In a recent Citigroup (NYSE: C) press release, its headline stated, “Citigroup Reports First Quarter 2011 Net Income of $3.0 Billion, Compared to $1.3 Billion in The Fourth Quarter 2010.” After reviewing the Citigroup press release, The New York Times (DealBook) ran a story, “How Banks Spin Their Earnings,” that expressed concern about how Citigroup compared its current quarter net income to the most recent quarterly net income (Q4, 2010). This is different than the more traditional comparison to the same period of the previous year. The implication is that Citigroup intentionally tried to confuse analysts and investors with this headline.
The short answer is “yes,” Citigroup was attempting to confuse its stakeholders. Citigroup conveyed itself in a more favorable light by changing the basis of its net income comparison. Though there is nothing specifically wrong with what Citigroup did, it is not forthright or a stellar exhibition of candor. However, what Citigroup engaged in is common practice among large publicly-held companies. Many companies attempt to convey a positive financial perspective through the use of non-GAAP metrics, selective disclosures, omissions, and comparisons to unconventional reporting periods.
Though there can be value in understanding how the current period compares to the most recent period, the primary reason companies identify the previous period is to provide a favorable comparison. The unusual aspect of Citigroup’s press release is that it placed this comparison in the headline; however, non-GAAP comparisons are quite common in press releases, which provide a significantly more confusing and potentially misleading metric. To Citigroup’s credit, it specifically identified that the comparison was to the previous quarter. As far as lengths that companies go to in order to gray or confuse their financial results, this ranks fairly low on the scale due to the clear identification of the comparison.
What appears to be most upsetting to the news outlets is that they were not notified of the change in comparison versus the company actually presenting in this manner. In all likelihood, Citigroup will not compare future quarters to the previous quarter, unless it is a favorable comparison. Thus, this is not a change in presentation, but merely an adjustment in metrics to help convey the message management wants the investment community to receive.
Though it is quite concerning that companies regularly utilize various techniques to massage financial results, it should not be accepted by the investment community. Companies that fail to convey financial information in a straight-forward and direct manner should be viewed with skepticism. Based on the confusing nature of the messaging, invest in Citigroup with caution, if at all.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.