here is some truely incredible crap on the newswire...but hey..... but hey.....
By Sarah Edmonds
TORONTO, July 12 (Reuters) - North American corporations
have discovered confession is good for the soul.
Warnings of earnings disappointments are on the rise in the
United States and Canada, both because of the slowing economy
and because companies see the value of letting an unforgiving
market know immediately if they are going to fall short of
expectations.
And while they may cause short-term turmoil in the market
and occasionally sweep whole industry segments lower, early
warnings of earnings shortfalls are seen as vital in a world
where credibility is key as real-time information and real-time
accounting become commonplace.
"We've been tracking this for five years now and there does
seem to be an underlying rise in the number of
pre-announcements of all types," said Charles Hill, director of
research at First Call/Thomson Financial in New York, a pioneer
firm in gathering consensus estimates from the Street.
A majority, 57 percent, of 430 chartered financial analysts
polled in a survey for Reuters by the Virginia-based
Association for Investment Management and Research -- the
nonprofit group that runs the CFA program -- said they thought
earnings warnings were on way up. Only 22 percent thought they
were about the same and 21 percent had no view.
The availability of timely consensus earnings estimates
culled from analysts by outfits such as First Call/Thomson
Financial has sharpened the market's focus on quarterly
momentum. It has also driven demand for companies to reveal
quarterly stumbles as soon as they discover them.
The technology stock rally has drawn an unprecedented
number of investors into the market and the Internet is arming
them with a lot of knowledge. They know, for instance, that
financial management systems are sophisticated enough for the
best-managed companies to be aware well ahead of time when
things are going wrong.
Networking firm Cisco Systems Inc. <CSCO.O>, for example,
takes great pride in the fact that it knows how well it is
performing at the close of every day.
Investor expectations in the current market, particularly
in the technology arena, are extremely high. Just meeting
estimates is no longer a reason to celebrate. Disappointments
are ruthlessly penalized.
But analysts said faith in management skill and honesty is
shaken far more when the Street is blindsided by nasty
surprises than it is when companies break the news earlier and
more gently.
"Certainly if...(a company does) report, and that's when
investors discover to their horror that the company hasn't met
the numbers, it does call into question a lot of things," said
Brian Piccioni, a tech analyst at Nesbitt Burns in Toronto.
"How efficient are their internal bookkeeping procedures
that it takes them so long to figure out that they're going to
miss a quarter that they couldn't pre-announce it?"
Holding out on investors can also be cited in shareholder
lawsuits -- another phenomenon on the upswing in the past few
years. The Securities and Exchange Commission, however, does
not have rules governing this sort of disclosure.
Earnings warnings do not always improve the market's trust
in a company. Those making confessions in the middle of the
night -- or, in the case of software maker Computer Associates
International Inc. <CA.N>, minutes before midnight on the eve
of the July 4 U.S. Independence Day holiday weekend -- are
perceived by analysts as trying to slip one by them.
Computer Associates was punished. The market pummeled its
stock, dropping it 42 percent by the close to 29-1/2. There it
has languished, more or less, closing at 27-15/16 on Wednesday
on the New York Stock Exchange.
Several analysts in the AIMR/Reuter survey mentioned leaks
and unequal disclosure, both of which are a risk when a company
keeps problems to itself. Leaks can sometimes cause more stock
market punishment than straight disclosure because trader
imaginations are fertile anda word spread is often a word
distorted.
Pre-announcements are seen as helping the corporate image
over the long term. Fully 70 percent of analysts in the
AIMR/Reuter survey said credibility was less damaged by an
early warning than when disappointing numbers come out when a
company reports. Just 19 percent thought it made no difference
and 12 percent believed market trust was hurt more.
An academic paper published in the Journal of Accounting
Research concluded that analysts, as well as investors, "prefer
companies that warn and punish companies that do not in their
future earnings forecasts".
The toughest thing to quantify is the actual effect on
stock prices, chiefly because it is impossible to make
apples-to-apples comparisons among companies without taking
into account a vast number of variables including how bad the
earnings shortfall is, the number of warnings that the company
has issued and its industry segment.
Analysts said that while the shares of a pre-announcing
company are likely hit just as hard as a company that waits
until reporting day, the forthcoming company may be rewarded by
a quicker return to stock market favor.
Some dissenters suggested that warnings can sometimes make
downturns more acute since they can cause attract undue
attention in the media and the market.
Analysts were fairly evenly split on how much they thought
stocks were hit after an early warning, with 33 percent saying
the shares suffered more, 29 percent opting for less and 38
percent figuring there was no difference.
However, companies that warn, and warn again, and warn
again and again are likely to get savaged.
Networking equipment maker Newbridge Networks Corp.,
recently taken over by France's Alcatel <CGEP.PA>, finally
jammed a "for sale" sign on its front lawn last November after
announcing six earnings warnings in 10 quarters.
In May, after the Alcatel deal was unveiled, the
Ottawa-based firm pre-announced a little good news for itslast
independent set of results -- fourth-quarter profits that
trounced expectations. |
