(TWTR) made a splash (like a cannonball) when management reported earnings last week. The drama was all about its decision to stop providing analysts and investors with the company’s monthly active user numbers, or MAUs.
That coming nondisclosure spooked Wall Street, and Twitter shares dropped 10%. Of course, the stock also dropped because Twitter’s outlook was gloomy. But investors are hypervigilant to metric changes these days after
Based on what’s happened to Twitter and Apple, you might think that less disclosure is a recipe for disaster, and that stocks of tight-lipped management teams should be shunned. That’s not always the case. Sometimes added volatility can be an opportunity.
Long ago, in 2002,
(KO) walked away from giving the Street earnings guidance. That was a really big deal when it happened. Back then, Coca-Cola guidance and earnings estimates were sacrosanct. If Coke couldn’t beat estimates by a penny or two, the thinking went, something must really be wrong.
That era—right after the dot-com bust—might have been the peak of the earnings-manipulation backlash. Once upon a time, investors relied implicitly on accountants to help corporations produce smooth, upward-sloping earnings growth. After the crash, people started to distrust regularity. Giving no guidance was a bold move that reflected financial integrity.
There were consultant white papers about giving guidance too. According to McKinsey, the belief that offering Wall Street consistent guidance would lower stock-price volatility and raise earnings multiples was misguided. We checked, and Coca-Cola shares didn’t lag the market or become more volatile after management stopped giving guidance.
Yet earnings guidance isn’t the same as nonfinancial metrics that companies provide—like MAUs or iPhone units. And it appears that stopping the disclosure of that kind of data might lead to more stock volatility.
We can remember two industrial firms got hit around the time they stopped reporting certain data.
(KMT) ceased releasing its monthly orders in mid-2015. Later that year the stock dropped 34%, after the toolmaker warned it would miss revenue guidance. Analysts wondered if management had lost control of the company’s ability to forecast its business and manage inventories.
Overall, Kennametal stock has struggled, losing an average 1% a year for the past five years. The Dow Jones Industrial Average has returned 12% a year over that span, and the Industrial Select Sector SDPR ETF (XLI) has returned 9.6% annually.
It’s possible that the severe declines led to a management shake-up. CEO Don Nolan left Kennametal in February 2016 and Ron De Feo took over.
(GWW) also stopped giving monthly sales figures in September 2017. That was a year after CEO Don MacPherson took over for longtime CEO Jim Ryan. But MacPherson didn’t just stop reporting numbers, he also added a conference call. Before that change, the industrial-supply company didn’t host quarterly confabs with analysts, which are common at most other companies.
The result? Grainger had a weak 2017, rising less than 2% when the market was up nearly 20%. Back then, new competition from
(AMZN) was on everyone’s mind, and the reporting change helped fuel fears that Amazon was going to be a big player in business-to-business distribution. At their worst, Grainger shares hit $155. Today, they are just north of $303.
There are a couple other data-reporting scenarios that analysts and investors have to regularly endure. First, many conglomerates are always fiddling with their reporting structures. That makes getting consistent data series impossible. Second, it can also be hard to get any meaningful data from serial acquirers.
(EMR) have changed how they report data a few times over the years. Again, that drives analysts crazy because the Street relies on reported numbers to model sales at different divisions. It’s unlikely anything nefarious is going on, but it does highlight the fact that conglomerates can be complicated to understand.
Emerson and ABB shares have returned 3.5% and minus 2% annually, respectively, on average for the past five years. Barron’s thinks the tide is turning at ABB, in part because all changes that led to new segment disclosures are coming to an end and the business portfolio is very attractive.
Then there are companies like
(ROP). It has done 22 deals since the start of 2015—about five a year. Investors aren’t complaining about management’s aggressiveness, though, as the stock has returned 18% a year on average for the past five years. Investors just don’t expect Roper to give them much detail about how the acquired businesses are preforming.
Roper’s disclosure strategy works, in part, because of all the goodwill built up by CEO Brian Jellison, who ran the company for 17 years. The stock returned 18% a year on average over his entire tenure.
Jellison, who had retired last August, died in November. Perhaps his successor, Neil Hunn, will decide to offer more segment detail, or maybe no news is good news.
Barron’s pointed out last year that more isn’t always better when it came to corporate PowerPoint presentations. The same may be true for nonstandard metrics like MAUs. If that’s the case, then the recent volatility in stocks like Apple and Twitter is an opportunity.
Write to Al Root at email@example.com