How do companies avoid earnings volatilities?


I probably have a magic trick which I hope I can say I can help companies to avoid volatilities in their earnings. I DON'T.

Basically many companies - or all of them - CANNOT avoid volatilities! Some businesses or companies are just more volatile than others. For example, a company which provides tax filing business for tax returnees makes only one quarter profit, H&R Block most of the time registers 1 quarter of profits while the rest of the quarters it registers losses. It makes a lot during 2nd quarter of the year when individuals or companies file their taxes. Other quarters, are just very quiet for the company.

In Malaysia, airlines for example make more during the 4th quarter due to end of year school holidays. In Europe, airlines make the most in the July to September quarter while during winter, they probably can make losses.

Construction companies have high volatilities due to the nature of their business which is dependent on sign offs and contracts in which case I gave some opinions on Gadang. Hotels, retail, toys businesses can be very seasonal too.

To provide soft landing to anyone's earnings on a quarterly or annual basis is CHEATING. No company can or should do that.

I just read an article which teaches companies to avoid filing bumpy financial results through several methods - in which case, one of the method is to increase the company's provisions. This is hugely wrong.

In fact, what companies should do is to provide more guidance or reasonings on their results. As an example, if the company has huge exposure to earnings or borrowings from foreign currencies, they should explain - not leave it to individual investors to decipher. Numbers sometimes do not match the actual performance. This is also why analysts use core earnings as part of their valuation.

Malaysian companies generally do not do well in explaining. They in fact are not that honest sometimes.

As an example, I remember, I wrote an article warning investors on some of the good results which were registered by several export oriented companies, and many investors jumped to the good results like bees to honey. This example was by a company which I respect - Top Glove. And to prove to what I have said here is an example on its press release during 30 November 2015 results, the height of our Malaysia recent economic problem where our currencies dropped drastically last year.


Part of Top Glove's press release for Nov15 quarter ending results

If you read the article I wrote December last year and the rationale which was provided by Top Glove for example (I boxed in red), the real reasons why Top Glove made good money was not MAINLY because of their operational efficiencies. Operational efficiencies do not bring 173% improvement in bottomline in just one year. If today, one is to go though its latest results, it has come down as its huge currency benefits from ringgit depreciation has dwindled and buyers (foreign companies) can now have better bargaining power as Top Glove's competitors can also fight back by providing lower pricing. (Note: This does not mean Top Glove is a bad company)

As I have said many times, do not look at quarter to quarter results. They can be misleading. Look at fundamentals of the business and perhaps their annual results as they are audited.

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How do companies avoid earnings volatilities? How do companies avoid earnings volatilities? Reviewed by admin on 11/05/2016 Rating: 5
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