Is It Good for Management to Lower Investor Expectations?


Two weeks ago, Walt Disney Chief Financial Officer Jay Rasulo told a group of analysts at the Nomura Global Media & Telecom Summit that Disney's operating income, cable network affiliate fees, and parks revenue could suffer in the fiscal third quarter. The stock ended that week lower by 3.68% after falling 2.69% on May 30, the day the comments were made.

A Goldman Sachs analyst quickly released a report indicating that the market overreacted to the comments, the quarter wouldn't turn out to be as bad as the company made it sound, and Rasulo's comments were primarily reiterations of prior comments.

Well, if Rasulo was just repeating what the company had previously said, then the stock decline was an overreaction and shouldn't have happened. But the question I have is why management makes these sorts of comments at all.

The most likely reason is to appease Wall Street. Talking to analysts also may make some management teams feel important or help them fulfill some sort of ego-driven need. Now, I'm not saying that's the case with Disney, but in my opinion, these sorts of comments aren't helping anyone, and I'd prefer management teams to just stop talking until their quarterly results have been released and we know the actual numbers.

Year to date, shares of Disney are up 30.25%, while the Dow Jones Industrial Average is up only 16.36%. Only four of the other 30 components that make up the Dow have performed better in 2013. Investors clearly think the company is performing well, and shares rose 2.80% this past week, gaining back nearly all the downside the stock realized after the comments were made.

So will shares not fall when earnings come out, because investors knew about the possible poor performance? We've seen this time and time again: A company releases a statement days or weeks before an earnings release, and shares fall that day and again after the results are published. Investors have a terrible long-term memory. The case with Disney is a perfect example. The Goldman Sachs analyst said the company had previously told us of most of these issues, yet shares fell when we heard them again. Shares will tank if quarterly results come out and miss big time, even though we've been told not once, but twice, that they would be weak.

So if shares fall when the possible miss is announced well in advance, and then shares will probably fall again later when the actual quarterly results miss, then why make the announcement at all?

Please shares your thoughts below and help me understand this reasoning.

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Fool contributor Matt Thalman owns shares of Walt Disney. Check back Monday through Friday as Matt explains what caused the Dow's winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter @mthalman5513. The Motley Fool recommends Goldman Sachs and Walt Disney and owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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