"Everything You Ever Wanted to Know About Earnings"-Guiding the Numbers
Friday, April 20, 2007SUSIE GHARIB: As we reported at the top of tonight's program, earnings are a critical factor for Wall Street. One key element in reporting earnings is guidance, a company's own forecast of its performance. Guidance numbers are eagerly awaited by investors but increasingly, companies are questioning the benefit of short-term targets. Tonight as we wrap up our series "Everything You Ever Wanted to Know About Earnings," Suzanne Pratt looks at the issue of quarterly earnings guidance.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: On General Mills earnings conference call last month, company management gave Wall Street plenty of financial information. But, one thing General Mills CFO Jim Lawrence did not provide was quarterly earnings guidance. That's the controversial practice of a company making public predictions about its future earnings per share. Lawrence says focusing on those specific numbers is bad idea.
JAMES LAWRENCE, CFO, GENERAL MILLS: I think what companies need to do is to drive performance for the shareholders, to drive real economic wealth and that is not necessarily represented by EPS, be it for the year or the quarter and to the degree that companies have setup a quarterly target of EPS and then tried to hit that, I think that's a mistake.
PRATT: General Mills is part of a growing list of large companies that do not give quarterly earnings guidance. Some the biggest names include Coca-Cola, Walt Disney and ExxonMobil. According to the National Investor Relations Institute, the number of companies that supply guidance slipped to 66 percent last year from 71 percent in 2005. Guidance became a corporate habit in the late 1990s after Congress passed legislation protecting companies from liability for performance forecasts. But, in the last few years, many companies have concluded the quarterly practice does more harm than good. CFA Institute managing director Kurt Schacht says the problem is that guidance encourages obsessive attention to short-term goals.
KURT SCHACHT, MANAGING DIRECTOR, CFA INSTITUTE: The company will tell you specifically they should make $0.06 over the next quarter, a range of what the earnings should be over the next quarter and then they spend the next 90 days doing everything they possibly can to make sure that they are at or above that earnings guidance. PRATT: Other experts believe doing that breeds bad behavior in boardrooms and accounting departments. Although an extreme case, WorldCom is a frequently cited example of executives crossing the line to hit their numbers. Nevertheless, quarterly guidance does have supporters in corporate America and on Wall Street. They contend no guidance means more earnings surprises and leads to greater stock price volatility. Intel, which released earnings earlier this week, does not make EPS projections. But, it does provide quarterly revenue guidance. CFO Andy Bryant explains why.
ANDY BRYANT, CFO, INTEL: Intel believes that what we can do to help our owners, for the general public understand the company is a positive. We think we can best do that if we're talking to shareholders, potential shareholders than if we're keeping quiet about it. Certainly I can see positive and negatives, but we clearly believe the more we can share about our business, the better off everybody will be.
PRATT: BMO Capital markets analyst Victor Lazarovici says there's nothing wrong with a company going out on a limb about its future.
VICTOR LAZAROVICI, METALS ANALYST, BMO CAPITAL MARKETS: I thing guidance is helpful and I think it also makes management focus on the short term. It's helpful to analysts and the investing public because you get a sense of where management thinks the business is going.
PRATT: If a company doesn't give guidance, Wall Street analysts will still make their own projections. Lehman Brothers retail analyst Alan Rifkin admits he has to work harder to evaluate those companies that don't supply guidance.
ALAN RIFKIN, RETAIL ANALYST, LEHMAN BROTHERS: It's a little more difficult in that you're not getting your hand held, but that's really where the opportunity lies in that the people who, the analysts who uncover more stones and do more due diligence on their own quite often are ahead of the folks who are solely reliant on company management telling you exactly what they would earn.
PRATT: Guidance is just one aspect of earnings season. As we learned this week, investors should closely scrutinize earnings reports and listen to what companies have to say about them. Armed with that information, investors should be able to make better investment choices. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
