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.

 

Why Jeff Bezos is our greatest living CEO

by | Jan 8, 2013 | Defend & Extend, In the Rapids, Innovation, Leadership, Web/Tech

The Harvard Business Review recently published its list of the 100 Best Performing CEOs.  This list is better than most because it looks at long-term performance of the CEO during his or her time in the job – with many on the list in service more than a decade.

#1 was Steve Jobs.  #2 is Jeff Bezos – making him the greatest living CEO.  It is startling just how well these two CEOs performed.  During Jobs' tenure Apple investors achieved a return of 66.8 times their money.  During Mr. Bezos' tenure shareholders achieved a remarkable 124.3 times return on their money.  In an era when most of us are happy to earn 5-10%/year – which equates to doubling your money about once a decade – these CEOs exceeded expectations 30-60 fold!

Both of these CEOs achieved greatness by transforming an industry.  We all know the Apple story.  From near bankruptcy as the Mac company Mr. Jobs led Apple into the mobile devices business, and created a transformation from Walkmen, Razrs and PCs to iPods, iPhones and iPads – to the detriment of Sony, Motorola, Nokia, Microsoft, HP and Dell. 

The Amazon story is all the more remarkable because it has been written in the far more mundane world of retail – not known for being nearly as fast-changing at tech.

Lest we forget, Amazon started as an on-line seller of books frequently unavailable at your local bookstore.  "What's a local bookstore?" you may now ask, because through continuous upgrading of its capability to build on the advances in internet usage – across machines, browsers, wi-fi and mobile – Amazon drove into bankruptcy such large booksellers as B.Dalton and Borders – leaving Barnes & Noble a mere shell of its former self and on tenous footing.  And the number of small bookshops has dropped dramatically.

But Amazon's industry transformation has gone far beyond bookselling.  Amazon was one of the first, and by most users considered the best, at offering a complete on-line storefront for any retailer who wants to sell goods through Amazon's site.  You can set up your inventory, display products, provide user information, manage a shopping cart and handle check out all through Amazon – with minimal technical skill.  This allowed Amazon to bring vastly more products to customers; and without adding all the inventory or warehousing cost.

As digital uses grew, Amazon moved beyond the slow-paced publishers to launch the Kindle and give us eReaders displacing paper books and periodicals.  But this was just the first salvo in the effort to promote additional on-line buying, as Amazon next launched Kindle Fire which at remarkably low cost gave people a tablet already set up for doing retail shopping at Amazon.

As Amazon launched its book downloads and on-line services, it built its own cloud services business to aid businesses and people in using tablets, and doing more things on-line; which further reinforced the digital retail world in which Amazon dominates.

And make no doubt about it, Kindle Fire – and the use of all other tablets – is the WalMart and other traditional brick-and-mortar retail killer.  Amazon is now a player in all pieces of the transition which is happening in retail, from traditional shopping to on-line. 

Demand for retail space in the USA began declining in 2009 and has not stopped.  Most analysts blamed it on the great recession.  But in retrospect we can now see it was the watershed year for customers to begin looking more, and buying more, on-line.  Now each year growth in on-line retail continues, while demand at traditional stores wanes.

Just look at this last holiday season.  To (hopefully) drive revenue stores were opening on Thanksgiving, and doing 24 and 48 hours of non-stop staffing and promotions to drive sales.  But it was mostly in vain, as traditional retail saw almost no gains.  Despite doing more and more of what they've always done – trying to be better, faster and cheaper – they simply could not change the trend away from shopping on-line and back into the stores.

For the last year the #1 trend in retailing has been "showrooming" where customers stand in a store with a smartphone comparison pricing on-line (most frequently Amazon) to the product on the shelf.  Retailers were forced to match on-line prices, despite their higher overhead, or lose the business.  And now Target has implemented a policy of price-matching Amazon for all of 2013 in hopes of slowing the trend to on-line purchasing.

Circuit City went bankrupt, which saved Best Buy as it picked up their lost business.  But now Best Buy is close to failure.  Same store sales at WalMart have been flat.  JCPenney recruited Apple's retail store wizard as CEO – but he's learned when you have to compete with Amazon life simply sucks.  Nobody in traditional retail has found a way to reverse the on-line shopping trend, which is still dominated by Amazon.

We all can learn from these two CEOs and the companies they built.  First, and foremost, is understand trends and align with them.  If you help people move in the direction they want to go life is easy, and growth can be phenomenal.  Trying to slow, stop or reverse a trend doesn't work, and is expensive. 

Second, don't ask customers what they want, instead give them what they need.  Customers may be on a trend, but they will frame their requests in the old paradigm.  By creating new trend-promoting products and solutions you can capture the customer and avoid head-to-head competition with the "old guard" titans selling the increasingly outdated solutions.  Don't build better brick-and-mortar, make brick-and-mortar obsolete.

So, what's stopping you from growing your business like Apple or Amazon?  What keeps you from being the next Steve Jobs, or Jeff Bezos?  Can you spot trends and provide trend-supporting solutions for customers?  Or are you stymied because you're spending too much time trying to defend and extend your old business in the face of game changing trends.