Here's another metric to throw in your hopper.

This morning, ratings agency Standard & Poor's announced its adoption of a new yardstick for evaluating corporate performance. Called core earnings, the measurement represents the difference between the revenue of a company's principal business and the costs and expenses associated with deriving that revenue.

S&P management said it developed the core earnings calculation in response to the recent rash of corporate restatements and financial scandals. Accounting "creativity is definitely on the rise," noted David Blitzer, chief investment strategist at S&P, during a telephone conference. "But reliability is not."

The core earnings measurement starts with GAAP net income—with a few significant alterations. First off, core earnings treats the cost of administering—and contributing to—an employee stock option program as an expense. That alone could have some serious implications for the earnings numbers of U.S. corporations. "Across the S&P 500," claimed Blitzer, "options expense would have reduced earnings by 10 percent."

Core earnings also factors in write-offs and restructuring costs. According to S&P, these costs are adjustments to ongoing operations—and should be treated as such. "Most of the time, these adjustments are just as real as if a company hadn't shut down an operation," notes Blitzer.

Interestingly, management at S&P decided to exclude goodwill impairment from its core earnings measurement—a move that will undoubtedly rankle some feathers at the Financial Accounting Standards Board. "When goodwill is impaired, there is a loss in value," explains Blitzer. "So if a company takes a charge, it winds up having to pay for it twice."

S&P management says the company's analysts will consider core earnings when they analyze and review stocks. In addition, S&P will begin calculating core earnings per share for the company's U.S. indices—for example, the S&P 500.

Such a rejiggering could have an interesting effect on corporate price-to-earnings ratios. According to Blitzer, core earnings for most corporates will be lower than operating earnings—the figure S&P had been using for its P/E calculations. When asked if the higher ratio means the market is still overvalued, he replied: "In the short term, yes. That maybe creates a little nervousness."

More than a little nervousness. But Blitzer thinks higher P/E figures pale in comparison with the larger issue at stake. "If we leave the current situation unchanged and untouched," he argued, "investor confidence will slowly but surely seep away."

Remember Orange County?
New York Federal Reserve president William McDonough on Tuesday issued a warning to Corporate America: improve disclosure practices on derivatives or else.

The "or else" part? If another derivatives-related corporate disaster strikes, it would lead to stringent reforms.

"The financial industry must make an effort to improve transparency," McDonough reportedly said, speaking to attendees of the 30th anniversary celebration of the International Monetary Market, a unit of the Chicago Mercantile Exchange.

Indeed, many business watchers are worried about another derivatives crisis surfacing in the wake of Enron's collapse. The Houston-based energy company was an aggressive user of those synthetic financing vehicles.

In his speech, McDonough did defend the use of derivatives as useful tools to manage complex risks in an era of 24-hour, global financial asset flows. He warned, however: "A common feature of recent financial crises, including those involving derivatives, is how financial innovation has made traditional accounting measures of leverage almost meaningless."

McDonough said it is important that financial institutions and publicly traded corporations make it clear to investors the risks associated with their use of derivatives.

Seems like we had this discussion—about 10 years ago.

Financing News

• Countrywide HomeLoans Inc., a subsidiary of Countrywide Credit Industries Inc., issued $1 billion in five-year global medium-term notes, up from a planned $750 million. The MTN offering was underwritten by J.P. Morgan and Lehman Brothers Inc. The notes were priced to yield 5.727 percent, or 108 basis points over comparable Treasuries. The issue was rated A3 by Moody's and Single-A by S&P.
  
  

• Kraft Foods Inc. is looking to reenter the capital markets. The company's management plans to raise $2 billion later this week from a sale of global notes, according to published reports. The largest food maker in North America plans to sell $1 billion each of 5- and 10-year notes. Kraft last issued $4 billion of bonds on October 30.
  
  

• Inveresk Research Group, a provider of drug-development services to companies in the pharmaceutical and biotechnology industries, will sell 12 million shares at $14 to $16 apiece in an initial public offering.
  
  

• Plumtree Software lowered its anticipated IPO price range from $13-$15 a share to $7-$9.
  
  

Short Takes
>> Shareholders of Cooper Industries Inc. voted Tuesday to reincorporate the company in Bermuda. The Houston-based manufacturer of electrical products, tools, and hardware expects the reincorporation to generate $55 million in additional cash flow and add 58 cents per share to earnings.

• 1
• 2
• next »