Not Fooled By Pre-Paid Legal's Accounting Tricks

Feb.21.07 | About: Pre-Paid Legal (PPD)

Pre-Paid Legal Services, Inc. (NYSE:PPD) announced results for the Q4 and year ended December 31, 2006. The press release breathlessly announced all sorts of excellent numbers. As a matter of fact the press release was a blizzard of numbers without any qualitative comments whatsoever. Everything was up and so much better - Hmmm. (I think the lawyers have a gag order on management.)

The only comment that provided any real insight was in the first paragraph where they admitted that because of a 10% decrease in weighted outstanding shares, they were able to trick the diluted earnings per share number up by 29%. Net income was actually only up 16%. This clearly is not sustainable and basically is a magic trick. Maybe you should read the line:

Diluted earnings per share increased 29% to 94 cents per share from 73 cents per share for the prior year's comparable quarter due to an increase in net income of 16% and a 10% decrease in the weighted average outstanding shares.

The press release only included financial highlights whereas most companies who are focused on disclosure actually provide the entire financial statement allowing the market place to reach informed conclusions about the state of affairs.

An interesting financial highlight showed dividends being paid in previous quarters and no dividends being paid in the past year. Dividends are one of the true and few ways to determine financial health. “In cash we trust - all else is BS.”

Yahoo Finance reports “Pre-Paid Legal Services Inc.'s Corporate Governance Quotient (CGQ®) as of 1-Feb-07 is "better than 23.1% of S&P 600 companies.” That means approximately 76.9% are better.

Last time I looked, an incredible 70% plus of the float is short. Look for an interesting annual meeting.

PPD 6-month chart:

PPD 6-month chart