Earnings Are a Corporate Crap Shoot

Results from some new research from strategic consulting firm The Hackett Group just hit my inbox, and my, are the results scary. The consultancy does financial and management studies of a good number of corporations, and they've found that two-thirds of companies are off in their next quarter earnings forecasts by 6 to 30 percent. When it comes to gross sales, more than half of the companies couldn't get even within 5 percent of their next quarter's numbers.

Notice that this is all about next quarter, not next year. And 14 percent of companies describe themselves as being in high risk/high volatility areas - three years ago, the number was only 2 percent. In other words, the number of companies finding the world changing too quickly has been rapidly rising. (My guess would be that conditions changed just enough to let them realize how dangerous their markets were, and not necessarily a drastic change in the markets themselves.) As the release said:

"It’s shocking to see this level of poor performance in such a key area," said Fritz Roemer, who leads Hackett’s Enterprise Performance Management Executive Advisory Program. "We’ve seen companies take severe hits in the past few years after missing forecasts. Analysts suddenly question the competence of senior leadership. Stock prices become unstable and valuations drop dramatically. In some cases, CFOs have had to resign. Yet companies still refuse to make the necessary efforts to get this area under control."

Apparently, two-thirds of companies do year-end forecasts only, not rolling forecasts, which would match changing conditions more closely. Some forecasts should even be done on a monthly basis. In addition, only a fifth of the companies had forecast accuracy targets, which is like saying you're going target shooting, only you'll not look at the score after to see how well you're doing.

Not only is this bad for investors, but it shows that for many corporations, the basics of understanding their business and how things are going is dangerously out of their control. Sure, an unexpected event can come along. But what do you do if you have these events constantly? Then there is something wrong in the business model, management, the board, or some combination of the three.