Health Warning! Healthcare Tax Could Thwart Improving Earnings

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After Obama’s health care plan was signed into law, a number of companies have stepped forward to assert that their earnings may take a dip due to new taxes and requirements on their health care programs.  Although the charges will be on the books for just one year (afterwards companies will account for the higher costs), some companies could come up short in 2010.

Names to Watch

Among those that will face higher expenses this year are all-American companies like John Deere and Caterpillar, which stand to charge off $100 and $150 million respectively due to a new tax on government subsidies.  The subsidy, which helps carry some of the burden of the high cost of prescription drugs for seniors, will affect a number of firms.  Boeing, Con-Way, Navistar, Exelon, Verizon, Xerox, Met Life and Public Service Enterprise Group all came public with new expenses in an open letter before Congress’ important vote.

An Accounting Game

The new tax, which will not go into effect until 2011, will charge 2010 earnings for most of the above companies.  John Deere, for example, will take the $150 million charge in the second quarter and advised that its earnings forecast of $1.3 billion in 2010 did not include the cost.  Despite going public about the costs, investors could be caught off guard when 2Q earnings are released with the full burden of one year's taxes accounted in just one fiscal quarter.

Playing it Safe

A number of companies from small businesses to international conglomerates will have a costly new tax on their books, and many will account for the new costs at differing times.  Although many have made their accounting timetable public, several firms have yet to advise their shareholders for the costs – which could impact stock prices as the healthcare cost makes its way on the books.  Investors with a long term horizon have nothing to worry about, though shorter term investors and those with significant holdings in subsidized firms would be well-advised to look for company guidance regarding these one-time charges.

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