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The Danger Zone Pick: 9/17/12

Another company with questionable pension accounting. This situation is similar to what I wrote earlier this year: “Bail Out of Delta Before the Stock Crashes” and “US Steel (X) At Risk of Pension Pressure“.

All details are in this week’s Danger Zone interview with MarketWatch’s Chuck Jaffe.

In summary, this company manipulates a key, but overlooked, assumption in its pension accounting to reduce the cost of pensions and overstate earnings.

If we lower the assumptions to a value consistent with past performance that would lower the companies earnings and profits by $275 million (before tax), a 25% ding to Net Income and EPS.
Lowering to a more realistic level also reduces the NOPAT margin by about 150 basis points after tax.

The impact on valuation: instead of a fair value in the mid $50s, I now see it in the low $40s – about 30% lower than where the stock is today. 30% dwarfs the 4% dividend yield.

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