Is <I>This</I> Why PolyMedica's Earnings Are So Strong?

Fried-Day:

Whenever one company treats expenses differently than most other companies, it's bound to raise red flags. And they're flying high over

PolyMedica

(PLMD)

, a highflying direct-to-consumer distributor of diabetes supplies and other medical products.

This is a company whose stock, a year ago, was in need of a big dose of insulin, which it apparently received. In recent months, PolyMedica's stock has been on a roll -- up 127% since a secondary offering in November. And judging by the numbers, it's easy to see why: Revenues last quarter were up 47%, while earnings per share exploded upward by 106% to 37 cents per share. The strong earnings helped boost the operating margin to 17.8%, from 11.9% a year earlier.

PolyMedica's secret? Look no further than its advertising -- or at least the way the company accounts for it. Rather than expensing all of its advertising, like most firms do, it capitalizes, or spreads out, the costs for much of it over as long as four years. There's nothing illegal about that. However, whenever expenses are capitalized, reported earnings are higher than they otherwise would be.

PolyMedica's chief financial officer didn't return my call, but after reading the company's

Securities and Exchange Commission

filings, my guess is that he would've said that the company's "direct response" advertising creates long-term revenue, which in turn justifies not recording those costs as an immediate expense.

I also bet he'd have said that the company believes it is being conservative by going that route. After all, that's pretty much what PolyMedica said in a recent S-3, when it disclosed that: "Revenues generated from new customers as a result of direct-response advertising have historically resulted in a revenue stream lasting seven years. Management has selected a more conservative four-year amortization period..."

There was another disclosure, however, in the risk-factor section -- a risk you don't usually see -- which is also worth noting. According to PolyMedica, "Any accounting or business change that shortens or eliminates the four-year amortization of our direct-response advertising costs could result in accelerated charges against our earnings."

If that were the case today? If the company hadn't been able to capitalize its advertising expenses in each quarter of the last year, it wouldn't have posted

any

profit.

So much for those fat operating margins.

Help, I've been Seymoured:

I

promised you a response yesterday. I promised my editor a response for today. Sorry ... make that Monday.

So much for predictions:

Last week I said on our

Fox

show that I thought the

Nasdaq

would fall to 4450 before it closed above 5000. I stand in awe. (Which is why I prefer to focus on the micro!)

Oops:

An item

yesterday said that

Transaction Systems Architects

(TSAI)

had warned that its fourth-quarter earnings would be off. The company was referring to the quarter ending Dec. 31, but that wasn't Transaction's fourth quarter; it was its first fiscal quarter. Sorry 'boud dat. And from the clarification department, yesterday's item on

Kodak

(EK)

suggested that the company was losing market share. A Kodak spokesman said the market share data cited represented dollar amount of sales, not the number of cameras sold.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.