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|  | FEBRUARY 4, 2004
A Quality Improvement for Earnings The latest update of S&P's Core Earnings measure for companies in the S&P 500 shows a strong rise, thanks mostly to lower pension costs By most accounts, the latest earnings season shows that profit growth is heating up. So far, about two-thirds of companies in the S&P 500-stock index have reported December-quarter results. Standard & Poor's estimates that the quarter's operating earnings rose 24%. In addition, 81% of these companies have reported higher sales from the year-ago quarter. And for full-year 2003, S&P 500 operating earnings are running 4.6% ahead of estimates and 30% above 2002's results, according to S&P. Even better, earnings quality is improving. S&P Core Earnings, which among other things adjusts for pension accounting and options expenses, are expected to increase 56% for the fourth quarter because of the decline in unusual items being reported. For all of 2003, S&P Core Earnings are estimated to jump 79%, after rising 48% in 2002 and declining 59% in 2001. RISING SALES. S&P Core Earnings posted such strong gains mainly because pension costs fell as the overall stock market rallied in 2003, explains Howard Silverblatt, equity market analyst for S&P. For 2003, he figures pension-interest expenses for S&P 500 companies amount to just 29 cents per share, a large improvement from $5.01 per share in 2002, when the market dropped, he says. For 2004, Silverblatt sees no pension-interest expense that would cut into Core Earnings for the 500 companies. Another encouraging sign is that sales are expected to rise for the first time in three years. So far, they've improved 9%. This has helped boost operating margins from 7.4% in 2002 to 8.8% for 2003, Silverblatt says. In general, companies are disclosing more information to investors and aren't reporting as many unusual charges or items as in previous years. This has helped close the gap between S&P Core Earnings and traditional, or as-reported, numbers for S&P 500 outfits. S&P estimates 2003 Core Earnings of $42.31 per share for the S&P 500, compared with $45.43 for as-reported earnings per share. Back in 2001, S&P Core Earnings were $16 per share for the S&P 500, vs. $24.69 as-reported results. "We believe that the convergence of as-reported and S&P Core Earnings figures has positive implications for the overall quality of corporate earnings," says Silverblatt, who compiles the data for S&P. BIGGEST GAP. BusinessWeek Online's latest S&P Core Earnings Scoreboard shows the traditional and S&P Core Earnings for the S&P 500 companies for the trailing 12 months ended in September or October. (Full-year 2003 results should be available for most companies in our next S&P Core Earnings update at the end of March.) A few outfits still have a wide gap between Core Earnings income and as-reported results. IBM (IBM ) had the widest difference, due mostly to a $4 billion pension expense in the September quarter, according to S&P. Verizon (VZ ) reported $2.9 billion in charges for severance, pension, and benefits costs related to its recent layoffs. On the other hand, Time Warner (TWX ) had much higher Core Earnings than as-reported earnings because of a $44 billion asset writedown in 2002 as it restructured, says S&P. S&P devised its methodology for Core Earnings in 2002 to bring more transparency and consistency to earnings analysis and forecasts. BusinessWeek Online's scoreboard can help investors find which companies may be overstating profits by ignoring costs related to items such as stock options, pensions, and purchased research.  By Karyn McCormack in New York
BW MALL
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