S&P; Sets New ‘Core Profit’ Measure

Responding to deepening skepticism about the way many companies report their financial performance, Standard & Poor’s introduced a new benchmark Tuesday designed to more accurately gauge corporate earnings.

Under a new “core earnings” measure, the 10,000 U.S. firms analyzed by S&P; will have some revenue that they now use to boost profits--such as pension fund gains--stripped away.

Also, the lucrative stock options that corporations typically grant to their executives will be deducted from earnings because S&P; believes that will help provide a better yardstick of the costs companies incur to pay their top managers.

The result of the changes, in the near term, is that many companies will appear to be less profitable--boosting share price-to-earnings ratios. That could add to worries that stocks are overvalued.

But S&P;, whose research is considered more independent than that of major brokerages, said declining investor confidence in the wake of numerous accounting scandals pointed to a need for more accurate reporting.

“If nothing changes, investors will lose more and more faith in the stock market,” said David Blitzer, S&P;’s chief investment strategist.

S&P;’s new measure of core earnings--also referred to as “operating” earnings--will exclude gains and losses on asset sales, unrealized gains or losses from hedging activities, fees related to mergers and acquisitions, and legal settlements.

S&P; President Leo O’Neill said the firm won’t lobby for its core earnings measure to be mandated by regulators, but is willing to discuss the system with the Securities and Exchange Commission and other agencies.

In one example of how S&P;’s measure will change corporate results, General Electric Co.’s per share earnings for 2001 were reported at $1.41 excluding an accounting charge, but S&P; now calculates the conglomerate’s core earnings at $1.11--a 21% difference.

GE spokesman David Frail said S&P;’s new standard departs from generally accepted accounting principles and raises questions about whether the method “can serve to clarify or whether it’s going to confuse things further” for investors.