• The Atlanta Journal-Constitution
  • April 12, 2009

Firms’ excuses for poor earnings apt to wear thin


It’s the economy.

Investors are used to the three-word phrase serving as the explanation — or the excuse — for the implosion of their portfolios these past 16 months.

And as they brace for the flurry of first-quarter earnings reports that will be announced over the next several weeks, they’ll probably hear it again and again.

The question is: How long will investors remain patient with that mantra?

Sure, the United States is in the worst economic downturn since the Great Depression, and many sectors — banking and automotive to name two — are under pressure to eke out a profit in a global recession.

“It’s a case-by-case basis. Many companies are affected by what’s happening with the recession,” said John Fenton, the partner in charge of auditing in the Atlanta office of BDO Seidman, an accounting and consulting firm. “There are many unknowns. By and large, shareholders have been fairly patient.”

Still, some experts say investors probably won’t accept the “it’s the economy” line beyond the second quarter.

Investors expect the first-quarter results to be a washout already, and what they will be focused on is what corporate executives say about expectations for the future.

Standard & Poor’s expects first-quarter operating earnings in its benchmark S&P 500 to be down 23 percent compared with a year earlier and down 13 percent in the second quarter.

“We think it’s going to be the deepest recession since the Great Depression, and we also think it’s going to be the longest recession, at 22 months,” said Sam Stovall, chief investment strategist at S&P Equity Research. “We think the third quarter will end up being the bottom of this recession,” he said, adding expectations for that quarter are an increase of 5 percent in operating earnings.

More important than actual first-quarter results is the guidance about the future that CEOs will be giving on their conference calls, said Charles E. Osborne, managing director and co-founder of Iron Capital Advisors, an Atlanta investment advisory firm.

“Early indications are that they’re beginning to see glimmers of hope,” he said. “I think that’s what people will be looking for and paying attention to.”

Besides, Wall Street still expects companies to write off as much of their bad holdings as they can while the market remains under pressure, Osborne said.

It’s important to get the bad stuff out of the way, he said, because investors will gradually home in on fundamental problems with a company’s management team and focus less on industry woes.

The auto sector’s current issues, he said, underscore the point. Toyota Motor Corp., he said, an industry bellwether, forecast a loss for the fiscal year that ended March 31 of $3.84 billion — its first full-year loss since 1950. General Motors Corp. has also lost money amid plummeting vehicle sales, but arguably, he said GM enacted strategies over the years that Toyota did not.

“You can see how much of it is the economy based on how Toyota is doing,” Osborne said. “But there’s no doubt that unfortunately, especially in the case of GM, they made a lot of mistakes that they’re going to be paying for for a long time if frankly, they survive.”

Early battle line: exec pay

It explains why shareholders are increasingly focused on the pay packages of senior executives and becoming more vocal about tying more of that pay to a company’s actual performance.

Kent Moore, a Charlotte investor, who, along with his father, John, has been a fixture at annual meetings including SunTrust Banks, said CEO pay is proportionately out of whack with rank-and-file employees. And though some CEOs of struggling companies have seen their pay decrease — Newell Rubbermaid’s chief executive took a 38 percent pay cut last year when the Sandy Springs-based company reported a big fourth-quarter loss, restructured and laid off workers — Moore said corporate boards are not really holding their executives accountable for poor performance.

“You can say it’s the economy, but the current class of business and government leadership created this economy, either way you spin it,” Moore said.

Those sentiments could explain why many companies are being hit with so many pay-focused shareholder proposals. Citigroup Inc., for instance, has a shareholder proposal that seeks more disclosure regarding its compensation consultants while another would require executive officers to hold 75 percent of shares received through pay packages for two years after they leave. General Electric Co. has a shareholder request that would give stockholders a nonbinding advisory vote on executive pay, much like Columbus-based Aflac Inc. enacted last year.

Both Citigroup’s and GE’s boards are urging shareholders to vote against these proposals.

But the level of transparency a company gives to its shareholders could make the difference between those firms deemed to be successfully working through the current environment and those viewed as not, said BDO Seidman’s Fenton.

“Disclose known trends that affect cash flows. Investors expect, and the [Securities and Exchange Commission] expects, that companies will make good-faith efforts at reporting trends that are occurring in their business,” Fenton said.

Midyear breaking point?

Pete Kight, founder of CheckFree Corp., the Norcross online bill-pay company he sold to Fiserv in 2007 for $4.4 billion, agrees. Kight, now Fiserv’s vice chairman, said what investors want is not so much a laundry list of a company’s problems as a planned strategy.

“By midyear, that is going to have run its course,” Kight said of the blame-the-economy excuse. Investors will be looking to place their bets on those companies that have an articulated plan for the future.

“A couple of leading companies will start to show clear plans and that they’re under control and pretty quick,” Kight said. “Right now there aren’t many people showing they have clear insight or showing how they’re going to rise above this. Everybody has to do that.”