Posts Tagged ‘Guidance’

Is ‘guidance’ all there is?

November 13, 2013

Providing financial guidance has become so common – NIRI says 76% of public companies offer forward-looking financial guidance – that investor relations professionals don’t stop to think much about it. But an investment banker in the pharmaceutical industry notes increasing frustration with investors and analysts who obsess on guidance.

In a piece called “The Tyranny of ‘Guidance’,” Michael Martorelli of Fairmount Partners tells readers of Contract Pharma that he’s hearing more questions on conference calls seeking clarification or expansion specifically on management’s guidance for near-term financial results – as opposed to penetrating questions seeking insight into fundamentals or trends:

If you thought all analysts developed their own estimates for the revenue and earnings paths of the companies they follow, welcome to the post Sarbanes-Oxley world of Wall Street research.

Before Sarbanes-Oxley, Martorelli notes, sell-side analysts were committed to building in-depth knowledge of  companies and industries. Investors and corporate managements came to respect the best analysts, and the work of analysis was highly valued.

Post-Sarbanes, of course, the mandate to give the same information to everyone at the same time often takes the form of guidance. And market participants, Martorelli says, can put too much value in near-term numbers. They’ll ask, “Why didn’t you raise your guidance this quarter? Why is the range of your guidance so wide? Why did you lower (or raise) only the top (or bottom) end of your guidance?”

When evaluating the future financial results of a company … too many investors rely more on management’s guidance than on their own independent analysis of the company, the industry, and the trends.

The legal structure is what it is, but companies can perhaps affect the tone of the conversation by focusing what we talk about on the fundamentals … what is really changing in our businesses, growth drivers, challenges and the strategies our companies are executing. After all, we really outperform not so much by beating “guidance” as by beating the competition to create real value for shareholders. It’s the big picture, not the pennies for next quarter.

What’s your take on guidance? Has it taken over the conversation?

© 2013 Johnson Strategic Communications Inc.

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Guiding expectations: Of course we do

May 9, 2013

It’s as close as possible to unanimous: 97% of investor relations professionals say their companies attempt to manage expectations of shareholders, according to a survey of corporate members of the National Investor Relations Institute (NIRI).

No surprise, really. The results published today by NIRI just affirm the definition of IR as cultivating accurate understanding among investors of a company’s business, performance and prospects – communicating all that goes into valuing a stock.

IROs said the biggest focus (61%) is on guiding expectations for the current year, with smaller numbers of companies focusing on longer-term expectations.

What approach do companies use to manage expectations? Some 70% release financial metrics such as goals for revenue, margin or earnings; 27% offer “micro” industry-level metrics; and 22% give “macro” business-environment expectations.

Most CEOs and CFOs know instinctively that their job includes painting the clearest possible picture of the direction and prospects of the business. Exactly how to manage  expectations varies greatly from company to company – and executive to executive. You’ll find details and examples in the NIRI survey – and other sources.

As to the imperative of communicating with the market, it’s unanimous: We all do.

© 2013 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.

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.

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.

    Let’s stay forward-looking in ’09

    January 6, 2009

    One thing investor relations professionals (and finance executives) should work on during 2009 is our ability to look into the future, forecast likely or possible business outcomes, identify the risks … and communicate that forward-looking perspective.

    My fear is that companies, stung by the financial calamities of 2008, will shrink from providing any forward-looking information. This is not helpful for investors – and could damage capital market relationships.

    CFO Magazine encouraged finance chiefs to retool their forecasting abilities (see “Future Tense” story in December issue):

    Forecasts of 2008 revenues and profits have missed the mark substantially at many organizations. That’s not remarkable, given that the speed and severity of the third-quarter collapse caught nearly everyone off guard. …

    The credit crisis and the downturn in world economies may offer a useful lesson: forecasting can’t be just about number-crunching. Static spreadsheets filled with hundreds of line items that represent best guesses from operations just won’t cut it if a company hopes to produce forecasts that aid quicker, fact-based decisions under stress.

    Nor, we might add, will forward-looking statements to investors cut it if they fail to examine and disclose assumptions about economic conditions, key drivers of the business, and risks to the expectations.

    It’s understandable if a company wants to say, amid the current turmoil, we simply cannot predict earnings or what will happen in the economy. EPS ranges and CEO/CFO “comfort levels” seem retro, anyway.

    But a company can provide valuable perspective by defining some scenarios for demand and other key business drivers. We can describe, at least directionally, what these assumptions mean to results going forward.

    Most importantly, we can spell out management’s strategy and explain how it will maximize value for shareholders, even if difficult conditions persist.