Thursday, August 19, 2010

Useless Discussion

Financial statements can often use context. While the statements themselves can tell you that margins have changed, or that a balance sheet account has increased/decreased disproportionately, they can't tell you why. To fully understand the challenges a company faces, it's imperative that investors read management's discussion and analysis.

One of the most useful portions of management's discussion and analysis is management's outlook. Here, the investor can get a handle on what are the near term challenges facing the company. In so doing, the investor is able to determine whether the company's problems are of a temporary or more permanent nature, which is of the utmost importance for the long-term value investor.

But some companies aren't so great at relaying this kind of information, which leaves investors in the dark. Consider the outlook of C-Com Satellite (CMI), a company we have previously discussed for its lack of disclosure. The company's outlook is four paragraphs and includes the following:

"The Company continues to develop new products for new emerging markets. Some of these products will be introduced in 2010, while others are longer-range R&D projects that are ongoing and will target specific new vertical markets, which C-COM presently is not addressing...

C-COM is going to encounter more and more competitors on the way to these new markets. Some of them have already failed in their attempt to keep pace with new developments...We also expect some that are in it today to bow out. To date we are managing to keep a significant technological advantage as well as a price advantage over other established players in this market place... "

On the surface, there appears to be a good deal of information in the four paragraphs C-Com provides...until you look at the company's outlook from 3 months ago. The outlook from last quarter is virtually identical to that of this quarter: essentially a word-for-word copy and paste!

Okay, so maybe the situation hasn't changed much in the last quarter. Significant developments could be rare in this business. But wouldn't things have changed in the last five years?? The company's outlook is pretty much the same as it has been since 2006, when the company first published an outlook!

In fact, the company's outlook in 2006 contains the passages pasted above word for word. So the company wrote its outlook once (in 2006) and has been copying and pasting it ever since. (To the company's credit, it did remember to change the date to 2010 in the line "Some of these products will be introduced in 2006, while others are longer-range R&D projects that are ongoing and will target specific new vertical markets, which C-COM presently is not addressing... ", but otherwise the passage above is 100% identical!)

When management's discussion offers no information on the challenges a company faces (other than the same challenges the company faced five years ago, with nothing in the way of any updates), the investor is in the dark as to whether these challenges are of a temporary or permanent nature. This makes the company very opaque, and makes it difficult for value investors to value the company with a decent level of certainty.

Disclosure: None

1 comment:

Paul said...

haha. That is awesome. I think that would be a job even I could handle. :)

Thanks for sharing that...can't say I've ever seen anything quite like it.

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