letter published, this AM, in the Boston Globe (CITS Debt Watch)

Dear financial folk,

The letter (below) needs no explanation.  A copy of it,
included here, is the pre-edited version:

One editor said it was a "good letter" -- and if
I can help inform the "typical Boston Globe Reader,"
it is my pleasure.

Letter to the Business Editor:

To present a "growth" in earnings, either by comparing to the year
before, or the quarter of the year before, inadvertently can make a
period of corporate economic growth appear more robust than it truly
is.

Let us say that the "Chocolate Factory" had a bad last year, and
earned a penny.

Let's now say that this year, the Factory did a tad better.  They
earned 2 pennies.

The Globe would magnificiently report that earnings were up by 100%.

Is this reason for excitement?  No.

I suggest, a more informed way of presenting such information is to
compare any earnings to a regression of earnings over the last 10
years.

That would be meaningful.

Since my first letter on this concern submitted on April 16th I was
troubled to see, on April 21, Mr. Kerber reporting that "Boston
Scientific said that its first-quarter profit doubled."

I am trying to walk in the shoes, not of savvy investors, but in the
shoes of your average Business section reader.

In my first letter, I illustrated problems with stating earnings in
very confined and misleading ways.  You may respond that this is
"practise" to which I will respond, it is still seriously misleading
your average reader who is trying to maintain a KEOGH or make private
investment decisions.

With regard to Kerber's article on the 21st, what does your headline
writer do?  He/she puts in a font of five times the size of the
article, "Boston Scientific profits double."

This simply is not a true statement.

Boston Scientific had a lousy quarter one year ago, and it is true
that 23 cents compared with 11 cents is a factor of two -- but -- that
is simply noise and seriously misleading information.

Why not go back August of 2003, when profits were only 3 cents?  This
is not a cyclical industry, so comparing year to year quarterlies are
valid to any prior quarter.

So, why not have a headline that says:

BOSTON SCIENTIFIC PROFITS RISE BY OVER SEVEN TIMES SINCE AUGUST 2002

That headline is about as useful as any other of this limited outlook.

We, at MIT and my Center have analyzed corporate earnings since 1977.

While there is no space in a letter for charts let me describe a chart
of the performance of BSX over the last ten years.

This 10 year review shows that, on average (based on a simple
regression over the period), earnings rose from 29 cents in 1994 to 66
cents in 2003.

Yes, the last quarter, if annualized, is higher than this end point,
but, we do not know if the single quarter is a fluke.  Kerber
rightfully worries if Johnson & Johnson may out-compete Boston
Scientific.

So, the annualized growth rate of Boston Scientific, over 10 years has
been 11.6% (certainly not 100%).  Such a pattern of growth is only
somewhat higher than the norm for all listed stocks.

Now, in our analysis at MIT and the Center, we compensate for periods
of recent, sub-par growth.

This is done by looking at the growth of a company's earnings, 3
years, 4 years, etc., back, and finding the lowest growth rate.

In a second chart we see there was such a lower growth period from
1999 to 2003.

When we calculate the annual growth rate for this period, we have a
quite anemic rate of growth of 2.5 %.  During this period one might as
well have been in much safer instruments such as federal securities.

Our Center has never recommended to any of our clients that they
invest in a company that shows such poor returns via the analysis I
just described. And yet the headlines and the determined face of Mr.
Tobin suggests otherwise to your unwary investors.

For interested readers, I would be pleased to e-mail copies of the two
referenced charts.

Sincerely,

W. Curtiss Priest, Ph.D.
Member, American Economics Association
Editor, CITS Debt Watch
Research Affiliate, MIT
E-mail: BMSLIB@MIT.EDU for requesting charts
Melrose, MA  02176-4522

-- 


           W. Curtiss Priest, Director, CITS
   Research Affiliate, Comparative Media Studies, MIT
      Center for Information, Technology & Society
         466 Pleasant St., Melrose, MA  02176
   781-662-4044  BMSLIB@MIT.EDU http://Cybertrails.org