Were Optical Cable's Earnings Really Up?

"Second Quarter Net Income Jumps 37%." So blared the headline on Optical Cable's (OCCF) earnings report yesterday. Thirty-seven percent. Thirty-seven percent. Wow. Not quite the 50% the granddaddy of all fiber-optic cable companies, Corning (GLW), yesterday told its investors to expect, but impressive, nonetheless.

Optical's investors agreed, bidding the stock up 5, or 16%, to 36; that gives the Virginia company a market value of $1.3 billion. One-point-three billion!

So what if sales last year were a mere $50.7 million? So what if last quarter they grew at a mere 5%, vs. Corning, whose sales growth has been topping 30%? So what if Optical trades at twice the multiple of sales to Corning?

You might be able to overlook all of those items if it weren't for one, small, really very tiny issue: Remember that 37% gain in earnings? What the company didn't come right out and say in the text of its earnings release -- but which its income statement showed so clearly -- was that without so-called "other income," the company's earnings per share of 7 cents would've been slightly below last year's of 5 cents.

"Other" income usually refers to income earned from sources other than the company's main line of biz; it's income that can't be counted on to generate earnings year in, year out. Optical didn't disclose just what the "other" income was, but according to last quarter's 10-Q, when "other" income shot up to $532,000 from $40,000 a year earlier, it came from "trading securities." More specifically, the company said that it had sunk more than $7 million into an index mutual fund "concentrated in the technology sector." Put another way, Opitical is betting company money on the stock market.

Ah, you say, but so is Intel (INTC). So is Dell (DELL). And so do many other companies. Why, then, shouldn't Optical? Nobody says Optical shouldn't (though the merits of management investing up to 26% of a company's assets in a concentrated stock portfolio that produced 33% of pretax operating profits could be debated). To be sure, this column has questioned the stock gains from Intel and Dell, but not because those companies invested in stocks. The issue with Intel and Dell was that the investment gains were larger than analysts had expected and played a big role in the company beating Wall Street estimates.

By contrast, Optical has no analyst coverage so it has no estimates. The trouble with Optical is that it crowed its earnings were up 37% when they really weren't. (Or at least the earnings that count weren't.)

Optical execs couldn't be reached. The CFO, who the receptionist said was the person I should speak with, was said to be on vacation (when earnings were released?!) and the head of the accounting department, who was subbing for him, went home sick. Later, albeit just after 5 p.m. EDT, I left a message for CEO Robert Kopstein, who had already gone for the day. If he returns my call, I'll pass along his comments.

And this poll: Do You Want Your Company to Invest in the Stock Market? Yes No

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