What ever happened to warnings season? Aren't companies like General Electric (GE) supposed to warn investors of an earnings miss during the two weeks prior to the Alcoa (AA) report? After reporting net income of 44 cents a share vs. the 51 cents a share estimate, General Electric (GE) CEO Jeff Immelt explained, "We had planned for an environment that was going to be challenging...[but] after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments and this was something that we clearly didn't see until the end of the quarter," Immelt said.
There is nothing that investors hate more than surprises. Today's investment world demands transparency and full disclosure, which brings us to the big question, When did Immelt know about the miss? The Bear Stearns meltdown occurred on March 17th and Alcoa kicked off the earnings season on April 7th. Shouldn't a stalwart company like GE, with their pristine earnings history, be expected to give investors a heads up on unusual circumstances? I want to be careful not to unfairly single out GE. The consumer slowdown has been widely anticipated and yet warnings season was especially quiet. I expect this trend of 'failing to meet' expectations will continue, there will be countless other CEO's who must answer the same questions: what did you know, when did you know it, and why didn't we get a warning?
When a company offers forward looking guidance they are showing respect to the system. Respect to analyst's who cover the stock, respect to investors, and respect to the general public who are trying to make well informed decisions. When a company reports a warning they are doing the same thing. Earlier this year, on January 18th, GE offered guidance of .50-.53 cents a share but mocked the system by not warning of the pending miss as soon as they knew about it. People will try to defend GE by saying that this happened late in the quarter which left them no time. That defense is inadequate for GE shareholders who thought they were in a low risk equity. According to data published on earnings.com, the company had either met or beat expectations for 13 consecutive quarters and the last miss in Q3 of 2005 was only by a penny. Jeff Immelt could have avoided these attacks if he would have just disclosed what he knew when he knew it. You can do just about anything in this world as long as it's fully disclosed. Now investors are going to throw GE in the same basket as Goldman Sachs (GS).
Two companies who were content to let others take the credit crunch fall while they quietly sat on the sidelines. Investors of GE and GS go into this weekend feeling that their trust has been violated. The guiding principle for CEO's is simple; public disclosure earns you respect, fail to do so and you open yourself up to some tough questions. We'll see how Mr. Immelt gets treated over the next few weeks... it definitely won't be business as usual.