|
From: A. Whigham
This is to support the continued reporting of quarterly financials of publicly traded companies. It also addresses the suggestions that quarterly earnings are contributing to stock volatility. 1. Financials are Important for Fundamental Investors – Quarterly earnings are very important for fundamental investors. It allows for investors to review the health of a company’s finances throughout the year. It allows for investors to create a forecast model and a valuation model based on the recently provided numbers. 2. Quarterly Earnings Regulate Shareholder Communication – Earnings reports give investors a set time to allow investors to plan when they will be able to review important corporate information disclosures as well as when to expect communication from a company’s management, during a conference call. 3. Analysts Estimates part of the Volatility problem – When it comes to volatility in stock prices there is a strong correlation between the actual earnings and their comparison to the analysts’ earnings estimates. There are cases when a company’s stock price will increase after reporting a major loss because the reported loss was less than the analysts’ estimates. There are also times where a company will report strong earnings, but if reported earnings are less than analysts’ estimates the stock price decreases. Just recently a company beat the earnings estimate by analysts, but because the company offered guidance that was below the consensus of the analysts the company saw a drop in the stock price. Part of the volatility in markets is the valuation of companies are based off of the analysts forward earnings and consensus, and not the company’s previous results and forward guidance. 4. For Companies that want to Report Less, Go Private – If a company feels burdened with reporting requirements during a turnaround effort, they always have the option of going private. However, if the private equity group that owns them wants an update on their finances they make those reports readily available to them and don’t say, “we’re too busy focusing on the company to provide you with an update”. 5. Short Term Result Focus is From Activists Investors – There has been an increase in focus on short term results from companies; however that has come in large part from Activists Investors and hedge funds. They purchase a block of ownership in a company and demand for the company to buy back shares. They are using the company’s balance sheet to force them to buy shares and increase the “demand” for the shares, which in turn increases their value. The activist investors are usually the shareholders demanding seats on the board of a company if the current management does not quickly act on activist investor’s recommendations. Activist’s investors have taken good companies, especially blue chip companies and have demanded them to be broken up, so that companies would be able to report a better percentage earnings growth. They have forced companies to sell their real estate holdings and demand them to expend money on leases so that they can use the proceeds to fund stock buybacks. A stock buyback has never improved the income statement’s earnings; it can only “improve” the earnings per share. It should be noted that the board of directors for publicly traded companies use “poison pills” and other tactics that prevent investors from gaining more than 10% ownership of the company. This causes it where these “activists investors” are effectively insiders because of the access they have to the board of a company but they are not bound by the trading restrictions of being an insider. 6. Other Information will Replace Corporate Information – With less information being reported from companies; investors will look to other, sometimes non-relevant data, to try to determine the value of a company. This will cause for extended periods of time where analysts’ consensus for earnings and guidance as well as economic indicators will constitute the foundation for a company’s trading activity rather than the actual results. This could very likely lead to increased volatility in stock prices during the earnings release. 7. Computer, High Frequency, and Quantitative Trading Contributes to Volatility - Part of the volatility that is taking place in markets is that the data from earnings is being fed into computer models that automatically trade and create volatility. As mentioned just above these trading companies will replace the information from corporate earnings and use other information and data for their models. There will still be volatility during earnings reporting, and when the actual corporate earnings are reported there could be extreme volatility when results from the company are vastly different from expected company performance based on third party data. 8. Argument Against Undue Burden – The time consuming work for many of these companies is the reporting of their non-GAAP numbers. A small business running an off the shelf accounting program can easily have financial reports generated at almost any time they would like. It is not an undue burden for the management of a company to inform the owners of the company of pending legal actions, business conditions, expansion plans, and other pertinent information; as well as provide a Balance Sheet, Income Statement, and Cash Flow Statement four times a year. 9. Equal Playing Field – The system of reporting has been intended to offer transparency and allow for fair markets. The same information made available in a readily format with certain required disclosures. 10. Trimester Reporting – If you absolutely feel that the number of reporting periods needs to be reduced please consider possibly having companies report their financials 3 times a year. Every four months the company would report their financials and hold a discussion with shareholders. Conclusion: Stock buybacks are used by companies to prevent them from properly adjusting to a fair valuation. There are times that a company needs to have a correction in its stock price; however some companies have borrowed money to fund buybacks and have created an artificial floor on a stock price during what should have been normal correction periods. This will only lead to more drastic stock swings especially when earnings growth slows or decreases. As far as potential reform, please look into the usage of employee compensation via stock options. Compensation through stock options is an expense that the company pays out but it also dilutes the equity of a shareholder. Management would be more responsive and complain less about earnings reporting if only the C-Suite management received stock options, they only received awards every 4 – 5 years of tenure with the company, and to receive the awards packages would have to be submitted to shareholders to vote to approve which package to payout. The package should show the accumulated base salary and cash bonuses the C-Suite management received during the time period and show proposed stock option award packages and how much dilution each package would cause for the shareholders. Over the past few years Yahoo Inc.’s stock increased during Marissa Meyer’s tenure as C.E.O. However, during that period the core business shrank, but the value of a large ownership stake of another company, Alibaba, increased as a result of its IPO. Marissa Meyer received millions of dollars in stock options as the C.E.O. because the stock price increased, but the core business did not improve substantially during that time period. The quarterly earnings allowed for investors to recognize that the increase of Yahoo’s stock price was not due to the results of the core business, but because of an investment that had been made prior to that current management regime. Employees of publicly traded companies should receive pay primarily from salary and performance cash bonuses, and if the board feels the executive really did a great job they can justify why a check for $10 million dollars was written to the C.E.O. during the annual meeting. If the shareholders are pleased with performance of the C.E.O. and other management team they can vote and make a determination if they would like to offer the executives an ownership stake in the company knowing that the shareholder will see exactly how much shareholder’s value will be diluted if a stock option pay package was awarded. Thank you, for taking the time to read these comments, and please continue to protect investors. Please continue to require companies to report their quarterly earnings and discuss the business with the owners of the company, the shareholders. Also look into Analysts’ estimates, Activists Shareholders, Stock Buybacks, and Employee stock compensation |