With so much
anticipation and focus being directed towards "earnings season", it's
helpful to reflect upon what constitutes "an earning", and why there
are differences amongst them. Think
about it....we have all read recently about unfortunate passenger-versus-airline
experiences. It's no coincidence that
cutbacks in customer service, seat spacing, and fare increases are directly
attributable to a culture of financial restraint that insists upon getting the
most with the least amount spent. At
least that is what the narrative appears to be from our perspective. These short-sighted decisions fail to take
into account the most critical element of any business equation: customer
satisfaction and repeat business.
Thus, big business puts
cost in front of service.... an homage to Wall Street biases.... delivering
earnings based exclusively upon appeasing analyst expectations. But rest assured this is not only an issue
for the airlines industry. Every one of
us has a story to tell about a diminution in customer service reflective of a
change in mindset that puts the balance sheet ahead of moral suasion.
Lest you think this
thesis is an indictment of all businesses, a broad-brush condemnation of all
corporate decision-making and government culpability, consider that even
amongst earnings performers there is a hierarchy of responsible, well respected
companies, as well as an “asterisk" placed next to those whose sole
purpose is to reward stakeholders at the risk of alienating customers. The paradigm is never all black or
white. Somewhere in the middle resides
the preponderance of well meaning, well intentioned do-gooders.
Reformation
This missive hopes to
open a dialogue about what constitutes meticulous, competent equity analysis
and why it is important to identify ineradicable earnings performers versus the
one-shot-wonders and hangers-on.
Reckless use of common accounting practices in order to fabricate
surpluses and profits places the supremacy balance at risk, and modifies the
true structure of portfolio management by rewarding the alchemists equally as
well as conscientious citizens.
Simply
because a company has the ability to increase quarterly dividends by one penny
does not indicate anything deeper about their value system or how they view
their obligation to their environment, their neighborhood, or their customers. Rather, it says only that they have figured
out how to oblige their stakeholders to make a profit. The analysis, however, must be deeper than
that.
Sometimes it seems as
if the corporate "bar" has been set so low that profitability is
merely "one more widget sale away".The fact that the stock market is sometimes oblivious to this dichotomy between earnings and socially responsible governance speaks volumes about what moves the needle on Wall Street. When bull market rallies occur, even bad news is not sufficient to penalize companies that refuse to adhere to societal standards of good behavior.
The next time you're
treated rudely at the bank; bumped from a seat on an airplane; paying more for
less service; or pleading for technical assistance to no avail, think about the
board of directors of these companies sitting in their offices who frankly
don't give a damn.
There is a reasonable
argument to be made that in today's cost conscious environment the relationship
between quality service and expenses
paid has become inverted. The reason why businesses can get away with
such rude behavior is because they can!! The demand cycle in our economy is
still not such that business feels any responsibility to respond to a decline
in civility or to train employees that service is a right, not an option. When the economy improves to such a point
that financial power really does shift back to the consumer, perhaps then we
will see a gradual shift in the culture of sales and service.
That is when earnings
analysis will become more of a precise and rewarding science, and shareholders
might finally be on equal footing when comparing data with which to gain a
competitive edge.
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