New Study on Guidance Shows Deep Concern over Consensus Earnings and Short-term Volatility
The discussion of company guidance vs. meeting consensus estimates is hardly new. Certainly, in the mid-2000’s (thanks, Enron!) the practice or management publishing forward guidance took a evident shift from quarterly to annual, with updates as materially needed.
The benefits to issuing formal financial guidance is that it can be an effective tool for helping potential investors and shareholders to better understand market dynamics, a company’s growth and profitability expectations and the sources of potential troubles and opportunities within a fiscal year. Beyond showing “a number,” an earnings guidance mosaic will present shareholders some tactile measure on how a corporation is goaling and tracking themselves towards building shareholder value. Forward guidance gives investors and sell-side analyst the haven that there is a documented business model focused and predictable for building long-term value.
But Wall Street still judges you quarterly.
And that still worries corporate management reports a new Rivel Research Group study of 976 North American and European companies. A major finding is that when it comes to consensus data established by data aggregators (ie First Call, FactSet), 76% of management teams in North America(and 53% in Europe are “somewhat” to “very concerned” about meeting quarterly consensus earnings and revenues established by consensus data aggregators. Management teams are equally concerned about the short-term volatility that can occur when results do not align with consensus.
Verbatim comments from IROs and corporate management:
“We are always conscious of consensus, and know that our investors use it to benchmark earnings.”
“By giving guidance on the revenue margin it enables the analyst community to model more accurately their forecast numbers and this helps to prevent having real outliers in the consensus numbers.”
“Several years ago, the company missed revenue estimates and guidance multiple times. The guidance policies since that time have been conservative (under-promise and over-deliver) based on many conversations with the buy-side.”
“We moved to full-year EPS guidance as a means of narrowing the range of estimates on our stock and keeping sell-side engaged to update their models when necessary.”
“We try to make sure on certain industry-wide metrics (capital efficiency, production growth %, etc.) that we keep up to the top players according to analysts’ estimates.”
“Where they were having difficulty making estimates, we provided additional guidance points to improve their ability to forecast as well as enhanced the actual detail we report quarterly.”
“We provide more guidance now than we used to in order to reduce the range of estimates.”
“As the current environment punishes companies for missing earnings estimates in both the media and investor perception, we have felt the need to provide guidance to level set on expectations. In addition, our company is going through substantive change in the business that is very challenging to model in the near to medium term. This volatility exacerbates the issue with missing expectations.”
Rivel concludes that, while we know that meeting consensus is important, the study results really demonstrate the necessity of managing expectations directly with your shareholder base, managing all sell-side expectations and making sure that sell-side/data aggregator projections are correct and in-line with the company’s guidance.
I would add that to maintain good communications with analysts and investors, beyond (or instead) of issuing an earnings guidance number, IROs explore alternate methods to communicate that will not sacrifice transparency. Rather than providing raw quantitative quarterly earnings guidance, companies can highlight more qualitative information regarding business fundamentals, the drivers affecting those fundamentals, results, trends, market forces, the general business climate and the company’s intermediate and long-term goals. Remember, SEC rules and regulations require that management discuss in its filings the known trends and uncertainties that have impacted historical results and are likely to impact future periods. Provided properly, this enhanced qualitative disclosure should increase transparency and provide analysts and investors with the mosaic they need without placing undo emphasis to make forecasts and then meet these short-term estimates and goals… conceivably at the expense of long-term goals or creating exasperating and fluctuating short-term environment.
For more information on the Rivel study, please contact Sean McCurdy at [email protected].
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