CEOs are not great fortune tellers. When every part of the economy and the company's particular sector are moving like clockwork in predictable patterns, financial forecasting is an inexact science at best. However, when both Wall Street and Main Street go haywire, it's just a guessing game. This is why some financial guru and senior Fools would like to see less of the forward guidance you get in most earnings reports and more of the Google
Here and now
TI's recently released fourth-quarter results reported a 30% year-over-year sales drop to about $2.5 billion, and 85% weaker earnings that amounted to just $0.08 per share. The company prognosticated between $1.6 billion and $2.1 billion in sales for the current quarter, which would boil down to between a $.11 per share loss and $.03 per share gain. Either way, it'll look bad next to the year-ago totals of $3.3 billion and a positive $0.49 per share, respectively.
Your average executive has a lot of practice with putting a positive spin on bad news. When a chief with more spotlight experience than most starts to admit that it's not looking good, it can pay to look back at the speaker's track record and weigh the worth of those words. So, how accurate have Templeton's guesses been recently? Here's the play-by-play:
- Q1 2008: "Given uncertainty in the near-term economy, we have become more conservative with our outlook for the second quarter. More strategically, we believe our long-term opportunity is excellent." Cautiously optimistic, I'd say. And second-quarter results did fall within the lower end of Rich's estimated range.
- Q2 2008: "Our orders were up in the quarter and backlog grew, but we are cautious given the demand environment we just experienced. If demand strengthens as quickly as it slowed, we are well-positioned to meet it." It didn't, of course. Third-quarter results were within Templeton's range again, albeit once again at the low end.
- Q3 2008: The dung has hit the fan. "We will accelerate our inventory reduction in the fourth quarter. We also will continue to reduce expenses and capital spending." As prudent as that sounds, Templeton was wearing rose-tinted glasses and completely missed this report's forecast in the fourth quarter.
My own crystal ball
The latest mid-quarter correction put revenue expectations in the right range but still overestimated TI's earnings power by a mile. The trend here is that Templeton's guessing game becomes less accurate the deeper we slide into this economic tsunami.
So this time, when Templeton talks about cutting payrolls by 12%, generally reducing expenses, and positioning his company for long-term success, well, I'm taking the numbers with a generous helping of salt. As pessimistic as this forecast seems for a traditionally healthy sector leader, I think that the reality will look much worse. Expect TI to lower guidance again in March and then miss the new target as well.
There will be repercussions up and down the analog chip food chain, from materials suppliers like MEMC Electronic Materials
The long, slow recovery
Climbing back up on the other side of this deep dip, consumers have to start buying tech toys, so the toymakers have to order parts, and so on down the line. That recovery should start where the fall ended -- close to the consumer. And TI is several steps removed from the store shelf.
In other words, Texas Instruments may still be a fine company and well positioned to recover at the end of this recession. But the recovery will take longer than Rich Templeton wants to admit, and possibly longer than he thinks possible. You have a long time to do your homework if you want to own this stock someday, Fool.
Fool contributor Anders Bylund owns shares in Google, Coke, and Taiwan Semi (and is expecting more pain in the next few quarters), but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.