Wednesday, February 22, 2006
How to “Beat the Quarter”
Ms. Rieker, who joined Enron in 1990, clarified testimony from Mr. Koenig that as far back as January 2000, Mr. Skilling had directed last-minute changes to earnings results to put them in line with analysts' expectations.—New York Times
Thanks to Paula Rieker, the former board secretary of the former Wall Street Favorite known as Enron, the world now knows how certain large, complex, multinational companies manage to “beat the number” by a penny or two, quarter after quarter after quarter, until they don’t.
When the consensus expectation of analysts suddenly rose by 1 cent a share, to 31 cents, she said she "panicked." But a day later, when she was told that Enron would report 31 cents a share, Mr. Koenig explained that Mr. Skilling and the chief accounting officer, Richard A. Causey, had decided that the numbers should be changed. She modified the news release that went out that day.
Anybody who has ever worked at a real company—as opposed to the bright bean-counters who move straight from grad school into the ranks of Wall Street’s Finest—knows that companies are inherently messy affairs, what with people to manage and budgets to meet and judgment calls to make and accounting rules to bend...not to mention currency swings and interest rate movements and hurricanes, droughts, wars and government policy changes.
But to Wall Street’s Finest, who view nearly everything through the prism of a quarterly earnings-per-share number that is almost as meaningless as the paper on which it is printed, the messiness vanishes, its place taken by a "Number" that becomes the all-encompassing target, almost regardless of how that "Number" is reached or exceeded.
Take Dell, for example: Dell “made the number” last week thanks entirely to a lower-than-expected tax rate. Wall Street's Finest, as reported here, liked "the number" but not Dell's forward guidance, which seemed light to the so-called analysts whose job it is, presumably, to divine trends before they are glaringly evident and already priced into their stocks.
Where, the readers of this blog who have experienced terrible service problems at the hands of that once-great company might ask, have those analysts been for the last year? How can they be surprised at Dell's weak revenue growth, the declining earnings growth rate, and the lack of a full year forecast?
They’ve been spending too much time on useless models and not enough time talking to customers, that’s how.
Every investor should read carefully the account in today's New York Times of how one complex multi-national corporation “beat the number,” according to Enron’s Ms. Rieker in yesterday’s testimony:
Then in June 2000, with Enron prepared to meet analysts' earnings expectations of 32 cents a share, Ms. Rieker recalled that Mr. Koenig came into her office and said he had "just come back from a meeting with Skilling where he had said he wanted to beat earnings by 2 or 3 cents."
Four days later, Enron reported 34 cents a share. Analysts were never told about the sudden change.
The next time a company “beats the quarter” by a penny or two, think about how Enron used to "beat the number."
And ignore the analysts who actually care about it.
I Am Not Making This Up
© 2005 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.
Posted by Jeff Matthews at 8:00 AM