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3/7/2003
10:35 AM
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Taking Stock: Take Time To Hear The Whole Story

A half-empty room shows what's wrong with our markets

It's been such a tough financial market lately that I thought I'd give InformationWeek readers some perspective on a typical day of a financial analyst and portfolio manager. After you stop laughing, maybe you'll come away with some insight into why the markets have been so volatile lately.

The day started well. I got up, read The Wall Street Journal, and planned how I was going to beat the Street once again (all right -- I was down on my knees praying and pleading). But first I had to go to the annual analyst meeting for Symantec (SYMC--Nasdaq).

As usual, the nearly 200 analysts and interested spectators filtered into the conference room a few minutes before the meeting's start. As the first two speakers provided some insight into systems integrators and security technology, I thought about how nice it was to be able to spend a day learning about strategy rather than worrying about whether the next quarter's earnings would fall a penny short of expectations.

Curiously, some wireless phones began ringing. Some analysts were opening their laptops and scrolling through their models. Others left through the rear doors. Then I noticed people turning to the last few pages of the 111-page handout. It seems that CFO Greg Myers was to speak last and discuss projections for the fiscal year ending March 2004. One of the slides gave a quarterly breakdown of the previously forecasted earnings-per-share estimate of $1.88. Myers' earnings-per-share estimates for the first half of the fiscal year were lower than analysts had expected, while estimates for second-half earnings were higher.

What had been a full room was now half empty. Someone said that the stock was down 15%. I checked; it was true. Outside, scores of analysts were calling the office or speaking with clients. All this while the next speaker, Gail Hamilton of the enterprise systems division, struggled in vain to grab the attention of a room filled with murmurs.

I guess that's the last time Symantec hands out the financials early without someone in the room to explain what they mean.

I don't blame the company for this madness. It's indicative of what's wrong with our markets. Symantec had merely broken out revenue and earnings forecasts on a quarterly basis for the first time; it hadn't changed any earlier forecasts. The analysts didn't seem to care that the company had beaten analyst predictions for six straight quarters -- the last four by an average of 7.5 cents per share.

Instead, the analysts were trying to make up for the fact that they hadn't understood the business well enough to adjust for seasonal factors in revenue and earnings throughout the year. In some cases, the recent upside earnings surprise probably caused them to be overly optimistic in their earnings projections, which they might now have to reduce.

Most Wall Street analysts are predicting 2004 earnings per share of $1.91, though the company forecasts $1.88. It wouldn't surprise me to see the company's earnings come in closer to that $1.91 prediction. At $41.57, the stock isn't cheap, as it trades at 21.8 times fiscal 2004 earnings-per-share estimates. However, that's not bad for a company that's growing earnings per share 20% in a very tough IT spending environment.

A strong balance sheet with growing cash is good news in tough economic times. Too bad some of the analysts didn't hang around long enough to hear the whole story.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

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