Fewer Companies Issue Quarterly Earnings Guidance

Companies are moving away from making quarterly predictions, survey says.

With its bad rap for promoting short-term stock price gains over long-term stability, the practice among corporations of issuing quarterly earnings guidance was losing popularity even before last year’s financial meltdown. And if accurately predicting future earnings was a tough job before the Great Recession, it’s now more daunting than ever.

Companies are moving away from making quarterly predictions, a May survey by the Vienna, Virginia–based National Investor Relations Institute confirms; 60 percent of firms that responded said they provide earnings guidance — a majority, but down from 64 percent in 2008 and 66 percent in 2006.

“We still provide qualitative guidance,” says Ria Carlson, senior vice president of strategy and communications for Santa Ana, California–based technology distributor Ingram Micro, which stopped issuing quarterly guidance last year when it became nearly impossible to forecast sales. Instead, it provides nonspecific information, such as how the economy is affecting its business overall.

What’s curious, though, is that investors don’t seem to be rewarding the more cautious approach. Two studies in June and September found that companies churning out guidance every quarter enjoy superior stock price performance to those that don’t.

The first study, conducted by investor relations firm Sharon Merrill Associates and research firm IntelliBusiness, both based in Boston, analyzed stock price returns for the S&P 500 index and the Russell 1000 index ten trading days before and 20 days after earnings announcements in first-quarter 2009. The share price of firms offering quarterly guidance fell 5.4 percentage points, on average, more than the wider market, compared with 15.4 percentage points for those that did not.

Skeptics dismissed the study, saying it tracked stock prices during the depths of a near-depression. However, a follow-up study of the second quarter produced the same findings.

Sell-side analysts say it’s not a matter of disclosure but of whether the news is bad or good. “Companies must remember they’re talking to their owners,” notes Richard Kugele, a Boston analyst who follows Ingram Micro for New York–based Needham & Co. “It doesn’t serve them to keep us in the dark. Those that don’t provide guidance unnecessarily create a lot of volatility in their stocks.” Maureen Wolf-Fried, president of Sharon Merrill, says that in the current environment investors want more information, not less — even if it’s unreliable: “Greater transparency wins out.”

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