Mad2, earnings disappointments are so usual now that they gonna make a science out of it:...
biz.yahoo.com
Wednesday July 12, 5:26 pm Eastern Time
Earnings warnings good for the soul, and the stock
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 preannouncements 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 programme -- 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. (NasdaqNM:CSCO - news), 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 penalised.
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. (NYSE:CA - news), 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 and a 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 favour.
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 , 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 its last independent set of results -- fourth-quarter profits that trounced expectations. |
