Drink Up! Seagram Rallies as Earnings Info Trickles Out

Seagram moves its earnings release up two weeks and is rewarded despite a $95 million loss.
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Ohh, the games companies play.

Seagram

(VO) - Get Report

, the Canadian liquor and entertainment conglomerate, released its third-quarter earnings Thursday morning. No surprise there -- it's earnings season.

The earnings were lousy, by any reasonable standard. Revenue was flat. Cash flow was down. And on the bottom line Seagram swung to a loss of $95 million this quarter from net income of $95 million a year ago.

No surprise there, either. The music industry is in a slump, and Seagram just ponied up $10 billion to buy

Polygram

and make itself the biggest music company in the world. Seagram "moved in the music business at the wrong time," says Bruce Sherman of

Private Capital Management

, who sold his position in the stock earlier this year.

Yet despite the ugly numbers, Seagram stock was up Thursday, after a big gain Wednesday. Over the last two days, it has risen from 37 to 42, a move of close to 15%. Why? Therein lies a story that would be surprising, if it weren't so common in these anything-goes days.

For the recent action in Seagram stock raises -- how to put this delicately? -- serious questions about the flow of information. Take Wednesday's move, for example. Seagram stock opened just above its Tuesday close of 37. Then it started to ramp. By just before noon, Seagram was trading at 40 1/4, not bad for a day's work. Volume was also quite brisk, with around 1.2 million shares changing hands, already more than the average daily volume.

Why? Well, that became clear at 11:55, when the company issued a press release announcing it would move up its earnings release from Nov. 3 to Thursday morning. Investors generally regard early releases as a positive sign: Why speed a release if the news is going to be bad? But just in case anyone didn't get why Seagram was moving up its announcement, the company threw this sentence in the release: "The company is releasing its earnings early because it has confidence that its businesses are fundamentally sound and there has been no material change in its outlook for the fiscal year."

But somehow, the news already seemed to be in Seagram stock. For the rest of the day, the stock barely budged, and volume was relatively light. The stock closed at 41 1/2, up 4 1/2 on the day.

"The news came out at 11:57 ... and the stock started moving at more like 10:00," says Tony Gray, chief investment officer of

STI Capital Management

, which owns more than a half-million Seagram shares. Gray says that didn't surprise or bother him: "All stocks move before the news is out."

For Seagram, Wednesday's gain was pure joy. By moving up the announcement, the company managed to convince big investors that the earnings report would actually contain good news. And Thursday, when the report actually did come out, investors and analysts lapped it up. After starting slowly Thursday morning, Seagram traded around 42, up 1/2.

A Seagram spokeswoman declined to comment on the moves in the company's stock price, or the timing of its release.

That's convenient, since this isn't the first time the stock has moved sharply without Seagram's cluing individual investors in on news many analysts seemed to have. On Sept. 21, for example, Seagram fell 9.1%, to 46 13/16, on extraordinary volume of almost 7 million shares. Just before the close of trading that day, Seagram put out a release saying it didn't know why the stock was moving.

Yet an "Intra-Day Special Call" from

Merrill Lynch

that day noted that "we believe the shares have been weak today on reports have been circulating concerning the company's first quarter and their music division." And in a note on the morning of Sept. 21,

Morgan Stanley Dean Witter

cut its estimates for cash flow from Seagram's music business by $40 million to $1.01 billion for fiscal 2000.

The drop last month occurred because Seagram "essentially preannounced," says Mark Greenberg, manager of the

Invesco Strategic Leisure

fund, which owns more than 100,000 shares. But not to everyone. Take another look at that release, headed, "Seagram Issues Statement in Response to Inquiries." It begins by saying that Seagram "stated that it is not aware of any material developments."

A Sept. 22 posting called "VO's puzzle" on Seagram's

Yahoo!

message board summed up the situation: "Yesterday the stock goes down on huge volume, with no release from anyone. Speculation circles of analyst downgrades, the company says it knows of no news that would cause a drop in price. Than, later in the day they (VO) say that cash flow will be reduced, after 4 of 5 hours of trading and 11% drop. Give me a break!!"

Not a chance. Unlike many companies, Seagram won't even let reporters on the conference calls it holds with analysts and institutional investors to discuss its earnings. Big players sit on those calls for a reason: They give investors a chance to hear in detail about issues a company's management thinks are important and to get guidance about where business is headed. By barring reporters, Seagram insures that most smaller investors will never get that opportunity. Why does the company keep them off? Its spokeswoman couldn't say.

But the message is clear: If you're a retail Seagram investor, don't try to get information about the company you own. You're better off with a drink instead.