How Did You Manage That, Garmin?

In 2000, General Electric posted its 100^th consecutive quarter of growth in continuing operations. That's 25 years. Raise your hand if that sounds just a bit suspicious. Whatever business you're in, that feat just isn't possible unless your company's managing its reported earnings.

According to a 1998 survey, 78% of CFOs attending a given conference said they'd been asked to "cast financial results in a better light" without running afoul of GAAP. Half said they'd done it. Nearly half said they'd been asked to misrepresent their company's numbers, and 38% admitted they'd done so. Another survey at a different conference found that more than half of the CFOs attending had been asked to juice their numbers, and 17% had agreed to do so.

It's easy to understand why companies succumb to the incredible pressure to make it look like they've met or beaten targets or Wall Street expectations. Consistent growth is a feather in any CEO's cap, and a rising stock price often increases many executives' compensation, especially from stock options. But when companies stray from merely managing their numbers within GAAP into outright fudging them -- Enron, Sunbeam, we're looking at you here -- they can ruin themselves and their shareholders.

How can we spot suspicious earnings patterns soon enough to save ourselves? We can track how closely a company meets earnings expectations, monitor its frequency of year-over-year growth, and compare those stats to numbers from a few competitors, which should be affected similarly by changes in the business cycle. Any company that lands eerily close to earnings-per-share (EPS) expectations, and grows earnings year-over-year with unusual reliability, should raise a yellow flag and invite us to look closer.

Here's a look at what Garmin (Nasdaq: GRMN), the navigation-device company, has done over the past few years. I've also included a couple of other businesses playing in the same space for comparison.

Source: Earnings.com and author calculation. Difference in number of quarters counted due to data source.

It seems a little odd that Garmin has had such trouble over the past few years and not hit estimates very often at all, but has managed to report yearly growth so often.

Looking back, most of that time was in Garmin's fast-growth days, when it was reporting 50% growth in revenue or more, before the recession hit. For the three years ending with 2007, it went 12 straight quarters of meeting (twice) or beating (10 times) estimates. Coming out of the recession, however, analysts have been a bit too pessimistic, and Garmin has beat estimates four times out of the past five quarters.

Nokia, owner of Navteq -- which is the map-provider for Garmin -- came close to estimates barely half the time, while Rockwell barely managed one-third of the time. No real yellow flags here, at least by this way of looking at things.

Note that I'm not concentrating on managing estimates here -- though management does that, too. However, if a management team always seems to deliver on estimates time and time again, you should probably dig a bit deeper, to see whether its interpretation of GAAP is getting a bit too fast and loose.

Investors crave consistency. That's one reason why its string of reliable results spurred GE's stock price to rise so much in the 1980s and 1990s. But the real world isn't consistent, and Foolish investors should account for that. If a company's results seem too steady to be true, Fools should proceed with caution.

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