin on a earnings valuation basis,and you can trust the nunbers.Picked up some more this morning @2565.
Looks like that went over well...
Found a link to (a draft of) the full article. May be a little murky on the IP details, but hey, that's WSIA's problem, isn't it?
Other recent articles on options in WSJ:
<<Seventy-two percent of the survey's respondents expect to run out of shares to grant to employees within two years. New rules adopted by the New York Stock Exchange and Nasdaq Stock Market this year require shareholder approval of new stock compensation plans.>>
If shareholders vote for the options, then they have no one to blame but themselves.
FASB has decided at least this so far, as far as accounting for them:
<<Financial Accounting Standards Board officials said the board has decided not to designate one particular option-pricing formula in the option-expensing standard it expects to propose. Rather, the board expects to specify its objective, which is to measure how much a stock option is worth at the time it is granted.
As a result, a company could choose either a "binomial" valuation model or the commonly used Black-Scholes model. A binomial model incorporates more information than Black-Scholes, such as how soon employees are likely to exercise their options.
Some analysts have expressed concerns that such a flexible approach could lead to a race by companies to find the lowest acceptable number and, therefore, the lightest possible hit to earnings.>>
"underrecognition of the impact of stock options"
Those darn options again. How soon people forget.
Maybe we should start calling the options problem the "2% question", as in, where did my 2% go?
Full article below from a recent WSJ "Ahead of the Tape" column, because of the point made (have no idea of the author's calculations on INTC are correct, or much about the author, but the compensation points are still valid)
Now that stocks are rising anew and tech is back, baby, the stock-option expensing debate seems so 2002.
Nobody talks about options much any more. Like other corporate-reform efforts, could the effort to expense stock options just fade away in the bright light of a sunny market?
Advocates have already lost a round to the Canali-clad lobbyists for the Back-to-the-'90s tech crowd. In a little-attended announcement last month, the accounting watchdog FASB said that it would delay its final stock-options expensing decision till the second half of next year. Lest anyone forget: When this came up last in the early 1990s, the tech industry rolled FASB.
Certainly it's a tad complicated how to actually value options. The tech lobby says there's no workable model for doing so. But the debate about stock-option expensing needn't be held solely on an esoteric plane about how to make the ledgers approach the Platonic ideal of accounting.
Companies want to keep pretending stock options aren't a compensation expense. But because they are doling out options, they use cash to buy back stock and keep their share count from ballooning. As the stock rises, they need to spend more, buying high, not low. Investors, though most seem not to realize it, need to be more conscious that as stocks are rising, the rise in the shareholder's stake in the company isn't necessarily commensurate, because of dilution from stock options.
Take Intel, which is adamantly against expensing. In the first six months to June 28, Intel made 95 million new share-option grants. The average strike price was $18.52. On Friday, the stock closed at $31.66. So, the intrinsic value of those options, right now, is about $1.25 billion. (They are worth more than that according to Black-Scholes, but for the sake of that model's opponents, let's leave that out of this example.) Intel had pretax profit of $4.9 billion in the first nine months of the year. So, the value of options the chip maker granted in the first half is worth just over a quarter of its profits through nine months. To keep the share count flat, Intel must spend cash to buy back stock.
If options were included as an expense item, some investors would foolishly ignore the noncash expense. But others would treat it like they treat depreciation, which is also a noncash expense. Depreciation is a proxy for how much capital spending a company needs to make to maintain its infrastructure.
When stock options are expensed, they will be just such a proxy for the cash costs to the company from employee options. That is, if the accounting watchdogs manage to do the right thing.>>
Hyperlink to William J. Bernstein's article "The Two-Percent Dilution" in the Summer 2002 online edition of "Efficient Frontier".
or, if you prefer Adobe Acrobat:
Earnings growth was indeed high during the 1990s. But the persistence of this growth is dubious for three reasons:
The market went from trough earnings in the 1990 recession to peak earnings in the 2000 bubble. Measuring growth from trough to peak is meaningless; extrapolating that growth is even worse.
Analysts frequently ignored write-offs while increasing their focus on operating earnings. This behavior is acceptable if write-offs are truly "extraordinary items" but not if write-offs become an annual or biannual event, as was commonplace in the 1990s. Furthermore, what are extraordinary items for a single company are entirely ordinary for the economy as a whole.
The peak earnings of 1999�2000 consisted of three dubious components. The first was an underrecognition of the impact of stock options, which various Wall Street strategists estimated at 10 percent or more of earnings. The second was pension expense (or pension "earnings") based on 9�10 percent return assumptions, which were realistic then but are no longer; this factor pumped up earnings by about 15 percent at the peak and 20�30 percent from recent, depressed levels. The third was Enron-style "earnings management," which various observers have estimated at 5�10 percent of the peak earnings.
In summary, in a dynamic, free-market economy, considerable capital is consumed funding new ventures. For this reason, per share growth of prices, earnings, and dividends will lag aggregate macroeconomic growth by an amount equal to the net issuance of new shares. In peaceful, stable societies, this gap appears to be about 2 percent a year. In war-torn nations, this gap is considerably larger. Although these nations' economies can recover relatively rapidly, the high degree of recapitalization that is required savages shareholders.
The markets are probably in the eye of a storm and can expect further turmoil as the rest of the storm passes over. If normalized S&P 500 earnings are $30-$36 per share, if payout ratios on those normalized earnings are at the low end of the historical range (implying lower than normal future earnings growth), if normal earnings growth is really only about 1 percent a year above inflation, if stock buybacks have been little more than an appealing fairy tale, if the credibility of earnings is at an all time low, and if demographics suggest Baby Boomer dis-saving in the next 20 years, then we have a problem.
That old post by Flatfisher reminded me of a good article that shows why Buffett was right and Flat was flat wrong ;-) Earnings Growth: The Two Percent Dilution is by William Bernstein and Robert Arnott and appears in the latest Financial Analysts Journal. Here's a summary:
The bull market of the 1990s was built largely on a foundation of two immense misconceptions:
With a technology revolution and a "new paradigm" of low payout ratios and internal reinvestment, earnings will grow faster than ever before. Five percent real growth will be easy to achieve.
When earnings are not distributed as dividends and not reinvested into stellar growth opportunities, they are distributed back to shareholders in the form of stock buybacks.
In fact, neither of these widespread beliefs stands up to historical scrutiny. Since 1800, the economy, as measured by real GDP, has grown a thousandfold, averaging about 3.7 percent a year. The long-term uniformity of economic growth is remarkable; it is both a blessing and a curse. To know that real U.S. GDP doubles every 20 years is reassuring. But this growth is also a dire warning to those predicting rapid acceleration of economic growth from the computer and Internet revolutions.
The relatively uniform increase in GDP implies a similar uniformity in the growth of corporate profits�which does, in fact, occur. Except for the Great Depression, during which overall corporate profits briefly disappeared, nominal aggregate corporate earnings have tracked nominal GDP growth, with corporate earnings staying at 8�10 percent of the GDP growth. The trend growth in corporate profits is identical, to within a remarkable 20 bps, to the trend growth in GDP.
For 16 countries, with data spanning the 20th century, we compared dividend growth, price growth, and total return with GDP data from the same period. We found that in stable, non-war-torn nations, per share dividend growth was 2.3 percent less than growth in aggregate GDP and 1.1 percent less than growth in per capita GDP. In the war-torn nations, the situation was far worse�per share dividend growth 4.1 percent less than growth in aggregate GDP and 3.3 percent less than growth in per capita GDP.
Data for the comprehensive CRSP 1�10 Index from 1926 to June 2002 show that, after adjustment for additions to the index, total U.S. market capitalization grew 2.3 percent faster than the price index. Thus, over the past 76 1/2 years, a 2.3 percent net new issuance of shares took place, which is the equivalent of negative buybacks. Although net buybacks occurred in the 1980s, by the 1990s, buyback activity had once again returned to historical norms.