Options expensing and consensus eps
Here is a great posting from Wall Street on the curve balls thrown at equity research analysts due to the differing treatment of options expenses (an excerpt):
“Sell-Side Analysts and Option Expenses: Is There Anybody Out There?
I’ve commented quite a bit lately on the topic of sell-side research, its plight and its problems. Unfortunately, many of the problems it faces it brings upon itself, as highlighted in Herb Greenberg’s interesting piece in Saturday’s Wall Street Journal titled “How Expensing for Options Throws Analysts Off Course.” Before I dig right in, I’d like to tell you what I’d expect from sell-side analysts (or analysts of any stripe, to be truthful):
Critical, independent thinking; and
A digestable, informative work product; that gives me
A reason for me to read their stuff
I mean come on, is this really too much to ask? I’ve known and worked with many sell-side analysts in my career, almost all of whom have been good, caring people. But the problem is that many missed several key items on the list above, with numbers 3 and 4 the most frequently omitted. Analytical rigor and critical thinking? Shouldn’t these be the two bedrocks of investment research, regardless of whether or not one is talking buy- or sell-side, retail- or institutional-oriented, etc.? Am I missing something here? I think not. And there are structural issues for why these problems have become embedded in the [sometimes] dysfunctional Wall Street architecture, i.e., analysts covering too many companies, being forced to release work product too frequently, pressure from clients and bankers to emphasize the positive and downplay the negative, etc. But the bottom line is that research is and should be treated as a profession with the same degree of standards expected from other professions, i.e., law, accounting, medicine, etc. And in the absence of this recognition of research as a profession, it will be frought with inconsistency, conflict and bias.
Anyway, so what of Herb Greenberg’s article? The bottom line is that earnings estimates reported to the biggest aggregrators and distributors of such things are not prepared in a similar manner, because not all analysts taken option expenses into account in their estimates.”
Message is: if you buy stocks based on quant screens you might be in for a rude surprise.