Those Pesky Earnings

By Queenan, Joe | Chief Executive (U.S.), March 2000 | Go to article overview

Those Pesky Earnings


Queenan, Joe, Chief Executive (U.S.)


In the past two years, venerable corporations with real products, real revenues and real profits have repeatedly seen their stock prices massacred, either because they failed to meet quarterly earnings projections or because they were thought to operate in mature industries where spectacular growth was no longer possible.

Simultaneously, tiny dot-coms with virtually no revenues, barely a handful of employees, and no earnings whatsoever have repeatedly shocked Wall Street with their gravity-defying valuations.

The lesson to be drawn from this is obvious: If large companies ever again wish to see their stock trade at high multiples, they must do everything in their power to get rid of their earnings. In the current environment, earnings have become an absolute curse, and revenues aren't much better. Here's why: As soon as a firm has earnings, investors subconsciously begin constructing a mental diagram of the market in which the company operates, calculating the potential size of that universe. Sometimes, the image they arrive at is small, sometimes it is large, sometimes it is enormous, but it is never infinite. Conversely, if a company has no earnings, investors can endlessly rhapsodize about how gigantic those earnings will be in the future. Because of this planet-wide deviation from traditional stock valuation models, corporations now find themselves trapped in a milieu where healthy but less than Croesian earnings not only confuse but in many cases infuriate investors.

In making these assertions, I am not being a curmudgeon, a whiner or a spoilsport. I am simply reminding readers that in AOL's merger with Time Warner it was the company with lots of products, lots of employees, and a long tradition of healthy earnings that got taken over by a company with earnings that have long been viewed as a complete joke. Clearly, Time Warner was hamstrung by the fact that it had regular but not breathtaking earnings, as opposed to AOEs ludicrous, and therefore irrelevant, earnings.

Indeed, more than one critic has suggested that the folks who run Time Warner were eager to be bought by a company whose stock price is totally out of line with its earnings because it was the only way to jack up their own stock price and make some money. Whether or not this is true, it is undeniable that Time Warner's pedestrian earnings anchored the conglomerate to reality-the worst place to be these days.

Only a fool would suggest that AOL's acquisition of Time Warner is the last takeover of this type that we will see. In the fullness of time, perhaps Yahoo will swallow up IBM or some Internet portal company that does not yet exist will devour GE. This is why established corporations that do not want to see themselves eaten alive by a company with 43 employees, none over the age of 23, must take bold steps to ensure their survival now.

The easiest way to do this is to inflate the stock price so high that a takeover is unthinkable. …

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