Expensing options will not hurt most tech earnings

By the end of this year, the U.S. accounting regulators are likely to require all U.S.-listed companies to account for the expense of their stock option programs on their income statements. Right now, it's up to each individual company to decide how it treats the accounting for stock options. Many tech companies account for them in their footnotes to financial statements and that means that options expense does not show up in the reported bottom line.
Relative to companies in other sectors, tech companies are more frequent users of options as part of employee compensation plans and worry that putting options expense into an income statement will hurt their profit and earnings per share.
Not so, say the tech analysts at Smith Barney, the brokerage of Citigroup. While they single out a couple of companies that they are concerned about — namely JDS Uniphase and Sun Microsystems — they say the market has largely already taken options expense into account when they value a given company's stock.
I reported on this study in today's Globe and Mail.
The analysts said there are six factors that investors ought to consider when looking at stock options and other issues related to employee compensation. Here they are, as listed in the Smith Barney report:

  1. Is option expensing increasing faster (or slower) than earnings and thus becoming more (or less) dilutive?
  2. Does the company have a limited/strong growth prospects but a disproportionately large/small amount of option expensing?
  3. Is there a track of record of activities that alienate investors, such as the re-pricing of options?
  4. Is the company likely to reduce options issuance and offset that practice with another one that might actually fare worse/better in the eyes of investors?
  5. Are there underlying issues not fully appreciated by the Street, but for which “option expensing” may serve as a trigger to bring the valuation into focus?

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