Capital Markets

Merrill: Ditch Guidance

Merrill Lynch's chief researcher joins others on Capitol Hill to argue against quarterly earnings guidance.
Marie LeoneMarch 30, 2006

A veteran Merrill Lynch analyst told a Congressional panel yesterday that public companies should stop issuing quarterly earnings guidance. “Merrill Lynch believes it would be in the best interests of investors if companies dropped quarterly earnings guidance,” testified Candace Browning, head of the firm’s Global Securities Research and Economics.

Browning joined several other government and industry representatives who gathered to give testimony before the House Committee on Financial Services in a day-long hearing on “Fostering Accuracy and Transparency in Financial Reporting.” She reiterated the position of others who oppose a heavy reliance on quarterly guidance — including the U.S. Chamber of Commerce and CFA Institute — noting that quarterly earnings are easily “tweaked,” and emphasizing that companies provide both the “measurement stick and the expected outcome.”

Browning noted that Merrill analysts are advised not only to heavily discount earnings guidance, but to analyze what the guidance says about management. For example, Browning cited managers that boasted meeting or beating their guidance “56 out of the last 59 quarters. That this metric is carefully tracked shows that beating the guidance is what is important, and the guidance is clearly not accurate and should be heavily discounted.”

She also noted that earnings guidance rarely includes significant non-operating items, such as write-offs or restructuring charges, which provide insight into management’s prior decisions about capital allocation.

Browning’s comments were echoed by other witnesses, including Rebecca McEnally, Director of Capital Markets Policy for the CFA Institute Centre for Financial Market Integrity. McEnally noted that in an informal survey of the CFA Institute’s membership, three-quarters said quarterly earnings forecasts should stop, though almost all said they would like more information on “fundamental, longer-term drivers of the business.” Based on those results, observed McEnally, “we conclude that our members find little value in the current earnings guessing-game, but they would value clear, timely information on the basic economic factors that will affect the company and its prospects.”

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