An Inexplicable Event

FDC Restates Earnings, Stock Falls

By Bryan Bottarelli
Monday, September 18, 2006 10:32 AM EST
Mon, 18 Sep 2006 15:32:00 GMT

Dear Bottarelli Research Member,

This morning, we’re getting hit with an unpredictable, random, and rather inexplicable earnings restatement from First Data (FDC – NYSE).

According to the restatement, the company has increased their net income in some periods and has decreased their net income in other periods. On a cumulative basis, FDC’s net income (through this year’s second half) was $30 million higher than reported. But for the first quarter of 2005, consolidated net income is $90 million lower than previously reported.

The news headline reads “First Data Restatement Lifts Past Results” and the article leads with the statement that First Data has boosted net income by about $340 million, or 6%, over the past three-and-a-half years due to accounting changes for certain interest rate swaps on foreign currency contracts related to Western Union.

But unfortunately, Wall Street is not seeing this restatement as bullish news. In today’s trading, FDC is down $3.00 and your FDC October 42.5 Calls (FDC JV) are trading for $1.15 per contract.

In my opinion, this restatement was a horrible error in FDC’s management team. I’m guessing that FDC figured that their stock would have rallied big-time on the news — which is why they decided to release the news just days prior to their Western Union spin off. After all, you can’t put a price on positive publicity, right? Well, as it turns out, they were wrong. Very wrong. And today, it’s killing their shareholders.

FDC

I really wish the suits at FDC would not have tried to get “cute” and simply let the natural market forces push the stock higher as we lead into the September 22nd cut-off date. But as it stands, they released an earnings restatement which is having the exact reverse effect of what was intended — thus pushing FDC lower. Unfortunately, this means we are stopped out on our FDC October 42.5 Calls (FDC JV). I’ll continue to monitor the situation, but it looks like this one was nothing more than bad luck brought about by horrible judgment in the FDC boardroom.

In other news, I’m still keeping a close eye on Marathon Oil (MRO – NYSE) to see when it’ll establish a firm bottom. As I’ve reported last week, the stock has given up $20 since late August, and I think it’s a classic case of overkill.

MRO

When it’s time to act, I think adding some MRO January calls to your ledger will pay off handsomely. Until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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