Self-Diagnosing Earnings (Feedback)

TO THE EDITOR:

In her Aug. 12 Editor’s Note (“Spin It, Baby, Spin It”), Gwen Moritz pointed out something that doesn’t get talked about much: the appropriateness of non-analysts relying on corporate press releases regarding financial performance. There is an investment skill set (largely accounting) that is advised. One solution could be for public companies to just file their better defined regulatory reports (10-Qs and 10-Ks) and avoid the latitude of the “plain English” press releases. But that could easily be considered an investor disservice as well.

Much of the press release verbiage Moritz pointed out would be very clear to a securities analyst, but they are trained to think in terms of gross profit, operating profit, EBITDA, net income, operating cash flow, EPS, adjusted EPS, etc. — all unique performance metrics that the general public might not easily differentiate. Likewise, as an investor, I place more importance on earnings per share than on net income, out of concern for my shares’ portion of the profits rather than for some absolute number that makes little sense without knowing the shares outstanding. I’d much rather have more earnings per share and less net income from a smaller company than less earnings per share and more net income from a larger company. But that is from an investor’s perspective. Conversely, a taxing authority or an economic development concern would likely focus on the absolute number of pretax or net income, regardless of shares outstanding or company size.

From a different slant, it might be argued that public companies putting out such press releases for general public consumption is similar to the pharmaceutical industry marketing products in a way that encourages the public to “self-diagnose.” There may be some public benefit there, but many qualified health care professionals might view it as potentially misleading, inappropriate or even counterproductive.

So yes, public company press releases can be misleading. But that might be due to any combination of factors, including investor sophistication, reader perspective and even the character of corporate governance in some instances. To complement a financial press release, it’s advisable that investors also follow a company’s regulatory filings, and that they take advantage of the public access to the company’s quarterly conference calls that include a question-and-answer session with analysts.

Andrew A. LaGrone
Lathrop Investment Management Corp.
Little Rock