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Chief executives across the country are paid millions of dollars a year to lead their companies through the treacherous waters of the New Economy. They constantly make mistakes. They sign bad merger deals. They mismanage cash reserves. And then they fix things, and collect a big check.
The golden rule of being a CEO, though, is that you can't make an enemy of Wall Street. Once you get the analyst and investor community angry at your company, there's little chance your stock will rise. On the list of mistakes a CEO can make, it's one of the few that's unpardonable.
Michael Bonsignore, the CEO of Honeywell International (HON), committed that sin this week. As a result, his stock has dropped 28% in two days, and some analysts are calling for his head: All of this because his company is going to miss its earnings projection by -- ready for this? -- a penny or two a share.
"UNCONSCIONABLE."
What happened, exactly? On the morning of June 19, the stock of industrial conglomerate Honeywell started a slow but steady slide. At 10 a.m., half an hour into the market session, it was down $2 from its opening of $48.75. Allen Ashby, who manages the Ark Blue Chip equity fund, called the company. A secretary refused to transfer him to the executive suite. "Everybody up there is in a big meeting, and they won't be done for a while," she said.
By noon, the stock had dropped an additional $5, and the New York Stock Exchange had halted trading because the activity in Honeywell shares had become so intense. Still, no one at Honeywell's Morristown (N.J.) headquarters had returned Ashby's calls. Then a press release crossed the transom: Honeywell wasn't going to meet analysts' expectations for the second quarter, whose results would be announced in a month's time. According to the press release, the company would be 1 cent to 3 cents below what Wall Street expected it to earn for the quarter.
At that news, the bottom fell out of the stock. By that day's market close, it was down to $40. By the next day's close, it had reached a 52-week low of $36. Ashby was incensed. "It's O.K. if they're going to miss the quarter. They should just lay their cards on the table, and all sins will be forgiven. But to not return anyone's calls and just be quiet about what's going on is unconscionable. I own hundreds of thousands of their shares. How many shares do you have to own before they return your calls?"
MORE TO THE STORY?
As it turns out, other institutional shareholders whose stake in Honeywell is well into the millions were rebuffed in the same manner, according to Paul Nesbit, an analyst with JSA Research who covers the stock. "I have no idea what they are thinking. Something goes wrong, and they just shut off all communication. It makes no sense," fumes Nesbit. "All their lines of business were doing well, and they were headed toward a growth rate of earnings in the high teens. Then out of nowhere this comes, and they make no attempt to explain it."
That's not entirely accurate. In the press release, the company said that higher costs for materials, higher interest rates, and a parts shortage in its aerospace division led to the projected shortfall. But Nesbit doesn't think that's the entire story. "Everybody has to deal with higher interest rates and the higher oil prices," he says. "But not everybody is decreasing their forecasts for the quarter."
The problem, everyone seems to agree, is not that the company's profit growth is slowing, but rather the way in which Honeywell made that known. Now, the company's official line is that it won't say anything prior to an analysts' conference scheduled for July 10. "We can't speak to anyone until the analysts' conference because we have to disclose any news to everyone at the same time," says Tom Clarke, head of investor relations for Honeywell.
LIVING LEGEND.
But that's too long to wait for the analysts and investors who follow the company. "If he [Bonsignore] has a handle on the company, he should have seen this coming. It shouldn't take him three weeks to figure out how big the problem is. If he doesn't have a handle on the company, then he's the wrong man for the job," says Ashby.
That Bonsignore replaced a living legend, CEO Lawrence Bossidy, who retired after completing the merger between Honeywell and AlliedSignal, has made it tougher to get the Street's love. Already, there are calls for Bossidy to return, at least as a caretaker CEO until a new replacement can be hired. "I think they should bring Bossidy back," says Ark's Ashcroft. The company refuses to comment on any potential management changes, or on anything of substance for that matter.
Until the June 19 announcement, things looked bright for Honeywell. The maker of home security systems, aerospace systems, and turbines was heading toward 8% revenue growth and nearly 20% earnings growth this year. The company is also in the process of selling off some of its other businesses, including its underperforming auto parts subsidiary. Shareholders were happy. Honeywell was humming.
Then came bloody Monday. "I think it was the shock of the announcement that caused the damage," says Merrill Lynch analyst Phua Young. "It was a complete surprise to everyone."
"DEAD MONEY."
Moreover, the company hinted in its press release that second-half revenue and profits may be disappointing, too. "It's not the news about the quarter that scared everyone," says Buckingham Research analyst Edward Wheeler. "It's that they're concerned about the second half of the year, and they're not guiding anyone on where they expect it to go."
So what's an investor to do? Most analysts who cover the stock have downgraded it, although none have brought it down as low as a hold rating. "I don't see the stock moving much higher in the short term," says UBS Warburg analyst Quinten Nufer, who is one of the few who kept his buy rating on the stock. "But I won't tell clients I think they should sell because I don't think you should ever sell into paranoia. That's all that we have right now, since the company is being so tight-lipped."
Ark's Ashby is holding onto his shares, too. "I don't think the shares will go any lower. They're at a price-to-earnings ratio of 10, which is just too cheap. But I also don't think they'll move higher for a few quarters. It's dead money for a few quarters," he says. "I would tell the same thing to Bonsignore. But I can't get him on the phone."
Sam Jaffe covers investing for Business Week Online
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