Rarely are trends in investor relations precipitated by a single event or factor. It's a dilemma facing many public companies today - whether or not to continue to provide
guidance on earnings estimates to the analyst community.
First, some history. Guidance regarding a company's prospects for performance began in the 1970s when individual investors dominated the market. Brokerage firm analysts used
this guidance in producing research that served the interests of the individuals and was also sold to the institutional investors. In the late 1980s, heavy M/A activity began
transforming the market, giving rise to the dominance of the institutional investors and the resulting influence of investment banking on the bias of sell-side research - the root
of the issue we're facing today.
As we entered late-1990s and the "new economy," dominated by a strong IPO market, analysts were scrambling for "guidance" from the companies they followed, particularly in the
technology sector. These companies were not the typical brick-and-mortar companies that analysts were used to and were largely valued on their prospects for earnings where
profits often didn't exist.
In the early 1990s a relatively new phenomenon entered the market - plaintiff's attorneys would quickly file strike suits against companies that missed their earnings
estimates, often causing their stock price to take a dive. Consequently, many of these companies shied away from making forward-looking statements. NIRI recognized this and
helped lead the effort to create a "safe harbor" for good faith, forward-looking statements under the 1995 Private Securities Litigation Reform Act.
This Act didn't stop legitimate lawsuits against companies for making fraudulent statements or for engaging in overly aggressive accounting practices designed to make earnings
look good. But, it did put the brakes on frivolous suits. Throughout the late '90s, analysts became increasingly dependent on earnings guidance, as companies were more
forthcoming. Some tried to get the information selectively, but the SEC stepped in, appropriately, and stopped that with Regulation Fair Disclosure. Now, if a company wants to
tell the market that its earnings are likely to be different from its earlier guidance, it must make that information available to all at the same time.
In NIRI's March 2003 survey on the earning guidance issue, we found that 78% provide earnings guidance through the following means: an EPS or point estimate (12%), a range of
estimates (75%), an earnings model (8%), or revenue estimates (5%). These four, by our definition, constitute earnings guidance, per se. Over the past six years in surveying
this question, we've found consistently about an 80/20 split between those that provide earnings guidance and those that don't.
What's new and different in our March 2003 survey was that 28% said they are considering discontinuing earnings guidance as defined above. The reasons vary - the inability to
look ahead with any certainty in today's economy, a desire to focus analysts and investors on the long-term prospects of the company in order to get away from the fixation on
quarterly results, and some board audit committees are not comfortable with approving earnings releases containing guidance. (Under the Sarbanes-Oxley Act, the audit committee is
responsible for reviewing earnings releases, among other financial documents before being released.)
On the other hand, as companies are beginning to lose sell-side coverage, small and mid-cap companies, in particular, are reluctant to give up earnings guidance for fear of
accelerating the loss of research coverage. And, there are a substantial number of companies, which have sufficiently strong track records of predicting earnings, who believe
earnings guidance is important.
NIRI's position on the issue is that it is up to the company to do what it considers in its best interests. There are good reasons to continue providing earnings guidance.
There are also good reasons to stop it. But, above all, companies that stop providing earnings guidance should not stop communicating with Wall Street. In fact, if you talk with
the investor relations officers of companies that no longer provide earnings guidance, you'll find they are still providing guidance on business and industry trends that affect
their companies' earnings, qualitative statements about market conditions, estimates or forecasts of factors that drive their earnings and a range of other qualitative information
that may impact earnings - factors that most companies discuss in providing overall guidance.
But, I can't leave this subject without saying that the market's fixation on the so-called earnings "consensus" number (it's not a consensus but an arithmetic average of
analysts' estimates) caused the wrong behavior on the part of many companies that used questionable accounting practices to meet or beat the estimate. For many the stakes were
too high for failing to do so. This, in part, led to the situation today where companies have to work harder to restore investor confidence in their numbers.
So, however, we get there, if we could just focus the market on the longer-term prospects of companies and get away from the fixation on quarterly results, we'd all be better
off.
Contact: Louis M. Thompson, Jr., president & CEO, National Investor Relations Institute. He can be reached at [email protected]