Posts Tagged ‘Forecasting’

Altitude sickness, anyone?

July 13, 2016

WSJ 7-13-2016

Headlines like “Dow Presses On to Historic Peak” seem a little scary. Yet there it is, splashed across page 1 of today’s Wall Street Journal.

Being part of anything cyclical can bring its chills as well as thrills – because of that old saw about what goes up must … (well, you know, I don’t want to say it). We don’t know, of course, whether this is THE PEAK or simply a peak. And I can’t forecast worth a darn.

Not all that long ago, in the summer of 1979, Business Week‘s cover declared “The Death of Equities.” If you had taken that as a Buy signal and held on through the 1980s and 1990s, you would have done alright – check it out on the WSJ‘s graph.

But “Historic Peak” does make you think. Many of us work for companies that have shared in the market’s relentless, if bumpy – maybe historic – climb. The trends may look fine. But did we cause this rise in the market – or in our companies’ stocks? And what comes next?

My feeling is that all of us, especially investor relations people, need to stay a bit humble about trends and prospects.

© 2016 Johnson Strategic Communications Inc.

In 2012, embrace the uncertainty?

January 2, 2012

Happy new year. A chatty column in the Financial Times, “Three cheers for new year trepidation,” touches on a central issue for investor relations in 2012: How should companies communicate with shareholders about what we can’t foresee?

Citing the obvious risks in trying to predict what will happen in a fragile global economy, FT management editor Andrew Hill notes that many companies are simply waiting, hoarding cash, holding off from embracing any particular scenario. But, he adds, mere expressions of caution don’t do much for their investors:

As executives’ reluctance to commit themselves grows, so the appetite of outsiders to know about their future plans increases. Investors are now far more interested in the “outlook” section of the company report than in the backward-looking summary of the historic results. But in their public statements, most chief executives hide behind a “lack of visibility”, adding to the general nervousness.

Hill says CEOs should “embrace uncertainty” in 2012 while at the same time communicating what they can see in the current situation:

Business leaders need to count on their ability to be the one-eyed man in the land of the blind – a proverb recently recast by Richard Rumelt in his book Good Strategy/Bad Strategy: “If you can peer into the fog of change and see 10 per cent more clearly than others see, then you may gain an edge.”

So we should acknowledge to investors our uncertainty but then discuss what we do know: data on changes in our customers’ behavior, qualitative trends in the business, our own strategies for surviving and thriving in what could be difficult times. This may be the biggest messaging challenge for investor relations in 2012.
                                                              –
So how are you communicating in this environment of uncertainty?
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© 2012 Johnson Strategic Communications Inc.

Adding wiggle room to guidance

August 5, 2011

Are we in recession again? Weak recovery? Heading for Financial Crisis 2.0? No wonder more than a few CFOs and IROs have been wringing their hands over what guidance to provide investors as part of the second-quarter reporting season.

If you’re looking for an example of softening guidance by widening the range, Procter & Gamble provided just that today with its fiscal fourth-quarter results. For the new fiscal year, P&G forecast core EPS “in a range of $4.17 to $4.33, up six to 10 percent.” Fair enough. That’s not exactly fuzzy, but the range is a bit broader than P&G gave last year at this time (a 10-cent span in EPS, vs. 16 cents this year).

Market watchers commented on the change, as in The Wall Street Journal story headlined “P&G Outlook Reflects Jitters”:

P&G adopted a wider-than-normal range for its fiscal 2012 outlook, which encircled Wall Street estimates, calling for per-share earnings growth of 6% to 10%. The low-end is slightly below the consumer-product giant’s long-term goals for annual growth of high-single digits to low double-digit growth, largely on questions percolating through the global economy.

On P&G’s conference call, Chief Financial Officer Jon Moeller blamed a cloudy macro environment:

Our guidance ranges will be a little bit wider than normal this year, reflecting a broad policy uncertainty, ongoing high levels of volatility and market growth rates, input costs and foreign exchange, as well as uncertainty both upside and downside related to pricing across the portfolio.

So there you have it – big, sensible P&G is a pretty safe role model. Go ahead and add wiggle room to your guidance. We may all need it.

© 2011 Johnson Strategic Communications Inc.

Let’s think about year-end

July 1, 2010

Arrival of the second half, naturally I think, sets investors and investor relations people to thinking about year-end. We’re halfway through 2010, so we begin to ask, “What will the outcome of this year be, in earnings and other accomplishments? … or in disappointments?”

As an IR person in the US, I’ve always seen Fourth of July weekend as a kind of pivot for the year. Whether it’s the start of third quarter or the holiday picnics and fireworks that punctuate this time for you, here are some questions to contemplate:

  • What kind of year will 2010 be in your memory, and that of your shareholders, 2 or 3 years from now? Do your communications now reflect that tone?
  • More immediately, when you report second-quarter earnings in the next few weeks, how will you answer questions about full-year 2010 prospects?
  • What do the first-half trends tell you about likely sales, costs and earnings in the next 6 months?
  • Does your outlook include a second-half turnaround, and what evidence can you offer of its probability?
  • What accomplishments has management promised for 2010 that need to get accomplished in the second half? Or do you need to soften those projections?
  • Do the CEO and CFO plan any mid-course corrections? If so, when is the appropriate time to begin to disclose those to investors?
  • What tone and messages will your audience get in the 2010 annual report? Time to get started is coming – whether your “annual” is a robust piece full of image, strategy and performance, a plain 10-K, or something in between.

Sure, we have a few weeks to relax – except for reporting Q2 results and all the interaction around earnings time – before the real rush to year-end begins. But the onset of second half is a good trigger for starting the thought process.

© 2010 Johnson Strategic Communications Inc.

Analysts “still too bullish”

April 21, 2010

Most of us remember a decade ago, when the stock market bubble of the 1990s finished inflating and began to spring leaks. Nasty stories were everywhere of Wall Street analysts overselling the stocks they were paid to peddle to investors.

The bear market of 2000-02 led to legislative and regulatory efforts to “fix” equity research, separate the sell side from – well, selling – and bring trust back into the markets. Alas, that’s probably not something new laws can accomplish.

New evidence from McKinsey & Co. suggests the sell side is “still too bullish,” based on a study of earnings estimates for S&P 500 companies from 1985 to 2009. Somewhere in the DNA of the sell side, it seems, lurks a gene for salemanship.

Only two times over the 25-year period did actual earnings on the S&P 500 beat analyst estimates, three McKinsey consultants write in the Spring 2010 issue of The McKinsey Quarterly. Analysts have been “persistently overoptimistic,” typically forecasting S&P earnings growth of 10-12% a year, nearly twice the actual 6% growth. McKinsey concludes:

Exceptions to the long pattern of excessively optimistic forecasts are rare …. Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught  up with earlier predictions, do forecasts actually hit the mark.

There’s an obvious caveat emptor for investors in data like this. In fact, the market as a whole doesn’t believe the sell side: Actual price-earnings ratios on the S&P 500 are almost always lower than the implied P/E based on analysts’ forecasts, the consultants note.

McKinsey also sounds a cautionary note for corporate staffs: Don’t put too much confidence in the sell side when formulating your own company outlook. Base your outlook on what’s really happening in your business, not so much on Wall Street’s view from a distance:

Executives, as the evidence indicates, ought to base their strategic decisions on what they see happening in their industries rather than respond to the pressures of forecasts, since even the market doesn’t expect them to do so.

Easier said than done, of course. But investor relations professionals ought to keep this advice in mind when serving as a conduit for communications between Wall Street and senior management.

While we’re thinking about taxes

April 16, 2010

“Today is the first day of the rest of your taxable year.”

– Jeffrey Yablon, a Washington tax lawyer
who has compiled an extensive and amusing
collection of quotations on taxes and life

I know, I know – we’d like to forget about taxes now that we’ve survived the annual runup to April 15. But this post-deadline breather actually may be a good time to think about taxes and how they relate to our mission in investor relations.

Taxes on corporations and various aspects of business are bound to change – OK, I really mean bound to increase – in the coming years. IR people need to be looking ahead to understand the impact on our companies’ P&Ls.

The first round of disclosures came three weeks ago after health reform became law. A few companies disclosed that one change in the health law will cost them billions in additional taxes (see post on Disclosing ObamaCare’s impact). This caused a brief outrage and flurry of saber-rattling in Congress, until lawmakers thought better and canceled a hearing that would have grilled executives on the GAAP-required charges. That would have given business leaders a forum to testify on the actual costs of what Congress passed.

What’s next? Hard to say, but various changes are in the works …

  • New taxes under the 2010 healthcare law will impose costs on pharmaceutical companies, medical device makers, and health insurance companies …
  • Not to mention the cost of healthcare coverage requirements, which everyone’s still sorting out, including a $2,000 a head penalty for employers who don’t cover workers and an excise tax down the road on “Cadillac” health plans …
  • President Obama has proposed taking away foreign tax credits and deferrals for US companies, a potential $200 billion of additional revenue …
  • The president has proposed taxing large banks and financial institutions to pay for the bailout …
  • Unless something changes, the “Bush tax cuts” will expire at the end of 2010 for individuals – including both the 15% maximum capital gains tax and 15% maximum tax on qualified dividends. Higher marginal rates on stock-related income will affect shareholders; it’s hard to say how this tax increase might affect dividend policy or other ways of returning cash to shareholders.
  • Other taxing ideas are floated almost daily. As a non-accountant and non-politician, I won’t attempt to lay odds on the various proposals. But Washington is on the hunt for revenue – that much we know.

Already, the US imposes the second-highest corporate tax rate among the world’s industrialized countries – 39.1% in combined federal and average state taxes – according to 2009 OECD data cited by the Tax Foundation. (This site also has a state-by-state comparison of combined corporate tax rates.)

The effective tax rate – what companies actually pay after working the system – is the operative issue for disclosure, along with potential balance-sheet impacts of deferred tax assets or liabilities. The conservative Cato Foundation estimates the US effective tax rate at 36%.

You don’t hear many analysts or investors on conference calls asking about effective tax rates, but what kind of dollar impact would a 1 or 2 percentage point increase – or decrease – in tax rate have on your P&L? Put a calculator to it. Have a conversation with your company’s tax people. Write your congressman.

And consider the potential need for disclosure as new tax policies continue to take shape in Washington.

Happy first day of the rest of your taxable year!

© 2010 Johnson Strategic Communications Inc.

CFOs: The future looks hazy

August 1, 2009

The good news is chief financial officers at the world’s top companies are a tad more optimistic than last quarter about when recovery will kick in and start benefitting their businesses, according to the Duke University/CFOGlobal Business Outlook Survey” reported in the magazine’s July-August 2009 issue.

CFO Survey July-Aug 09

Duke/CFO survey 2009

The bad news is – well, let’s skip over the CFOs’ plans to continue cutting workforces and capital spending. Underlying the bad news are two findings:

  • Most CFOs do not expect the US economy to begin recovery at least until 2010. The breakdown: 43% see an upturn starting in 2009, 50% in 2010 and 7% in 2011 or later. No wonder companies are still cutting costs.
  • The No. 1 concern for CFOs within their own companies remains the ability (or lack of ability) to forecast results. That makes business planning difficult, not to mention forward-looking discussions with investors.

CFO devotes a separate article (“Imperfect Futures“) to troubles companies are having with forecasting. When it comes to predicting the direction of sales or earnings, many more companies are invoking the “u” word – uncertainty. Says CFO:

Forecasting, never an activity companies felt particularly confident about, has now become nearly impossible. Processes that once results in mildly imperfect visions of the future now produce wildly imperfect ones.

The magazine cites some creative approaches, including collaborative efforts to identify new risks companies face in the marketplace, internal forecasting of which suppliers will survive or fail due to the recession, and prediction markets to draw out managers’ true feelings about the results they can deliver going forward.

For investor relations, the hazy economic future and its implications most likely will feed a continued trend away from companies providing specific earnings guidance. It’s even more important, then, for IROs to understand and communicate qualitative information on the key drivers – internal or external – of sales, costs and earnings.

‘Macro’ drives ‘micro’

July 1, 2009

The headline of the day, in my book, comes in a post on the Wall Street Journal Real Time Economics blog marking the arrival of July 1:

It’s The Second Half — So Where’s The Recovery?

Investor relations professionals may feel the same ambivalence today, as we enter the back half of the year wondering about macroeconomic trends and seeing the big picture’s influence on our companies’ fundamentals (and stock prices).

Investors are trying awfully hard to be there waiting on the dock when the good ship Recovery pulls in. So the market rallies … when Ford’s sales drop only 11% (the best of the automakers) … when manufacturing shrinks, but less than it has been declining for the past year … when unemployment keeps rising but probably at a slower pace. In a market eager to be hopeful, exuberance seems to come cheaply.

Anyway, the second half has arrived – and  let’s hope recovery really is at hand.

One of the challenges of investor communication is to explain how the business cycle works its way through industry and company-specific performance. We need to offer insight into how our P&Ls are affected by changes in product demand, sales volumes, pricing power, cost of materials and so on – and the timing of these changes within the economic cycle. Part of this is saying which “macro” metrics matter to our businesses – and providing the data for our shareholders.

IR people should be students of the macro environment (among other things). Three good sources on the dismal science are blogs that aggregate and report the daily economic news: Calculated Risk, The Big Picture and WSJ’s Real Time Economics. Following all three, of course, could be too dismal for most of us.

Another challenge for IR is to understand how our companies diverge from the economy as a whole. We must explain actions we’re taking to outperform, smooth the cycles or propel the recovery of our P&Ls beyond the macro trend.

The next couple of quarters promise to be interesting. Happy H2!

Majority still offer guidance

May 19, 2009

Despite the wild economic ride we’re on, most companies haven’t stopped providing forward-looking guidance on earnings, according to a survey by the National Investor Relations Institute.

In an Executive Alert published May 18, NIRI says the practice of guidance continues to decline – but not very fast:

One might assume that the recent dramatic economic decline would necessarily result in a meaningful decline of public company guidance. Counterintuitively, NIRI member respondents have not abandoned guidance in large numbers.

A few highlights from the 2009 survey of 515 NIRI members:

  • 60% say they do provide earnings guidance, down from 64% a year ago. The ranges companies provide are wider amid economic uncertainties.
  • 50% of the companies offer guidance on revenues, also down a bit.
  • Guidance on annual expectations is most popular, with quarterly updates.
  • The most common reason for offering guidance is as a way to keep sell-side expectations in line with what seems reasonable to companies.
  • My own feeling is that the decision “To guide or not to guide?” is individual to each company. The answer depends on needs of your investors, comfort level of your management and board, predictability of your business and so on. In some cases, offering qualitative or quantitative views on earnings drivers such as trends in key markets in which you compete may be as useful as an EPS range.

    Point is, most investors assess the value of your stock based on some forward-looking estimate of earnings or cash flows – so IR needs to provide as much guidance as the company is comfortable providing.

    A company’s policy on guidance, NIRI suggests, should include decisions on metrics that management wants to give forward-looking information on, time frames for that guidance (annual, quarterly, monthly), and frequency of communicating guidance. NIRI also offers links to supplemental information for members (see the Executive Alert).

    So there it is – some guidance on guidance.

    Lacking visibility in the corner office

    January 21, 2009

    What worries Chief Financial Officers most about their companies? Inability to forecast results is the No. 1 concern internally, according to the CFO Magazine/Duke University Global Business Outlook survey. Results are reported in the January 2009 issue of CFO (online here).

    That lack of visibility, of course, makes life hard for investor relations: IR can offer less forward-looking information in the current malaise.

    Externally, weak consumer demand and the credit crunch are causing CFOs to lose the most sleep. A majority of 1,275 finance officers polled aren’t even expecting recovery to start at least until the fourth quarter. Some 39% can’t see a recovery beginning until 2010 or later.

    Albeit without much faith in their own forecasts, CFOs are predicting an average 8% drop in earnings in 2009.

    In response, the finance execs expect to reduce work forces 5% on average this year. They plan to cut capital expenditures more than 10%, marketing and advertising 7%, and IT spending 4%. Specific plans along those lines might provide forward-looking tidbits that management is willing to share – even as the overall earnings outlook seems more elusive.

    Characterizing the uncertainties – the lack of visibility – may be more valuable to investors than giving guidance that turns out to be wrong.