Markets & Stocks
Good riddance to guidance?
Several major companies are clamming up when asked about their near-term earnings prospects.
January 28, 2003: 2:06 PM EST
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - What do Coca-Cola, McDonald's, AT&T and Sun Microsystems have in common...besides being well-known brand names that have recently fallen on hard times?

The four companies all recently told investors they are no longer going to provide earnings guidance. And that's created a maelstrom of controversy on Wall Street.

Most companies give investors periodic updates about what they expect to earn. Analysts tend to base their estimates on such guidance. So without guidance from Wall Street, will earnings estimates be as reliable?

Brooke Wagner, senior director at investor relations consulting firm Citigate Financial Intelligence, says that going forward, estimates for companies like Coke and AT&T could wind up being too low. "There will be an incentive for analysts to be more conservative and lowball estimates," says Wagner.

That's because analysts risk looking foolish by predicting earnings figures that companies fail to meet, Wagner says.

And that bias could have a major effect on the stocks of companies that don't give guidance since one popular way of valuing stocks is by using consensus earnings estimates. So reduced estimates would make these stocks more expensive.

Is the long-term focus a convenient excuse?

But the companies have argued this shouldn't be a concern; they are choosing to focus on long-term strategy instead of short-term performance, they say. There's obviously nothing wrong with that.

Legendary investor Warren Buffett has made it publicly known he is not a fan of companies managing for the short-term. And it's worth noting that Coke is a company that Buffett has a stake in. Two other Buffett investments, Gillette and the Washington Post, don't give guidance either.

Still, skeptics point out that few companies were taking this moral high road during the bull market when there was plenty of good news to report.

"When companies have positive things to say they want to get it out as soon as possible," says Mitchell Zacks, director of research for Zacks Investment Research, a firm that tracks analyst estimates. "This is a way for large companies to manage negative information."

The biggest criticism of companies giving short-term earnings guidance during the bull market was that companies would often underpromise to analysts and then overdeliver, says Zacks. Beating earnings estimates became routine...and therefore not as meaningful.

But it's harder to play that game now. It's one thing to promise that earnings will increase by 30 percent and then report 40 percent growth. "In this environment, if you want to underpromise you have to tell investors that things are really really bad," Zacks says. "So instead of giving negative information, they're giving no information."

Bad news better than no news

To be sure, it's been increasingly difficult for companies to pinpoint when the long awaited pick up in corporate spending will take place. So, it makes sense for companies to not provide an earnings target in a time of such uncertainty.

"Let's face it. Analysts as well as corporate America are having a difficult time forecasting next week," says Joseph Kalinowski, chief investment officer for brokerage house Ehrenkrantz King Nussbaum.

But some companies have found ways to give guidance without totally clamming up. Intel, for example, does not give earnings forecasts but it does provide ranges for revenues and gross margins. So, analysts have some short-term oriented numbers to work with.

Wagner says he sees no problem with companies preaching to investors to not get obsessed with one quarter's results. But he says that shutting the flow of information is not the solution. People buy stocks, after all, based in large part on how they think the company will do in the future.

"Companies are saying 'Look at our long term strategy and vision.' That's fine. But I do want to measure the progress management is making and how well they're executing. Give investors ranges so they can make a more informed decision," Wagner says.

Will other companies start to push the mute button on earnings guidance? Probably. But once the economy improves, it's highly unlikely companies will want to keep quiet.

"When things are good, there's nothing like getting up in the morning, issuing that press release and watching the stock pop," says Kalinowski.  Top of page

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