Thursday, July 07, 2011

Lowering the Bar

Pre-announcements. Mid-Quarter Updates. Estimate revisions. Rating changed. Price target moved.

A few weeks before earnings season kicks in to high gear there's always a parade of analyst reports that hit the streets and they all pretty much sound like this: "Our proprietary channel checks suggest that XYZ is having a few troubles this quarter so we are reducing our estimates and our price target. We expect next quarter to be better…. "

You've seen it before. Lower the bar before the report so the company doesn't trip over it.

This is the dance that many publicly traded companies and Wall Street play each quarter. Note I said many. There are a few, like Apple, that don't appear to play this game.

Over on the Big Picture site there's an article appropriately titled "Reporting Season Farce".

It's worth a read. Here's a brief quote to kick things off:

“It’s that surreal time of the quarter, just ahead of the reporting season, when US companies cajole compliant analysts into reducing their profit forecasts so that on the day the company can record a positive earnings surprise.”

The rest is right here:

I mentioned the misses that hit a few of the companies in the semiconductor sector yesterday. The slowing is becoming much more visible so don't be surprised to see more estimate cuts in the coming weeks. These will happen prior to the actual earnings release - of course.

It's probably worth revisiting the comments I received from Pip Coburn about the quarterly game. I don't think you can repeat this too many times:

Wall street rewards companies that play the stupid quarterly key performance indicator game because it is lowest common denominator — it takes ZERO thought… They “made” or “missed”… Reward/punish, play again…

SHAME on boards of companies if they don’t see the paradigm and stay clear of it and there ARE many companies that DO avoid merely becoming a series of key performance indicator tactics masquerading as “strategy”.

Congrats to Cisco for waking up – (my add here – have they really woken up?)

They (Cisco) may find that they need a fresh start with “investors” and there may be a period during which ALL the old investors have to be flushed out and the right new matches must be steadily made… Kinda like a juvenile drug addict being told he has to give up his old “friends” and find new ones. The old “friends” weren’t really friends but rather facilitators of the addiction.

I couldn’t agree more…….

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