When I sat down to write this article, I sort to find out why the earnings season is often referred to as the silly season. What exactly do people, stock market players in particular, mean when they refer to a period such as the earnings season as silly?
There are a few definitions that I came across.
The Collins English Dictionary defines the silly season as a “period of time when people do or say things that are not sensible or serious”.
The Cambridge Dictionary also has something closer.
It says, mainly in the UK. The “silly season” is the time of year, usually in the summer, when newspapers are full of stories that are not important because there is no important news to report on. Ouch!!
Indeed, when you really analyse what is said during the reporting season, you realise why it’s not far-fetched to equate the earnings season with a “period of time when people do or say things that are not sensible or serious.” To some extent, the earnings season is indeed a silly season. Most of the time, the information shared by management in their reports are historical.
Very little to nothing about the long-term prospects of a company is shared. Some information is better than none, granted, but the information that is sometimes given is useless, nor is it particularly accurate, or even trustworthy.
It is an open secret that companies play around with cookie jar reserves, accruals, and other accounting instruments to flatter, or even depress, earnings.
Recently large corporates have been found wanting.
Take the Steinhoff saga for instance, possibly the biggest case of corporate fraud in South African business history. At the pinnacle of its success, the international business giant became the darling of investors, asset managers, analysts and financial journalists. They all feted its expansion into new ventures and countries. But, as it later turned out, its success was built on shaky foundations epitomised by unfettered greed as well as dodgy and unethical practices, including alleged accounting irregularities, tax evasion and lax corporate standards.
Then even closer to Zimbabwe is the Tongaat Huletts’ scandal. The JSE listed company, which owns Zimbabwe sugar operations Triangle Limited and Hippo Valley was also embroiled in accounting shenanigans. Tongaat and its local unit Hippo Valley were both suspended from their respective stock exchange listings. PricewaterhouseCoopers had to be called in for a forensic investigation amid revelation that “certain past practices” did not reflect the company’s business performance accurately.
Given such a background, where data released by listed corporates has to be taken with a grain of salt and not treated as gospel, the earnings season is indeed what it is known as by pros, the “silly season”. For the serious investor, earnings reports are just another media curiosity, fodder for morning talk shows and nothing more. It cannot be used as a basis (or excuse) for buying and selling shares.
The real silly season is in Zim
The silly season stakes are, however, even higher here in Zimbabwe. There is so much fuzzy data around this current earnings season. The numbers being reported are at best fodder for morning talk shows and nothing more. They are meaningless at most and useless to some extent. Take for instance the valuations that are being put on investment properties at a time industry players admit that they are being done using valuation inputs that are not fully developed.
“The valuation was undertaken during a transition from multi-currency system and as such information on valuations inputs had not been fully developed,” writes First Mutual Properties in a statement accompanying its half year to June 2019 results.
Given that fair value adjustments to the same properties contributed a significant share to the overall profitability achieved during the period under review, to what extend can they be used in decision making? How far from being accurate are the valuations then?
To look at it from another angle. First Mutual Properties says rising inflation posed challenges for property portfolio valuation as fair value gains were significantly higher than increase in revenue, resulting in unsustainably low yields. Are the valuations and such information useful then and is it worth the while?
At NMB, basic earnings jumped 519 percent to 14,55 cents from 2,34 cents prior year comparative. That would have been an impressive set of results had this not been only influenced by the change in reporting currency and property revaluations. Much of the earnings growth was realised from net foreign exchange gains which grew to $32,6 million from $1,1 million prior year. Significant contribution also came from fair value adjustment on investment properties which stood at $27,9 million. There were no value adjustments prior year comparative
As some have rightly put it, current economic turbulence makes current earnings less relevant but plans for the future, in terms of sustaining and preserving value for the business, would be most welcome.