Earnings guidance is proving to be the old soldier of investor relations: It won’t die, but it certainly is fading away.
A new survey from the National Institute of Investor Relations shows the recent trend of moving away from quarterly guidance towards annual forecasts continues unabated, with nearly half of all companies offering guidance now preferring annual statements. But more than 85 percent also steadfastly say they will continue to offer guidance, in the name of better relations with analysts and shareholders.
NIRI surveyed 654 companies on their earnings guidance, and found that two-thirds offer some type of it—down from 71 percent one year ago. But among that group that does provide guidance, 86 percent say they are committed to the practice.
The number of companies furnishing annual earnings guidance jumped sharply to 82 percent, compared with 61 percent a year ago. The number of companies providing only annual guidance also rose significantly, from 28 percent in 2005 to 43 percent today, while companies providing only quarterly guidance fell from 28 percent last year to just 13 percent today.
Thompson
“There’s a clear downtrend in the number of companies only providing quarterly guidance,” says Louis Thompson, NIRI’s president and chief executive.
The reason respondents cited most often for continuing to provide guidance was a belief that it contributes to better communication between the company and analysts and investors (95 percent), and almost two-thirds (62 percent) said it helps decrease stock price volatility. Another 54 percent said most of their peer group provides guidance, and 10 percent said they worry that lack of guidance will lose them “sell-side coverage” from analysts at trading houses.
Of those who don’t provide earnings guidance, 87 percent said they have no plans to do so in the future. Half also said they decline provide guidance as a matter of general policy, while 24 percent cited limited visibility into their revenue and earnings future.
Thompson also expects the Securities and Exchange Commission’s proposal to overhaul disclosure of executive pay to affect earnings guidance, as the new rules—likely to be in effect for the 2007 proxy season—will “direct the market focus toward the longer term.”
Under the proposed rules, the performance goals of senior executives will be required to be stated in plain English in the proxy. “I think that will influence how companies communicate their strategy and their goals to Wall Street,” Thompson says. “If senior executive performance goals are out there for world to see in the proxy, you certainly can’t have a different message going to Wall Street as to what the company’s strategy and goals are. They have to be in concert.”
Different Strokes
One size does not fit all when it comes to guidance policies. The type and frequency of guidance that companies furnish is based on a number of factors, such as the industry in which they compete.
Griehs
Len Griehs, vice president of investor relations at Campbell Soup, which switched from quarterly to annual guidance in fiscal 2005, says the change gives the company “more flexibility.” For example, Griehs says, when company spending will be higher due to planned seasonal promotions, “we can provide spending information on an annual basis and not give away the plans we have on a quarter-to -quarter to basis.”
In fiscal 2002, after a major restructuring that included a new management team and a three-year transformation plan that cut profits 30 percent, Campbell did begin providing quarterly guidance in the form of an earnings-per-share point estimate. “To rebuild our credibility, we thought it was important to give quarterly guidance to give investors an idea of how things were going,” Griehs says. But when its three-year restructuring plan was complete, the company switched to annual guidance.
align="center">FINDINGS
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Below are highlights of the findings from NIRI's 2006 survey on earnings guidance:
The proportion of companies providing earnings guidance declined to 66 percent from 71 percent in the March 2005 survey.
Some 56 percent of companies provide revenue guidance, down from 60 percent.
The percentage furnishing annual earnings guidance increased significantly to 82 percent from 61 percent in the previous survey.
Some 52 percent provide quarterly earnings guidance, down from
61 percent.
The proportion of companies that provide only annual earnings guidance rose to
43 percent from 28 percent.
Those companies that provide only quarterly earnings guidance declined to 13 percent from 28 percent.
Some 77 percent of companies provide qualitative statements about market conditions that may assist analysts in arriving at their estimates.
Source
border="0" style="margin-top:3px;margin-right:6px;margin-bottom:9px"
border="0" align="left">National Investor Relations Institute (April 6, 2006)
“We were comfortable with what was going on with our business, so we decided to switch to giving guidance along the lines of our annual goals,” Griehs explains. “Everyone was fine with it. A lot of investors were happy to see us move to annual guidance.”
Campbell now provides annual guidance on the percentage of growth it expects to achieve in sales, earning before interest and taxes, and EPS. The company reviews and reconfirms that guidance each quarter.
Murphy
Meanwhile, Incyte Corp., an early stage biotech company that doesn’t have revenues, take a different approach: providing the company’s cash position and likely “burn rate” for a given year. “Our guidance is more limited in terms of financial metrics than some,” says Pamela Murphy, vice president of corporate communications and investor relations. “That’s as far as we project out. We also can estimate how long that cash will last.”
Incyte provides the information annually at beginning of its fiscal year and updates it as needed. The company also details important non-financial measures, such as research milestones and product development, Murphy adds.
Avnet, a global distributor of electronic components and computer products, only provides quarterly guidance, in the form of EPS and revenue ranges. During a conference call on the results of the NIRI survey, Avnet vice president and director of investor relations Vince Keenan said the company does so because, despite creating some additional volatility during earnings season, “we think it’s preferable to analysts setting estimates without any guidance from us.”
“The complexity of our business is one of the reasons we give quarterly guidance,” Keenan added. “It’s also one reason we don’t give annual guidance. Our concern is that if we did give annual guidance, we would spend too much time discussing changes to it.”
Same Format, Different Frequency
While the frequency of earnings guidance has shifted, the form of the guidance most companies provide remains largely the same, according to the NIRI survey. Among those companies that provide quarterly earnings guidance, 83 percent give a range of EPS estimates, up from 80 percent last year. Five percent give a point EPS estimate, and 7 percent provide an earnings model, the same numbers as in the 2005 survey. Overall, 92 percent of respondents say they update their earnings guidance during the quarter or year if there’s a material change.
Meanwhile, NIRI reports that 77 percent of companies provide qualitative statements about market conditions that may assist analysts in arriving at their estimates, which Thompson cites as evidence that “the lines of communication are very open.”
“There’s a notion that if company no longer provides EPS guidance, they’re clamming up,” Thompson says. “That’s not the case. Many companies are putting out more information. They’re just not giving a range or a precise EPS.”
In addition, 70 percent provide “trend” information that may affect their business, 56 percent provide industry-specific information, and 54 percent give quantitative information on business measures and/or assumptions. Half of the group provide estimates or forecasts of factors that may drive earnings, while the same number provide qualitative statements about high-level performance measures.
Among those who don’t provide earnings guidance, three-quarters provide qualitative statements about market conditions; 67 percent provide trend information; 55 percent provide industry-specific information. Half provide qualitative statements about high-level performance measures, while 38 percent furnish estimates or forecasts of factors that may drive earnings.
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