Business books are full of little homilies and axioms. Here’s one that some managers — and many investors — seem to have branded into their brains: “If you’re not growing, you’re dying.”
With that little ditty playing endlessly in their decision-making, there’s little room for more contemplative analysis. Why should there be? There’s already a handy little quip that excuses any further need for coherent planning or strategy.
Companies need to make a profit. To do that repeatedly, management needs to find growth strategies, if for no other reason than to backstop against any slippage in core business. But growth for growth’s sake alone proves nothing — look at the endless list of companies that have grown their way right into the grave. What companies need most is thoughtful, practical planning to insure a strong profit.
Sometimes that means taking a step back in business operations to make sure you’ve got everything right. Sometimes that means accepting slower growth, rather than trying to bully through unchangeable obstacles, like a collapse of a major market. What it always takes is good management, ready to see through its plans to completion, regardless of the caterwauling that may come from others.
All of that came to mind last week, when Hartford-based United Technologies Corp. announced its third quarter results. Earnings per share rose 22 percent, while net income escalated 20 percent. The conglomerate said profits at five of its six divisions grew by double digits in the quarter. UTC also raised its revenue projections for the year, adding another billion dollars to its sales forecast.
And then its stock got hammered, dropping $3.55, or 4.5 percent, to $76.10, within hours of the announcement.
UTC didn’t get punished for turning in tremendous performance. It got spanked for comments made on conference call with analysts and investors discussing its finances.
Greg Hayes, United Technologies’ vice president of accounting and finance, said in the call that moderating international growth, a continuing slowdown in the U.S. economy due to the troubled housing market and additional investments in research and development “will make 2008 a challenging year.”
Hayes did not say that UTC expects to earn less next year than it will this year. But he did note that investments in its newest aircraft engine designs and Hamilton-Sundstrand systems for the Boeing 787 “will put pressure on earnings growth” at Pratt & Whitney and Hamilton-Sundstrand.
Wall Street, of course, doesn’t care about long-term investments — which often lead to long-term stability, viability and increased profit. It cares about quarterly returns, which are enhanced in only two ways: net income growth, or selling the company.
Such a focus serves only to reward those whose interest is essentially in arbitrage. It does not enhance a company’s long-term prospects, it does not stabilize either our region’s or our nation’s economy, it does not create a foundation for job growth (without which consumer spending and consumer confidence go out the window). It does reward short-term imprudence, it does put an emphasis on narrow goals, it does transform a company’s strategy from being a provider of goods and services to being a provider of a financial pacifier to screeching money managers.
United Technologies, like many other successful large companies, will ignore the analysts and the stockbrokers while it follows the plans it knows will be most rewarding in the long run. Yet company presidents and chief financial officers are judged not by the business fundamentals they’re trying to protect, but by the value of the stock they have a duty to safeguard. It is the easiest report card to look at. And the easiest to misunderstand, if the only thing you’re doing is managing by maxim.
