Should a company give 'earnings guidance'?

[winner69]

Root on the FPA thread said 'Would have been nice to see some profit guidance before the AGM, maybe the crystal ball is a bit cloudy.'

I'd rather companies not give earnings guidance .... as they are only taken by lazy analysts .... have a bit added to them .... that then becomes the target management strive to get to (or else) .... but the target keeps going up ... so mangement strive even harder ..... until they invariably do silly things to achieve the unrealistic analyst targets .... doing things not good for the long term good and sustainability of the company .... and in some cases go broke chasing these unrealistic targets (which managaement didn't set in the first place)

Look at any analyst report and generally projected profits increase at rate higher than revenues ... for ever .... I doubt whether any company has ever achieved for instance 5% revenues gwoth pa and double digut ptofit growth over an extended period of time.

Instead of guidance a company should manage the markets expactations by only talking about how they make money and the value drivers of sustainable profits .... and then any decent analyst would have to do some real work to come up with an intrinsic value.

There are even gurus who say that a company should tell the analysts if they think there valuation is to high .... and reiterate the profit drivers and make them do it again.

Essentially saying that company management should be driving the company forward .... and not analysts or the market driving the company do do silly things

A guy called Joseph Fuller from Monitor Group has some strong views on thia

[winner69]

Interestingly Buffett is quoted as

"We do not want t maxmise the price at which Berkshire shares trade. We wish instead for them to trade in a narrow range centred at intrinsic business value .... (we) are bothered as much by significant overvaluation as significant undervaluations"

[Paper Tiger]

Armed with a glass of Archipelago Brewing Company Extra Stout (http://www.apb.com.sg/brand-KeyBrands.html)* I respond:

You have provided a perception of a problem, namely that some analysts are not worth the reports that they write and that some company managers [and by implication, board of directors] are lead by the over-optimistic expectations of said analysts, leading to bad business decisions. You have then provided a possible solution, that of a company not providing earnings guidance.

I am firmly of the opinion that it is the role of any company whether listed or not to communicate with it shareholders in an open, honest and truthful manner to keep those shareholders informed of the state of the company. While that does not necessarily require the issue of an 'earnings guidance' per se, shareholders should be informed if there is expected to be any significant deviation from the general perceived direction or profitably of the business. We have witnessed such behaviour from Virgin Blue this week.

The essential problem that you present is I believe that of weak company management and governance coupled with unrealistic and short sighted expectations from analysts, shareholders, the press and uncle Tom Cobbley and all (http://en.wikipedia.org/wiki/Uncle_Tom_Cobley).

Good company management, whether it issues earnings guidance or not, will not be diverted from their course by the uninformed expectations of the masses but should be able to explain why their strategy is best for the company and also be able to admit that a change of course is necessary due to changed circumstances or their own mistake (and everybody makes mistakes occasionally).
If they merely go with the flow then they are not worth the salary and bonuses they receive, after all, any idiot can do that.

In summary, let companies issue earnings guidance, but be aware of those who are lead by those who have unreal expectations.
Make your decision of whether you want to invest in them and and under what conditions with this knowledge.

regards
Paper Tiger

*You may have to admit to be grown up before the link works

[winner69]

Good company management, whether it issues earnings guidance or not, will not be diverted from their course by the uninformed expectations of the masses but should be able to explain why their strategy is best for the company and also be able to admit that a change of course is necessary due to changed circumstances or their own mistake (and everybody makes mistakes occasionally).
If they merely go with the flow then they are not worth the salary and bonuses they receive, after all, any idiot can do that.

In summary, let companies issue earnings guidance, but be aware of those who are lead by those who have unreal expectations.
Make your decision of whether you want to invest in them and and under what conditions with this knowledge.

regards
Paper Tiger

*You may have to admit to be grown up before the link works

Great response PT

The bit of your post I have left is eactly the essence of what I was trying to get at - managament of good companies should not 'led' by analysts and market expectations .... as you say 'they should be able to explain why their strategy is best for the company' and get on and implement the appropriate startegies ... and manage the expectations of the market.

This is far different from being 'led' eh

No doubt you can come up with your own examples of where companies ahve done things necause the market 'demanded' they grow and suffered the consequences.

On the other hand your favourite Mainfreight does what we are both saying, A clear strategy which they just get on and implement without little fuss .... and did they give any guidance the other day ...NO ,,, and were you unhappy they didn't ... NO ... because unless MFT tell us sometime different next years result will also be pretty good as well ... and probably the year after

Disclosure ... well thats another story

[Lizard]

Not being led sounds simple. More difficult to avoid being coerced.

The relationship between analysts and companies contains symbiotic elements. Analysts can build wealth for clients (and themselves) when companies maximise profit growth - particularly on a short term basis. Companies rely on analyst support to enable them to raise new capital without excessive dilution. Buy-side analysts may also represent major shareholders.

Spurned analysts can be vicious. Share price volatility will suit them fine, no matter if it hurts the company. And they have the ability to influence it. Personally, I have twice been told by brokerage houses that they ceased covering a company or did not recommend it to clients because "they're difficult to talk to"... which seemed to mean that the analyst couldn't be sure of avoiding embarrassment through getting it wrong. This could be regarded as a disclosure issue, but in my view, both companies had publicly issued plenty of guidance on strategy and appeared to be adhering to it. The issue, perhaps, was analysts wanting to be spoon-fed more specific information before it got to market. Both companies suffered from a long period of illiquidity and falls in share price which were not relative to earnings.

Hypothetically, a depressed share price can limit options for growth, since new equity would result in excessive dilution. It might also affect debt-funding if there are covenants relating to market value. It can destroy the value of management options or bonus shares - thereby nicely punishing those managers who've been unco-operative.

To varying degrees, managing the relationship with analysts is a necessary evil for any listed company that wishes to grow through new capital of some form. For management to avoid being influenced by analysts may be more difficult than it first seems.

[h2so4]

I'm easy on whether or not a company should issue guidance.

If a company issues guidance it becomes a historical event, and one we can look back on and say whether or not they achieved their guidance. This then becomes a reflection on how good or bad management is?

If on the other hand an analysts jumps on it and adds a bit to it, then maybe they are trying to sell us something.

It's all part of the hype and bull that we as investors have to sift through.

[percy]

I suppose I am changing the subject but I put a lot of weight on the chairman's outlook at AGMs.

[Paper Tiger]

Not being led sounds simple. More difficult to avoid being coerced.

The relationship between analysts and companies contains symbiotic elements. Analysts can build wealth for clients (and themselves) when companies maximise profit growth - particularly on a short term basis. Companies rely on analyst support to enable them to raise new capital without excessive dilution. Buy-side analysts may also represent major shareholders.

Spurned analysts can be vicious. Share price volatility will suit them fine, no matter if it hurts the company. And they have the ability to influence it. Personally, I have twice been told by brokerage houses that they ceased covering a company or did not recommend it to clients because "they're difficult to talk to"... which seemed to mean that the analyst couldn't be sure of avoiding embarrassment through getting it wrong. This could be regarded as a disclosure issue, but in my view, both companies had publicly issued plenty of guidance on strategy and appeared to be adhering to it. The issue, perhaps, was analysts wanting to be spoon-fed more specific information before it got to market. Both companies suffered from a long period of illiquidity and falls in share price which were not relative to earnings.

Hypothetically, a depressed share price can limit options for growth, since new equity would result in excessive dilution. It might also affect debt-funding if there are covenants relating to market value. It can destroy the value of management options or bonus shares - thereby nicely punishing those managers who've been unco-operative.

To varying degrees, managing the relationship with analysts is a necessary evil for any listed company that wishes to grow through new capital of some form. For management to avoid being influenced by analysts may be more difficult than it first seems.

Yes, it is not easy being management, go with the analysts and when you fail to meet the over-inflated expectations get set upon by the same pack of hyenas. Or do your own thing and suffer that anyway.

But as far as i am concerned it is better, in the long-term, to stick to what you believe is best.

regards
Paper Tiger

PS: I may write a book about my experiences (of working in various companies), but I am sure no one will believe half of it.

[root]

W69

In the situation of FPA I can't help but feel that the lack of guidance is driven by the fact that the company is struggling to identify the following:

How the various global sales markets will recover.
How to forecast production to meet the unknown sales targets.
How to structure the labour force to meet the forecasts.
What new products to try and introduce and when.

My comment reflects the uncertainty of the various sales markets over the next 6 months as opposed to an indictment of FPA for not issuing guidance, FPA have always appeared to be solid with their reporting and in contrast to NPX obeyed all the rules when banking covenants were breached last year. To me it definitely would have been more advantageous to my portfolio to see a rosier picture painted. :)

[h2so4]

W69

In the situation of FPA I can't help but feel that the lack of guidance is driven by the fact that the company is struggling to identify the following:

How the various global sales markets will recover.
How to forecast production to meet the unknown sales targets.
How to structure the labour force to meet the forecasts.
What new products to try and introduce and when.

My comment reflects the uncertainty of the various sales markets over the next 6 months as opposed to an indictment of FPA for not issuing guidance, FPA have always appeared to be solid with their reporting and in contrast to NPX obeyed all the rules when banking covenants were breached last year. To me it definitely would have been more advantageous to my portfolio to see a rosier picture painted. :)

Faced with uncertainty root, you always have the option of selling and moving on.

[percy]

W69

In the situation of FPA I can't help but feel that the lack of guidance is driven by the fact that the company is struggling to identify the following:

How the various global sales markets will recover.
How to forecast production to meet the unknown sales targets.
How to structure the labour force to meet the forecasts.
What new products to try and introduce and when.

My comment reflects the uncertainty of the various sales markets over the next 6 months as opposed to an indictment of FPA for not issuing guidance, FPA have always appeared to be solid with their reporting and in contrast to NPX obeyed all the rules when banking covenants were breached last year. To me it definitely would have been more advantageous to my portfolio to see a rosier picture painted. :)

I think the company would have to be nuts to give guidance for the reasons you have given.What we do know is that they have spent $48 mil on capital expenditure and are prepared to spend 7%of revenue,ie 35.3mil on R&D.Great company,well managed,good products in the growing health sector is always going to be a good investment.

[shasta]

Root on the FPA thread said 'Would have been nice to see some profit guidance before the AGM, maybe the crystal ball is a bit cloudy.'

I'd rather companies not give earnings guidance .... as they are only taken by lazy analysts .... have a bit added to them .... that then becomes the target management strive to get to (or else) .... but the target keeps going up ... so mangement strive even harder ..... until they invariably do silly things to achieve the unrealistic analyst targets .... doing things not good for the long term good and sustainability of the company .... and in some cases go broke chasing these unrealistic targets (which managaement didn't set in the first place)

Look at any analyst report and generally projected profits increase at rate higher than revenues ... for ever .... I doubt whether any company has ever achieved for instance 5% revenues gwoth pa and double digut ptofit growth over an extended period of time.

Instead of guidance a company should manage the markets expactations by only talking about how they make money and the value drivers of sustainable profits .... and then any decent analyst would have to do some real work to come up with an intrinsic value.

There are even gurus who say that a company should tell the analysts if they think there valuation is to high .... and reiterate the profit drivers and make them do it again.

Essentially saying that company management should be driving the company forward .... and not analysts or the market driving the company do do silly things

A guy called Joseph Fuller from Monitor Group has some strong views on thia

Aren't companies meant to notify the market if there profit result is +/- 15% over any previous guidance (incl last year results?)

[macduffy]

Aren't companies meant to notify the market if there profit result is +/- 15% over any previous guidance (incl last year results?)

They are certainly required to correct any "misinformation" in the market, eg a published analyst's profit estimate which the compamy knows to be wide of the mark.