Earnings Guidance
This earnings season companies have been posting wonderful results, which have been driving stocks up, up, up! Every quarter we listen patently as the CEO and CFO of our favorite stocks provide a report card. Like all little kids at report card time we hope for the best, and want nothing more than straight As!
In the business world, the equivalent of an “A” is when a company beats its analyst estimates. This quarter more often than not, companies are breaking the curve and reporting wonderful results. This got us thinking, who determines what earnings a company should be reporting and how do they do it?
Earnings estimates are available everywhere, you can get them off of any financial website. What they represent is an average of all the investment banking firms’ research analysts and their best guesses as to how the company should perform.
Interestingly, like all things on Wall Street, this little game of “guess my number” is rigged. Often the very companies that the research analysts are looking at are providing guidance.
This quarterly guidance has its problems. It increases volatility when a company doesn’t hit the earnings on the penny (and sometimes even when it does). It forces management to think short term – not long term (which can hurt in the long run) and often management uses it to lowball expectations.
Interestingly, investors and companies are starting to lean towards eliminating the guidance game all together. According to NIRI, the National Investor Relations Institute, the number of companies offering quarterly guidance fell to 52% in 2006 from 61% in 2005. Some of the largest firms in the world have stopped guidance including: Gillette, Berkshire Hathaway, Coca-Cola, Intel, and McDonalds.
In the future you will see a trend towards yearly numbers, and management will have more leeway in providing numbers in ranges, which benefits everyone. Interestingly, I think you will find quarterly guidance increase for small companies without an analyst following – it seems to be the only way to get proper expectations set.
Category: Stocks
