Risk & Compliance

Guidance Has Its Rewards

Tempted to give public earnings predictions a rest? It could come at the cost of a stock-price drop.
Kate O'SullivanSeptember 1, 2009

While the Dow’s dismal performance in the first part of 2009 may have tempted many CFOs to go incommunicado, those who fought that impulse were rewarded: a new study from investor-relations firm Sharon Merrill Associates and research firm eventVestor finds that companies that provide earnings guidance and preannounce earnings surprises realize superior stock-price performance compared with firms that don’t.

The study found that companies that provided guidance performed better than those that did not even when their actual earnings missed analysts’ estimates. When the companies exceeded analysts’ expectations, they outperformed other companies that also did better than expected but did not provide guidance.

Similarly, companies that provided early warnings when they expected to miss earnings estimates experienced better returns than companies that failed to preannounce a miss. “We were very surprised by that,” says Maureen Wolff-Reid, president and partner at Sharon Merrill, adding that many executives think their companies will be punished twice: once when they announce an impending miss and again when they post actual results.

Many big companies — including Unilever, AT&T, and Gillette — have recently pulled back from giving quarterly earnings guidance. But Jeffrey Morgan, president and CEO of the National Investor Relations Institute, says the Sharon Merrill report shows how much today’s skittish investors value transparency. “The more you allow people to see what is going on in your company, the more you are rewarded, or the less you are harmed,” he says. Many executives at smaller firms also feel that giving guidance is essential to receiving analyst coverage.

Michael Shea, CFO of Mac-Gray, an operator of institutional laundry facilities, says that while his management team “went around and around” on the issue, it ultimately decided to continue providing an annual revenue estimate, albeit with a wider range. “I get some criticism for giving too much of a range,” says Shea. “But I also get credit for giving one at all.”