Brown on Business
October 19-25, 2020
Arkansas’ publicly traded firms face quarterly earnings outlier many years ahead
By Wesley Brown
wesley@dailydata.com
One of the first things you learn as a novice investor or even a cub financial reporter covering publicly traded corporations is that quarterly earnings report are probably the single most reliable sources of available public information.
Every three months, top investors, mutual funds and venture capitalists often comb through quarterly financial reporters to compare profits and revenues for the past three months to the same period a year ago. At the same time, Wall Street analysts at top investment firms like Morgan Stanley, J.P. Morgan, Goldman Sachs and Little Rock’s own Stephen Inc. will grade those company’s investment potential with “buy, sell or hold” ratings.
Those recommendations also provide key details on a company’s directions to institutional investors, insiders and Wall Street traders, which can then lead to sudden spikes or sell-offs of a company’s stock price in a matter of hours. In fact, Arkansas companies hold conference call with Wall Street analysts and key investors every three months to provide detailed explanations of quarterly results, operations and one-time events.
For example, several Wall Street analysts have propped up shares of Little Rock’s Dillard’s Inc. after an Oct. 9 securities filings showed that a top lieutenant of billionaire investor Warren Buffett purchased over one million shares of stock in the upscale Arkansas department store. That Berkshire Hathaway investment, which represents a 5.9% ownership stake in Arkansas brick-and-mortar retailer, led to a 30% spike in the company’s stock price last week that is still largely owned and operated by the namesake Dillard’s family.
When determining the relative worth of any company, whether private, public or a startup in its first year of operation, the best way to make that determination is to get a copy of that concern’s balance sheet from the federal Securities and Exchange Commission (SEC). For Arkansans, however, the federal regulatory agency is often confused with the nation’s most famous collegiate athletic conference that includes the University of Arkansas and other flagship public universities across 10 southern states.
Still, under the nation’s federal securities regulations, the SEC polices certain company insiders and broker-dealer transactions and oversees filing of periodic financial statements and other corporate disclosures. Finance professionals, investors and shareholders often rely on these filings to make informed decisions when evaluating whether to invest in a company or divest their shares.
For many financial reporters, these SEC filings can be accessed at the Electronic Data Gathering, Analysis, and Retrieval system, otherwise known as EDGAR. This voluminous database, which is freely available to the public, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to file forms with the SEC.
The SEC was created through the Securities Exchange Act of 1934, which was signed into law by President Franklin D. Roosevelt. With this Act, Congress empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation’s securities self-regulatory organizations (SROs), including the New York Stock Exchange, the NASDAQ Stock Market, and the Chicago Board of Options, and The Financial Industry Regulatory Authority (FINRA).
The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them. For example, insider trading deals, Ponzi schemes, and the recent upswing in COVID-19 related investment scam are all regulated, investigative and prosecuted by the SEC together with the Justice Department and other federal regulators.
The securities regulator also awards millions of dollars to anonymous whistleblowers who provide tips to federal investigators that often lead to federal probes or complaints. On Sept. 30, SEC announced a whopping award of almost $30 million to two insider whistleblowers whose tips led SEC staff to open an investigation.
The most common SEC filings that include the balance sheet and other financial and operational information are the Forms 10K, 10Q, 8K, proxy statements and other securities filings. Most company employees, investors and shareholders are familiar with the annual report, which is usually dressed up as the once-a-year marketing publication released by companies several months after the end of their fiscal year.
For the even the most basic investor, the annual reports include almost everything one needs to know about a company. It is also sent to all shareholders in advance of the company’s annual meeting and then must be posted on the company’s website.
Although similar, Form 10K contains information that overlaps with the company’s annual report, but the two documents are not the same. Companies must submit the lengthy 10K filing within 60 to 90 days of the close of their fiscal year and fourth quarter.
And while the annual report is often a well-produced marketing document with lots of photos, company events and letters from the chairman and company CEO, the 10K includes everything about the publicly traded concerning’s operations, including information about business segments, products and services, subsidiaries, markets, regulatory issues, research and development, competition and employees, and other key details.
Enterprising reporters and investors also can find key information in the 10K in the “Management Discussion and Analysis” section. This portion allows the company to explain it operations and financial results for the past year, along with providing yearly financial statements that include the balance sheet, income and cash flow statement and other profit-and-loss data not easily found elsewhere.
Other section company’s management team, stock compensation and legal proceedings. For instance, the annual salary, bonuses, compensation and other perks of CEOs and other top executives at Walmart, Tyson Foods, Bank OZK and Murphy USA can be found in this yearly report and regularly filed proxy statements.
What may be an outlier in the upcoming earnings periods for most Arkansas and other publicly traded U.S. companies is that year-over-year comparisons may not mean much when pre- and post-pandemic information is assessed against the COVID-19 related downturn.
In fact, the SEC recently noted that the impact of COVID-19 on companies is evolving rapidly and its future effects are uncertain. Agency regulators said they are now monitoring how companies are reporting the effects and risks of COVID-19 on their businesses, financial condition, and results of operations and is providing this guidance as companies prepare disclosure documents during this uncertain time.
“The Commission and the staff have also provided targeted regulatory relief where appropriate in light of evolving circumstances,” the SEC stated two weeks after the novel coronavirus was declared a global pandemic on March 11. “We understand that reporting companies share the view that timely, robust, and complete information is essential to functioning markets and that they want to file periodic and current reports in a timely manner, notwithstanding the available relief.”
In the upcoming third-quarter earnings period for Arkansas companies that begins on Thursday (Oct 15) with Conway-based Home Bancshares Inc. and followed the next week by competitors Pine Bluff-based Simmons First and Bank OZK of Little Rock, investors should not be surprised to find some interesting and unusual financial items.
For enterprising financial reporters, such details obviously make for good reading and big news headlines. For investors and company executives, not so much.
