First, housekeeping: Glad to be back!
Second: My inaugural “Herb on the Street” on CNBC (see video below) focused on whether Hewlett Packard is minding the earnings GAAP.
GAAP, of course, is generally accepted accounting principles. My beef: HP presents itself to Wall Street as a non-GAAP company and has decided to exclude a $1 billion charge from non-GAAP earnings.
The issue of GAAP vs. non-GAAP is a longtime, simmering issue on Wall Street and it really gets down to this: Should investors view companies the way the companies want to be viewed or the way GAAP intended them to be viewed?
I say the latter, if the charges are not one-time in nature and are part of an ongoing restructuring/acquisitions strategy, which appears to be the case at HP. Acquisitions, in fact, are a stated part of HP’s business strategy. (Note its recent deals to acquire Palm and 3Com.)
- Two years ago, HP acquired EDS, the enterprise services company, for $13.5 billion.
- At the time the company said the deal would be accretive to GAAP earnings in 2010.
- Now the company is taking a $1 billion charge over a multi-year period, but only reporting that charge in GAAP results.
The result, in my opinion: Never mind that it appears EDS won’t be GAAP accretive in 2010, it would appear that non-GAAP results will be artificially inflated.
Furthermore, it’s easy to see why HP likes to keep the charges out of non-GAAP: Over the past three years, as the accompanying chart shows, non-GAAP earnings per share have beaten GAAP earnings per share.
I’m not the only person who has that view. On a conference call held by HP Monday to discuss a new strategy for its enterprise business, Sanford Bernstein analyst Toni Saccanoghi—who is generally known for asking the tough question—asked why the $1 billion charge would only be included in GAAP.
HP CFO Cathie Lesjak responded, saying, “While business charges in non-GAAP are typically more routine, routine rebalancing of activities and adjustments to changing business conditions. So this is really a structural change.”
Perhaps, but as Saccanoghi responded in a note: “Given that HP's actions appear to be strategic in nature, we believe this could (and should) raise questions among investors. We note that HP has taken restructuring charges of more than $50 million in 10 out of the last 20 quarters (and restructuring charges of any magnitude in 17 out of the last 20 quarter) and this current charge may reinvigorate investor debate over HP's use of GAAP vs. non-GAAP earnings.”
As well it should—and not just as it pertains to HP.