Cash Management

Mum’s the Word

Several companies have decided to forgo quarterly earnings guindance, but a code of silence may not be for everyone.
Joseph McCaffertyMarch 1, 2003

In late January, McDonald’s Corp. announced it lost $344 million in the fourth quarter — its first quarterly loss ever and more than four times greater than it had forecast just five weeks earlier. The world’s largest restaurant owner then said it was bagging future earnings guidance, at least for 2003.

“We have learned over the last year that we are not very good at making predictions, so we decided to get out of the predicting business,” lamented CFO Matthew Paull during the company’s quarterly conference call. “We are going to focus our entire organization on the long term and try to take the focus off the short term.”

The decision comes on the heels of a similar conclusion by The Coca-Cola Co. and AT&T Corp. to forgo quarterly earnings guidance in an attempt to end the “nod and wink” game played with analysts. “We are quite comfortable measuring our progress as we achieve it, instead of focusing on establishing and attaining public forecasts,” says Coke CFO Gary Fayard.

Others are likely to follow. “It’s a trend you will see a lot more of,” predicts Christian Hodges, co-founder of Ashton Partners, a Chicago financial-communications firm.

Proponents say the move will force analysts to do a better job studying companies. “It’s a great decision for Coke,” says Hodges. “It frees them to give more long-term, qualitative information.” He adds that less-specific guidance could also limit securities suits.

Not everyone is convinced, though. Chuck Hill, director of research for Thomson First Call, a financial-information firm, says the move could backfire. “If anything, it could make the focus on the short term worse,” he argues. Hill speculates that less guidance will lead to more-frequent and larger earnings surprises, adding volatility to stock prices. “Everyone will be tuning in each quarter to hear the big surprise,” says Hill. Instead, he advises firms to continue to give conservative guidance they are confident in. “Don’t make guesses,” he chides. “But let the facts hang out.”

Hodges agrees that a code of silence is not for everyone. “Smaller companies or those going through significant transition need to do more hand-holding with Wall Street,” he says.