The Motley Fool Take on Monday, July 15, 2002
Coke's Correct Option

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Admit it, for a while there, before they came back today, you were watching the market indexes and whispering to yourself, "How low can they go... how low can they go?" The Dow had plunged over 400 points, whipsawing the index back to its post-Sept. 11 low. The S&P 500, Nasdaq, and the FOOL 50 were each down about 4%. Then, in a span of about 30 minutes, they all came roaring back and posted minor moves on the day, forcing Web financial news services to change their sprawling, alarmist headlines every few minutes.

Of course, a late-day rally, if you can call it that, doesn't make the fact that we're in a bear market any easier. Even after bumping back up to 8,600 by market close today, the Dow doesn't look like the market force it was in 1999 when it hit 10,000 for the first time. Even back then we said it wasn't such a big deal.

For a little perspective, see our market blues special from 2000. The lessons to be learned are the same. Or, if you prefer a different tack, you could always just sleep through the bear market.

Now, on to more important matters than what the market indexes did. In today's Motley Fool Take, a few companies -- namely Coca-Cola and The Washington Post Co. -- aren't waiting for Congress to enact new laws affecting corporate accounting. They're taking matters into their own hands by expensing employee stock options. It's a move long overdue, and we hope many more companies will follow suit.

In today's Motley Fool Take:

Coke's Correct Option

The Motley Fool is lifting a glass today to Coca-Cola (NYSE: KO) because the corporate giant announced it will start treating employee stock options as an expense. "Management has concluded that stock options are a form of employee compensation expense," says CEO Doug Daft, "and therefore it is appropriate that these costs be reflected in our financial results." We couldn't agree more.

Warren Buffett is Coke's largest shareholder, and a board member to boot. The Berkshire Hathaway (NYSE: BRK.A) chairman has long been critical of the way most companies account for options, and he no doubt heavily influenced the company's decision. In his 1998 annual report, he wrote: "If options are not a form of compensation, what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where should they go?"

The Senate debated a bill that would require companies to do what Coke is now doing voluntarily. However, treating options as an expense will, in most cases, depress earnings (with its new plan in place for the fourth quarter, Coke expects earnings per share to be a penny lower this year). As such, corporate lobbying against the bill was intense, and it was defeated last Thursday.

We applaud Coke -- and the few other pioneers like Boeing (NYSE: BA) and Winn Dixie (NYSE: WIN) -- for taking this step and allowing investors to get a much clearer and more realistic picture of their finances. Late today, The Washington Post Co. (NYSE: WPO) joined in with the same announcement.

Now, who's next?

Quote of the Day

"October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February." -- Mark Twain

Pfizer's New Prescription

The prescription for Pfizer's (NYSE: PFE) growth involves ingesting a drug giant, then calling in sick this morning. For the leading drug maker, buying into Pharmacia (NYSE: PHA) might seem like a blast from the merrier past. After all, Pharmacia itself had acquired Upjohn during the industry's heyday, just as Glaxo and SmithKline Beecham would merge into GlaxoSmithKline (NYSE: GSK).

The terms of the new all-stock transaction have Pharmacia stockholders receiving 1.4 shares of Pfizer for each stub of Pharmacia. While the merger was initially valued at $60 billion, once Pfizer's stock opened at $29 this morning, it knocked the deal's value down closer to $54 billion. Expect that value to continue to fluctuate, just as further sector consolidation rumors will no doubt swirl. Gemany's Bayer has already responded to the merger news by saying that it, too, continues to seek out partners for its health care division.

Investors might wonder why the Viagra maker was out on the prowl. The company's rich pipeline has been the envy of the industry, and Pfizer has been a consistent fiscal producer. Today the company posted healthy second-quarter profits of $2 billion on $8 billion in revenue. Pfizer is also standing by its full-year target of growing earnings by 21% -- in line with analyst projections calling for $1.58 a share in net income.

So why would the maker of cholesterol-reducing Lipitor want to take on the Pharmacia fat? Bragging rights? Market share? Either way, while Wall Street might be initially unimpressed with the pairing, the company's competitors will be sleeping uneasy, at best.

Discussion Board of the Day: Pfizer

Is Pharmacia a good buy for Pfizer, or will it sandbag the company's organic growth? How will the rest of the sector respond? All this and more -- in the Pfizer Discussion Board. Only on Fool.com.

Don't Max Out Your 401(k)

When it comes to saving for retirement, many Americans first turn to their employer-sponsored plan (401(k), 403(b), 457, etc.). However, in a recent BusinessWeek article, economists Laurence J. Kotlikoff of Boston University and Jagadeesh Gokhale of the Federal Reserve Bank of Cleveland claim that many investors would have more money in retirement if they contributed to accounts other than 401(k)s. Their primary reason: Withdrawals from 401(k) accounts are taxed as ordinary income, instead of at the lower rates of long-term capital gains. Not only does this reduce the after-tax benefit of a 401(k), but it might push retirees into a higher tax bracket and thus subject more Social Security benefits to taxes.

If your employer matches your contributions to your retirement plan, you should contribute at least as much to take full advantage of that free money, according to Kotlikoff and Gokhale. After that, you're probably better off putting your money elsewhere, preferably a Roth IRA if you're eligible. Implicit in this argument is that, if your employer doesn't offer a match, you should contribute the maximum amount to a Roth IRA before even considering another option.

Very Foolish advice, indeed. But we'll take it even further by pointing out two other benefits of a Roth over an employer-sponsored plan:

  • Assets in an employer-sponsored plan (and in a traditional IRA, for that matter) must start being distributed by the time the account owner turns age 70 1/2, whether the money is needed or not. Thus, the account owner loses the benefit of tax deferral on that money, and the withdrawals may move her to a higher tax bracket. However, there is no required distribution age for assets in a Roth IRA. If the money is not needed, it can continue to bask in the glow of tax-free growth.
  • Withdrawals from work plans and traditional IRAs before the account owner is age 59 1/2 results in immediate taxation and a 10% penalty. Some plans allow participants to borrow from their plans, but many don't. On the other hand, contributions to a Roth IRA may be withdrawn anytime, penalty- and tax-free. The same can be said of earnings withdrawn for first-time home purchases, as long as the money has been in the account for at least five tax years. Not that we recommend this, but if you need the money, it's there.

Of course, everyone's situation is different. Should you max out your Roth IRA? Begin your decision process by visiting our IRA Center.

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Quick Takes

Advertising companies are the latest to come under question for their accounting practices. According to The Wall Street Journal (subscription required, free trial available to Fools), "the five biggest advertising-holding companies, suffering through one of the worst marketing recessions in recent memory, could owe an estimated $1.7 billion to the hundreds of marketing businesses they acquired in recent years.... The liability, it said, has been largely invisible to investors because some buyers haven't treated their future payments as debt." Firms in question include Interpublic Group (NYSE: IPG) and Omnicom Group (NYSE: OMC).

Home Depot (NYSE: HD) has reiterated its expected revenue growth rate of 15% to 18% over the next few years. Its board of directors also has just approved a share buyback plan of up to $2 billion per year. The company's stock is trading near a four-year low.

The government reported today that, contrary to expectations, U.S. business inventories at retailers, manufacturers, and wholesalers rose 0.2% in May -- the first rise in 16 months. This increase in stuff on warehouse shelves was coupled by a drop in overall sales by 0.4% after an uptick of 1.7% in April. The inventory rise can be partly explained by businesses stocking up their shelves, in anticipation of sales.

The Federal Trade Commission is investigating the degree to which online search engines don't make clear which search results offered are tied to payments for prominent placement. 

In the U.S., we have the Dow and the S&P 500 as our major indexes. In the United Kingdom, they have the FT100, or "Footsie." According to Reuters, "Weak oils, banks, and drugs pushed Britain's FTSE 100 index to a 5-1/2-year intraday low on Monday as weak U.S. data and the start of a crucial earnings season heightened concerns about the world's biggest economy."

InVision Technologies (Nasdaq: INVN), a company that makes machines that can scan baggage for explosives, announced that it expects to report significantly higher-than-expected sales for its second quarter. Ever since Sept. 11, its shares have been rising.

And Finally...

Today on Fool.com: Rex Moore explains how the three components of inventory can predict an earnings surprise.... In Foolish 8, Matt Richey writes about Imperial Parking's ticket to success.... In Fool's School, how to save lives and money.

Bob Bobala, Robert Brokamp, Jeff Fischer, Jeff Hwang, Tom Jacobs, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Jackie Ross, Reggie Santiago, Dayana Yochim

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