Published August 18, 2009

Quarterly earnings and their unbearable irony

By JOYCE HOOI
Email this article
Print article
Feedback

THE latest round of second-quarter earnings has proven to be like a weapon of mass destruction - not of any tangible use or particularly instructive, but merely important to have because everyone else does.

While both earnings and weapons of mass destruction occasionally cause fallout, it would have taken an explosion of epic proportions to raise any eyebrows this second quarter as earnings fatigue set in among analysts and investors.

At the close of trading last Friday, news of the 34.8 per cent drop in quarterly profits and 50.3 per cent plunge in half-year profits year-on-year for listed firms so far was largely a non-event.

Several reasons exist for the stoic response of market watchers.

This time last year, Bank of America's Ken Lewis had not yet been strong-armed into buying Merrill Lynch, and AIG had not yet gone up to the federal government, hat in hand.

As such, so starkly contrasting were the conditions of 2008's and 2009's first six months that even a relative novice would have been able to see that figures from both periods were virtually impossible to compare.

The other reason for the lack of hue and cry over results that would formerly have gotten firms lynched speaks of how quickly the human condition adapts to changes.

The last two quarters have proven that 'billion' is the new 'million'.

What is Neptune Orient Lines' H1 core loss of US$379 million when the US government is handing out US$700 billion in Troubled Asset Relief Program (TARP) funds as though it were candy?

Even if things might be getting worse for some firms on a quarter-to- quarter basis, analysts and pundits seem to have exhausted themselves from the hysteria of the start of the crisis.

Worse than abysmal?

Last December, when Toyota Motor Corp forecast its first ever annual operating loss, an analyst was quoted as saying, 'This is very, very, very bad', in blissful ignorance of just how much worse things would get.

What will he say if Toyota's situation deteriorates in the future? Add a fourth 'very'? Spaced just three months apart each time, there are only so many similes for 'downturn', 'abysmal' and 'plunge' that analysts and journalists alike can use each quarter.

Against a backdrop of larger and more interesting global catastrophes, local firms have been spared greater scrutiny and skewering, both in analyst reports and in the press.

In 2007, when a tarp was just something you covered your car with, profit warnings from local firms were so few and far between that each warranted its own article in this broadsheet.

Join the party

This year, profit warnings have come in droves both quarters, with as many as five firms being mentioned in one breath. Clearly, the best time to do badly is when everyone else is too.

Among various things, firms underachieving even in view of the downturn will have the enforcement of quarterly earnings reporting to thank.

Made compulsory for firms with more than $75 million in market capitalisation in 2003, quarterly earnings reporting had caused a 30-40 per cent decrease in the coverage of stocks by analysts, critics pointed out as early as 2006.

That would mean 30-40 per cent fewer companies that analysts might say are in a 'very, very, very bad' situation in a downturn, as they are forced to focus on high-profile stocks.

While not by any means in a 'very bad situation', Kingboard Copper Foil Holdings nonetheless saw a 94 per cent skydive in net profit for its Q2 earnings that went unreported in the press last week.

This despite having a local shareholder base of at least 40 people who cared enough about the stock to get 'hostile and emotional' at a shareholders' meeting for its privatisation bid early this month.

Even if an earnings analysis had been in the offing, getting varied opinions on Kingboard would have been a feat-and-a-half - on the entire island, only one analyst covers the stock.

At times like these, the main defence for quarterly earnings rests in the argument that it encourages more transparency in listed firms.

Just like weapons of mass destruction have not been set off precisely because every country (that matters) has one, the main reason we don't have to scrutinise all quarterly earnings as much as we should is, ironically, because they exist.