Options Expensing Imminent Impact

Cost of Options as % of Company Earnings

We have been harping on stock options expensing for some time now. Finally, the chickens will come home to roost Q106, in particular for the high tech industry. We believe that many company valuations will be brought "down to earth" so to speak. Excerpts validating our postion from the Economist follow:

Firms must expense options from the first financial year beginning after June 15th 2005. For many American companies, the cost of their options will have to be reflected in the profits that they report for the first quarter of 2006.

According to David Zion and Bill Carcache of Credit Suisse First Boston, there are only 96 firms out of the S&P 500 for whom Wall Street's consensus estimate reflects the cost of options.

In some industries, profits will be hit particularly hard. Including the cost of options would lower the consensus 2006 profit estimate for the semiconductors and semiconductor-equipment sector by 23%, calculate Messrs Zion and Carcache.

And, according to their rough estimates, a handful of companies would see their profits fall by over 50%, including Sun Microsystems and Novell, while one firm, Applied Micro Circuits, would swing from profit to loss.