A company's management has two primary responsibilities: running strong operations and allocating capital wisely. However, businesses inevitably experience periods of ups and downs. It is during periods of weak performance that management’s true character is revealed. Since assessing management is a critical part of my investment process, press releases can sometimes serve as a valuable tool in this evaluation.
In my experience, press releases generally fall into two categories: earning and non-earning. Market participants tend to focus on earning releases, where management has the discretion to highlight areas that they deem important. These highlights often appear prominently at the top of the release, either in bold or italics, to draw attention. This is where investors need to be cautious, as misleading information can be subtly embedded.
I frequently see various forms of management communication that could lead investors to have misleading views about business performance. Here are some common tactics:
- Using phrases like "record earnings", "record sales" or "record performance".
- Highlighting strong performance in minor business segments that have little impact on overall profitability.
- Presenting excessive information rather than focusing on the key variables driving the company’s earnings.
In non-earning press releases, I often see announcements that offer little insight into actual business progress. Some common examples include:
- Frequent press releases about awards or certifications.
- Announcements about attending trade shows.
- Discussions about product or service applications without real evidence of customer demand.
While the specifics will vary by business, here are some key ideas I consider when assessing management based on press releases:
Earning press releases
- Growth over Profitability: If a company consistently emphasizes record sales while ignoring margins, Return on Capital, or Return on Equity (ROE), that’s a red flag. A business can achieve record sales while having deteriorating ROE due to product discounting. If management prioritizes growth over profitability, it could indicate an empire-building mentality aimed at justifying higher executive salaries rather than maximizing investor returns. Analyzing a company's ROE, and more specifically incremental ROE provides more insights.
- Small Segment Performance: If the company is highlighting the success of an inconsequential segment, it is possible management wants to hide the problems occurring within the core business.
- Cash Flow vs. Earnings: Even if a company reports impressive sales and earnings growth, the absence of cash flow is concerning. A company that sells heavily on credit might show strong revenue and earning growth while experiencing a disproportionate increase in accounts receivable. This suggests management may be hiding the true competitive position of its product or service.
- Accounting Standard Changes: When a company adjusts its accounting standards during a period of poor performance, it is likely an attempt to inflate earnings figures.
Non-Earning press releases
- New Contracts & Customer Wins: If a company discloses contract wins and provides quantifiable details (even in ranges), it signals transparency and a willingness to keep investors informed about business prospects.
- Senior Management Hires: Announcements about top executive hires can be insightful. Reviewing the new hire’s past achievements may provide clues about the management and board's strategic direction.
- Small Transactions: The news releases around small transactions are also helpful. For example, selling an unprofitable division may indicate management’s commitment to improving margins and ROE, demonstrating a focus on shareholder value.
Analyzing management is a crucial part of my investment process, and press releases can offer valuable clues about their priorities. The key question I always ask is whether a press release is merely a promotional tool or a genuine, transparent report meant for shareholders.
_______________________________________________________________________________
Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).
