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Coca-Cola leads the way
NEW YORK -- Nothing good can come from the pressure that Wall Street puts on companies to meet their earnings estimates.
Need proof? Just look at all the accounting scandals over the last year.
That's why Coca-Cola's decision to stop giving any profit forecasts is such a big deal. Here's one of the nation's largest companies saying that it won't play the earnings game anymore.
The beverage giant still will talk about its business, but it won't try to predict how much money it is going to make down to the penny every quarter. That will let it focus on long-term growth.
It's yet another example of Coke leading the way in cleaning up corporate America.
"Companies have been focusing so much on earnings management that they haven't been managing their businesses well," said Jonathan Low, senior fellow at the Cap Gemini Ernst & Young Center for Business Innovation in Cambridge, Mass.
Earnings manipulation became a widespread problem during the booming 1990s. That's because Wall Street began severely punishing companies that missed their earnings targets.
The process generally works like this: Companies give analysts and investors an idea of what their earnings will be, which they periodically update throughout the year. They are then held to those forecasts.
Sometimes, though, the forecasts are too ambitious and hard to achieve. So companies start fudging the numbers to keep up, maybe by accounting for a sale in one quarter instead of the next or trying to shift a large expense to a later date.
As long as the earnings look good, investors are happy. But they lose out big when the maneuvering becomes harder to do and the manipulation game starts to unravel, just as it did when the economy weakened and business slowed over the last few years.
Take what happened at WorldCom, which is now operating under bankruptcy court protection. In order to meet Wall Street's expectations, the telecommunications company disguised more than $9 billion in expenses using fraudulent accounting, helping to boost revenues and report profits instead of losses.
"When you manipulate earnings, you give investors a false sense of security," said Amy Hutton, associate professor at Dartmouth College's Tuck School of Business. "Investors think they are safe, when they really are not."
So how do you break this vicious cycle?
Coke has the right idea.
It's not the first company to quit giving earnings estimates. The Washington Post hasn't been doing them for years, and Gillette since 2001.
But Coke is among the world's best-known brands, and what it does sends a message loud and clear.
That's what happened a few months ago when it announced it would start deducting stock options from its earnings. Soon after, other companies decided to do the same.
Coke, in its announcement on Dec. 13, said it would continue to provide information on such things as its strategic initiatives and its operating environment, but wouldn't give predictions of its earnings per share or volume growth.
It is then up to investors and analysts to determine what they think the earnings may be.
The risk of that is some potential volatility in the stock.
Companies that don't give estimates sometimes see greater swings in their stock prices when their actual results differ significantly -- both on the upside and downside -- from what Wall Street predicts.
Coke may be able to temper some of that by continuing to issue regular updates about its business, even if it doesn't provide earnings guidance.
After all the scandals of the last year, it might be hard to convince investors of the benefits of companies giving out less information.
This, though, may be a case when less is more.
Rachel Beck is the national business columnist for The Associated Press. Write to her at email@example.com.