Do Earnings Announcements Matter? Not To Smart CEOs

Do Earnings Announcements Matter? Not To Smart CEOs

by | Apr 23, 2014 | Current Affairs, Leadership

Every quarter I have to be reminded that “earnings season” is again upon us.  The ritual of public companies announcing their sales and profits from recent quarters that generates a lot of attention in the business press.  And I always wonder why this is a big deal.

 

What really matters to investors, employees, customers and vendors is “what will your business be like next quarter, and year?”  We really don’t much care about the past. What we really want to know is “what should we expect in the future?”

For example, two companies announce quarterly results.  One has a Price/Earnings (P/E) multiple of 12.8 and a dividend yield of 2.05%.  The other has a multiple of 13.0, and a yield of 3.05%.  For both companies net earnings overall were pretty much flat, but Earnings Per Share (EPS) improved due to an aggressive stock repurchase program.  Both companies say they have new products in the pipeline, but they conservatively estimate full year results for 2014 to be flat or maybe even declining.

Do you know enough to make a decision on whether to buy either stock? Both?

Truthfully, the two companies are Xerox and Apple.  Now does it matter?

While both companies have similar results and forward looking statements, how you view that information is affected by your expectations for each company’s future.  So, in other words, the actual results are pretty meaningless.  They are interpreted through the lens of expectations, which controls your decision.

You can say Xerox has been irrelevant for years, and its products increasingly look unlikely to change its future course, so you are disheartened by results you see as unspectacular and likewise see no reason to own the stock.  For Apple you could say the same thing, and bring up the growing competitor sales of Android-based products.  Or, you might say that Apple is undervalued because you have great faith in the growth of mobile products sales and you believe new devices will spur Apple to even better results.  Whatever your conclusion about the announced earnings, those conclusions are driven by your view of the future – not the actual results.

Another example.  Two companies have billions in sales, and devote their discussion of company value to technology and the use of new technology to pioneer new markets.  Both companies report they continue a string of losses, and have no projection for when losses will become profits.  There are no dividends. There is no P/E multiple, because there is no E.  There is no EPS, again because there is no E.  One company is losing $12.86/share, the other is losing $.61/share.  Again, do these results tell you whether to buy either, one or both?

What if the first one (with the larger losses) is Sears Holdings, and the latter is Tesla?  Now, suddenly your view on the data changes – based upon your view of the future.  Either Sears is on the precipice of a turnaround to becoming a major on-line retailer that will sell some real estate and leverage the balance of its stores to grow, so you buy it, or you think Sears has lost all relevancy and you don’t buy it.  Either you think Tesla is an industry game changer, so you buy it, or you think it is an over-rated fad that will never become big enough to matter and the giant global auto companies will destroy it, so you don’t buy it.  It’s your future view that guides your conclusions about past results.

The critical factor when reviewing earnings is actually not the reported results.  The critical factor is what you think the future is for these 4 companies.  No matter how good or bad the historical results, your decision about whether to own the stock, buy the company products, work for the company or join its vendor program all hinges on your view about the company’s future.

Which makes not only the “earnings season” hoopla foolish, but puts a pronounced question mark on how executives – especially CEOs – in public companies spend their time as it relates to reporting results.

Enormous energy is spent by most CEOs and their staff on managing earnings.  From the beginning to the end of every quarter the CFO and his/her staff pour over weekly outcomes in divisions and functions to understand revenues and costs in order to gain advance knowledge on likely results. Then, for the next several days/weeks the CFO’s staff, with the CEO and the leadership team, will pour over those results to make a myriad number of adjustments – from depreciation and amortization to deferring revenue changing tax structures or time-matching various costs – in order to further refine the reported results.  Literally thousands of person-hours will be devoted to managing the reported results in order to provide the number they think is most appropriate.  And this cycle is repeated every quarter.

But how many hours will be spent by that same CEO and the leadership team managing expectations about the company’s next year?  How much time do these leaders spend developing scenarios, and communications, that will describe their vision, in order to manage investor expectations?

While every company has a CFO leading a large organization dedicated to reporting historical results, how many companies have a like-powered C level exec managing the expectations, and leading a large staff to create and deliver communications about the future?

It seems pretty clear that most management teams should consider reallocating their precious resources.  Instead of spending so much time managing earnings, they should spend more time managing expectations.  If we think about the difference between Xerox and Apple, one is quickly aware of the difference the CEOs made in setting expectations. People still wax eloquently about the future vision for Apple created by CEO Steve Jobs, who’s been dead 2.5 years, while almost no one can tell you the name of Xerox’ CEO.  If you think about the difference between Sears and Tesla one only needs to think briefly about the difference between the numbers driven hedge fund manager and cost-cutting CEO Ed Lampert compared with the “visionary” communications of Elon Musk.

Investors should all think long term.  Investors should care completely about what the next 3 to 5 years will mean for companies in which they place their money.  What sales and earnings are reported from months ago is pretty meaningless.  What really matters is what is yet to happen.

What we don’t need is a lot of time spent talking about old earnings.  What we need is a lot more time spent talking about the future, and what we should expect from our investments.

 

Yes, You Should Buy Apple

by | Oct 19, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech


Summary:

  • Apple keeps itself in growth markets by identifying unmet needs
  • Apple expands its markets every quarter
  • Apple deeply understands its competition
  • Apple knows how to launch new products quickly
  • These skills allow investors to buy Apple with low risk, and likely tremendous gains

Apple’s recently announced sales and earnings beat expectations.  Nothing surprising about that, because Apple always lowballs both, and then beats its forecast handily.  What is a touch surprising is that according to Marketwatch.com “Apple’s Decline in Margins Casts a Shadow.” Some people are concerned because the margin was a bit lower, and iPad sales a bit lower, than some analysts forecast.

Forget about the concerns.  Buy the stock.  The concerns are about as relevant as fretting over results of a racing team focused on the world land speed record which insteading of hitting 800 miles per hour in their recent run only achieved 792 (according to Wikipedia the current record is 763.)  The story is not about “expectations.”  Its about a team achieving phenominal success, and still early in the development of their opportunity!

Move beyond the financial forecasts and really look at Apple.  In September of 2009 there was no iPad.  Some speculated the product would flop, because it wasn’t a PC nor was it a phone – so the thinking was that it had no useful purpose.  Others thought that maybe it might sell 1 million, if it could really catch on.  Last quarter it sold over 4 million units.  No single product, from any manufacturer, has ever had this kind of early adoption success.  Additionally, Apple sold over 14 million iPhones, nearly double what it sold a year ago.  Today there are over 300,000 apps for iPad and iPhone – and that number keeps growing every day.  Meanwhile corporations are announcing weekly rollouts of the iPad to field organizations as a replacement for laptop PCs. And Apple still has a majority of the MP3 music download business.  While sales of Macs are up 14% last quarter – at least 3 times the growth rate of the moribund PC market!

The best reason to buy any stock is NOT in the financial numbers.  Endless opportunities to manipulate both sales and earnings allow all management teams to alter what they report every quarter.  Even Apple changed its method of reporting iPhone sales recently, leaving many analysts scratching their heads about how to make financial projections.  Financials are how a company reports last year. But if you buy a stock it should be based on how you think it will do well next year.  And that answer does not lie in studying historical financials, or pining over small changes period to period in any line item.  If you are finding yourself adopting such a focus, you should reconsider investing in the company at all.

Investors need growth.  Growth in sales that leads to growth in earnings.  And more than anything else, that comes from participating in growth markets — not trying to “manage” the old business to higher sales or earnings.  If a company can demonstrate it can enter new markets (which Apple can in spades) and generate good cash flow (which Apple can in diamonds) and produce acceptable earnings (which Apple can in hearts) while staying ahead of competitors (which Apple can in clubs) then the deck is stacked in its favor.  Yes, there are competitive products for all of the things Apple sells, but is there any doubt that Apple’s sales will continue its profitable growth for the next 2 or 3 years, at least?  At this point in the markets where Apple competes competitors are serving to grow the market more than take sales from Apple!

Apple has developed a very good ability to understand emerging market needs.  Almost dead a decade ago, Apple has now achieved its first $20 billion quarter.  This was not accomplished by focusing on the Mac and trying to fight the same old battle.  Instead Apple has demonstrated again and again it can identify unmet needs, and bring to market solutions which meet those needs at an acceptable price – that produces an acceptable return for Apple’s shareholders.

And Steve Jobs demonstrated in Monday’s earnings call that Apple deeply understands its competitors, and keeps itself one step ahead.  He described Apple’s competitive situation with key companies Google and Research in Motion (RIM) as reported in the New York Times “Jobs Says Apple’s Approach Is Better Than Google’s.” Knowing its competitors has helped Apple avoid head-on competition that would destroy margins, instead identifying new opportunities to expand revenues by bringing in more customers.  Much more beneficial to profits than going after the “low cost position” or focusing on “maintaining the core product market” like Dell or Microsoft.

Apple’s ongoing profitable growth is more than just the CEO. Apple today is an organization that senses the market well, understands its competition thoroughly and is capable of launching new products adeptly targeted at the right users – then consistently enhancing those products to draw in more users every month.  And that is why you should own Apple.  The company keeps itself in new, growing markets.  And that’s about the easiest way there is to make money for investors.

After the last decade, investors are jaded.  Nobody wants to believe a “growth story.”  Cost cutting and retrenchment have dominated the business news.  Yet, those organizations that retrenched have done poorly.  However, amidst all the concern have been some good growth stories – despite investor wariness.  Such as Google and Amazon.com. But the undisputed growth leader these days is Apple.  While the stock may gyrate daily, weekly or even monthly, the long-term future for Apple is hard to deny.  Even if you don’t own one of their products, your odds of growing your investment are incredibly high at Apple, with very little downside risk.  Just look beyond the numbers.