The Maven: Revisionist Earnings History

The Business Press Maven only cried once at the movies, and that was when he dropped his tub of popcorn. But come earnings season, the tears always flow. The trigger is the sad fact that, in reporting earnings, the media reports what expectations were, but rarely bothers to mention when those expectation were last tweaked.

Why is this important?

You really didn't ask that, did you?

Hear me out: there is no portion of the relationship between Wall Street and the media that is more dysfunctional and of less service to investors than how earnings reports are reported. I'll try to stave off the waterworks long enough to explain that it can all be solved by simply giving a time context to the expectations that the company beats, matches or falls short of.

Let's start at the beginning, when a company first gives public guidance for future results. Considering how kooky it all can become, who better to put it in initial perspective than Groucho Marx, who once said: "Those are my principles. If you don't like them, I've got others."

And so it goes with numbers guidance. These are our earnings estimates. If you don't like them, we've got others.

A company throws out an original number for a future quarter, but that's just the opening salvo. As time passes and business swoons or surges, that original number, it turns out, is made of elastic. Sometimes it is ratcheted up, sometimes down. The shifts in numbers are sometimes subtle and come for totally legitimate reasons. (Business, by nature, has unforeseen variables.) Other times it looks like a numerical free association, and the tweaks are done to deliver bad news the way it goes down the easiest: slowly.

Then the earnings report comes and, right there in the first or second paragraph and quite possibly the headline, we read about how the quarter looks ... compared to expectations. The same expectations that have floated in the wind.