Evaluating Companies When the Financials Are Unreliable

Evaluating Companies When the Financials Are Unreliable (Marketing Memo August, 2002)

Enron, Xerox, Global Crossing, WorldCom - all accused of cooking the books. What does this mean for market researchers? Until accounting procedures change, financials will be an unreliable source of company information. When you need company information, try a 360-degree evaluation of your target rather than focusing on year-over-year changes in revenues or earnings. The results will be more complete and more meaningful. Following are some of the components of a Winett Associates 360-degree evaluation:

Management team. Does the team have relevant experience? (software experience for software companies, and consumer products experience for consumer electronics companies).
Company offering. What do they offer? Do people need/want the products or services? Has the company differentiated its offerings in terms of price or performance? Does the company have a reputation for providing quality and value?
New Products. Does the company have new products and services in the pipeline, or are they promoting mature products? Have they patented new products?
Marketing strategy and tactics. Is the marketing strategy suitable for the customer, the industry, and the price-point? If the company sells pricey products for teenagers, does it market to both parents and kids, assuming that parents may provide the funds?
International strategy. Are international initiatives well timed? Most companies test their products in familiar US waters. However, in regulated industries companies may first introduce products in foreign countries with less stringent regulations.
Distribution channel. Are distributors committed to the company and the product? Distributors may represent too many lines and ignore products from some vendors.
Customers. Does the company have a diversified customer base? EDS is concerned over the WorldCom melt down as EDS had agreed to provide WorldCom with over $6 billion of outsourcing services.
Competition. Is the company increasing or decreasing market share relative to the competition? Why? Slipping market share may indicate deteriorating service.
Employees. Does the company have a reputation for employee dissension? Why? Thousands of employees are suing Wal-Mart regarding forced unpaid overtime.
Financial reporting. Has someone accused the company of inflating earnings? Does the company seem to be taking appropriate corrective measures? Are they changing management and operating procedures, or are they just restating earnings?

When you need company or industry information, Winett Associates can help you by conducting 360-degree company investigations. We use the same fact gathering skills when we write white papers and user success stories.

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