If you have nothing nice to say, say nothing at all. That's the lesson being taught down Wall Street these days, as companies start to take a vow of silence when it's time to provide quarterly guidance.
The first batch of companies that have sworn off near-term profit projections over the past few months is an interesting lot. McDonald's (NYSE:MCD), AT&T (NYSE:T), and Coca-Cola (NYSE:KO) have two things in common: They were great. They are no longer great.
The method behind their muffled madness is transparent. It's like the home run slugger who had no problem rattling off statistics in his prime but now prefers a moratorium on box scores as he's batting below the .200 Mendoza line. These are the chip-chomping couch potatoes who refuse to remove their shirts at the beach or the homely girls who decline to participate in the bathing suit segment of the beauty pageant. They can reason away their right to conceal on principle but the motives ring hollow.
The turning point
When hypocrisy runs too thick, it can become quicksand, consuming all of its surroundings. When did these companies turn?
Back in January, the McDonald's press release read that the company "is focused on delivering improved results over the long term. Therefore, the Company will not be providing an earnings per share target by quarter or for the year." How exactly is a company whose stock is approaching a 10-year low focusing on improving results in the long term? Does it really believe that it's in a massive slump because of its freshly discontinued practice of providing profit outlooks?
Coca-Cola rolled out its outlook restraining order back in December. Yet a month later, it teased us in its earnings report when CEO Doug Daft said that the company was "confident about how we will execute in 2003." Good for you. I'm a big man in the dark, too.
Voiceless vogue
The only problem is that now good companies are crashing the pity party. Safeco (NASDAQ:SAFC) has decided to purse its lips, yet the insurer is doing just fine. PepsiCo (NYSE:PEP) went in for the silent treatment last month and, despite hiccups at Pepsi Bottling Group (NYSE:PBG), the soda and salty snack giant is still attractive. It's a troubling fiscal fashion statement. Guidance cleavage is out and verbal hemlines have reached the ankles. In short, the pretty girls are covering up, too.
However, it bears noting that Pepsi's declaration back in February of prognostication celibacy was accompanied with not only actual profit growth expectations for the year ahead, but it also followed up a month later by reaffirming its comfort in the guidance it promised not to provide in the first place. Ahhh, old flames die hard.
Still, this epidemic is troubling and I have no intention of falling for this wave of gag orders. If mum's the word, I cry "Uncle!" Silence is golden at libraries, movie theaters, and 2 a.m. karaoke nights. It just doesn't pan out down on Wall Street.
Warren Buffett as advocate
It bears noting that one of the leading proponents of these random acts of silence is none other than Berkshire Hathaway's (NYSE:BRK.A) Warren Buffett. Yes, The Oracle of Omaha is apparently not too fond of the public display of oracles. It was he who inspired Daft to do away with the practice of providing forward-looking profit forecasts at Coca-Cola.
Buffett doesn't provide bottom-line targets for Berkshire Hathaway but that's understandable. He's running a collection of companies and investments where it's just not feasible to draw the line. As a Coca-Cola director, his suggestion to Daft made sense on the surface. Buffett believes that a company won't be able to concentrate on achieving its long-term goals if it's too worried about meeting quarterly targets.
In other words, a company is behind the wheel, and it knows where it's going. It's got a map. It's got fresh windshield wiper blades to see through the rain, and it's got a steaming cup of joe in the cupholder to make sure it stays awake. Theoretically speaking, the last thing this driver needs is a brood of pesky financial analysts tugging at its collar from the backseat asking, "Are we there yet?"
But that doesn't excuse the market reality that every single trading day there's a "How's My Driving?" bumper sticker slapped on to the back of every single publicly traded company. If you don't want to be held accountable for where you are or where you're going, go private if you can or come clean if you can't. If you're evasive as the driver, everyone will come to the same logical conclusion: You're lost.
The model model
We have gone from bashing selective disclosure to embracing elective non-disclosure and that doesn't sit well with me. You could argue that I should be tickled pink over all this. The Motley Fool offers a wide range of premium research products, and this move towards companies pleading the quarterly Fifth will come to reward those who provide the standalone profit models and independent number-crunching. Most of the companies that have chosen to go silent on earnings have committed to still providing other fundamental figures to let more analysts draw their own conclusions. So they've shut the valve off on the free drinking water, but you can always pay up for the fancy bottled stuff. They're replacing the "connect the dots" activity pages with blank easels.
But you have to ask yourself what this will accomplish. Internally, you'd like to assume that these quiet companies know exactly how well they're doing. Analysts will still provide estimates. They will still hit or miss, with a likelier bet now placed on missing badly one way or the other and the stock swinging wildly either way as a result. So, in the pursuit of promoting long-term goals, they will be encouraging short-term trading for speculators to take advantage of the higher highs and lower lows.
Where's the upside? Do tight-lipped companies really think that keeping quiet will make insider-trading scandals and class-action litigation go away? I doubt it. Analysts speak to the companies they follow all the time. So, the moment that one analyst makes a move on estimates, everyone is going to start wondering about which loose-lipped executive spilled the bean-counting beans. Lawyers will watch insider-trading filings like hawks.
The only thing that grows in a perpetual state of ignorance is paranoia. Oh, that and opportunity for those who don't play by the rules. When good intentions are used as a crutch for the fiscally sputtered and common sense is sent to the corner, who wins? Investors sure don't.
Warren, what have you done?
Rick Aristotle Munarriz has chosen not to take a vow of silence. Now we just can't get him to shut up! Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
