Name That Company

I was founded in 1906 in Rochester, N.Y., as The Haloid Co., and got my current name in 1961. Today, based in Connecticut, I’m “The Document Company,” employing tens of thousands in the U.S. and abroad, including a female CEO. My annual revenues top $15 billion, and I spend roughly a billion dollars per year on research and development. Among other things, I offer printers, digital presses, multifunction devices, digital copiers, supplies, software and support. I’ve recently been named one of “America’s 50 Best Companies for Minorities” and one of the “Best Places to Work in Information Technology.” Who am I? (Answer: Xerox)

Know the answer? Send it to us with Foolish Trivia on the top and you’ll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.

The Fool School

Hooray for core earnings

Standard and Poor’s, a division of McGraw-Hill, is known for credit ratings, stock research, its index of America’s 500 leading companies (the “S&P 500”) and more. Standard and Poor’s recently introduced a new accounting concept, one many hope will become an industry standard: core earnings.

You may have noticed, especially in the past year, that companies’ stated earnings are not always what they appear to be. Some firms fraudulently manipulate earnings, while many others use perfectly legal accounting strategies to plump up profits. In neither case are investors well-served.

Enter Standard and Poor’s. Working with the input of some respected accounting luminaries, S&P defined a new way for companies to express their after-tax operating earnings. “Core earnings” aim to be more realistic, taking reported earnings (which should exclude costs of discontinued operations and extraordinary factors) and then adding and removing certain items. Excluded will be income that isn’t generated by a company’s operations, such as pension fund income from investments or funds from lawsuits or insurance. Included, among other things, will be the costs of employee stock option grants. Several kinds of write-offs that companies frequently take will be added back in. The new calculation is designed to offer a more accurate picture of a company’s profits from the ongoing operation of its core businesses.

To appreciate what a difference core earnings can make, here are the four companies with the biggest negative difference between their 2001 reported net earnings and their core earnings: DuPont ($4.33 billion reported, -$0.05 billion core), IBM ($7.72 billion reported, $4.85 billion core), Microsoft ($7.72 billion reported, $5.46 billion core), and General Electric ($14.13 billion reported, $11.9 billion core).

Standard & Poor’s will routinely use core earnings in its credit rating analysis and elsewhere. Other firms are adopting the measure as well. But some are critical of it, taking issue with its definition and/or arguing that its application isn’t “one size fits all.”

Still, core earnings do vastly more good than harm. They’re a welcome improvement, helping investors see how productive a company’s core operations really are. Learn more at www.standardandpoors.com/Forum/MarketAnalysis/coreEarnings/index.html.

DUMB investment

Investing from the heart

During my salad days in the early ’60s, I had more money than brains. One fine day, I decided to make some “emotional” investments. As a child reared in near-poverty, I had always longed for the toy cars, metal semi-trailers and electric trains that were then in vogue. To compensate for the frustration of my youth, I decided to invest in the Cudahy meatpacking company, toy train manufacturer Lionel Industries and the carmaker Studebaker, which offered auto miniatures. You guessed it … each went down dramatically in value. Since then, I never invested from the heart or emotion, opting instead to choose stocks from some more realistic or logical perspective. Dr. D.J. Davis, Waterloo, Ill.

The Fool Responds: That’s a great lesson. It’s often tempting to invest with your heart, but always invest with your brains. You can start with your heart picking industries that get it racing but then follow through with objective evaluation. You might love discount retailers, but over the past decade or so, you’d have done poorly investing in Kmart but would have done well with Wal-Mart.