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What I meant is that stock holders equity on the balance sheet today is lower than it was at the end of fiscal 2004. I am not speaking of future potential, I mean what you can touch today.

I was surprised to see this so I checked on it. Indeed it is true. Book value of the company declined from 2004 to 2005, although it rose in every other year since 2002.

I looked at the annual reports to try to understand this. Retained earnings have been positive EVERY year, which should be accretive to equity.

The answer, the reason equity fell in 2005, is massive share repurchases. The way share repurchase is accounted is by subtracting the cash used for the repurchases from the total equity. Since total equity is a small fraction of Market Cap, the company always spends more cash to buy a share than the recorded equity value of that share. Thus very large numbers of share repurchases overwhelm the ability of Earnings to keep that number from falling.

($ amounts in $1,000s)
year comp income Shr repurchase
2003 $403,847 $203,413
2004 $486,043 $1,139,250
2005 $580,618 $828,048

You can see that although comprehensive income (earnings plus a few adjustments) rose steadily in those years, the amount of cash spent on repurchases rocketed to over $1billion in 2004, and hung at a very high $800 Million in 2005.

Summary: the book value decline is an artifact of accounting, in particular, of the fact that equity per share is typically only a tiny fraction of the actual company worth per share. This causes large share repurchases at market price to appear to be destroying equity value, when measured in actual company worth, these MAY be positive (if management is right), but are certainly nowhere near as negative as standard accounting would suggest.

The share repurchases in 2004, when the stock traded at prices from $15 to $30/share, almost certainly produce higher prices per share today because of the significant reduction in total share count they produced, and at a lower purchase price (for the most part) than exists today.

when shrs equity($1000s) equity/shr
9/29/2002 776,457,184 $1,712,456 $2.21
9/28/2003 787,385,072 $2,068,689 $2.63
10/3/2004 794,811,688 $2,470,211 $3.11
10/2/2005 767,442,110 $2,090,634 $2.72
10/1/2006 756,602,071 $2,228,506 $2.95

Share count is lower today than it was in 2002, and has dropped in the last two years.


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