Is the End of Quarterly Forecasting in Sight?
WHY YOU SHOULD CARE
Because there’s a growing push against short-termism in the corporate world.
By Kimberly Adams
In early January, Apple CEO Tim Cook stunned markets when he announced the company would revise downward its quarterly revenue forecast, made just 60 days earlier. Apple’s share price tumbled, bringing the rest of the market temporarily down with it. But that forecast Apple missed, known on Wall Street as quarterly “guidance,” is falling out of favor among many corporations, with some of the biggest names in business pushing for an end to one of the most common ways investors value companies.
For years, supporters of such frequent guidance have argued that predictions can help prepare investors for changes in market conditions or company plans that might affect stock prices. But an increasing number of companies are now turning away from quarterly projections amid growing concerns that a short-term fixation can blind them from pursuing more long-term objectives — a potential weak point for America’s giants as they seek to remain on top of the corporate heap in the coming decades.
The number of American companies releasing guidance every three months has dropped from 75 percent in 2003 to 27 percent in 2017, according to a new report by the nonprofit FCLT Global, which advocates against quarterly earnings guidance. The phenomenon is even rarer outside the United States. Among listed companies on the Euro Stoxx 300, less than 1 percent issued quarterly guidance between 2010 and 2016. Several publicly listed companies that release quarterly sales and revenue information are joining the chorus against short-term financial thinking. Large publicly traded companies such as Cisco, GSK, Barclays and Unilever, along with some state pension funds and global investment firms, are among the members of FCLT, an acronym for Focusing Capital on the Long Term. The group presents data showing that such forecasting does not, as many argue, reduce stock price volatility.
[Quarterly guidance] very clearly focuses management’s attention on the quarter-to-quarter game instead of their long-term plans.
Sarah Williamson, CEO, FCLT
High-profile endorsements of ending the quarterly guidance are also increasing. Investor Warren Buffett and JPMorgan Chase CEO Jamie Dimon have joined in, criticizing, in particular, the practice of trying to predict a company’s share price on a quarterly basis. They and others argue the focus on “hitting the number” attracts short-term traders and shareholders.
“What we see now is that companies aspire to not have quarterly guidance, and are moving away from that whenever they possibly can,” says FCLT’s CEO Sarah Williamson. “We also see that companies that are going public — new companies — are not offering quarterly guidance out of the gate.”
Short-term traders argue regular guidance is still necessary as part of corporate transparency. “The reason why we like it,” says Juan Perez, a trader and strategist at investment firm Tempus, “is because in our world … you have to have not only fast reactions, but also you’ve got to be able to create some sort of narrative that you can give to your clients and to your investors.” He says even three months can seem like an eternity in today’s market, with news events and social media fueling market volatility. “Anything can happen now.”
Baruch Lev, an accounting and finance professor at New York University’s Stern School of Business, cites Apple’s updated guidance in January as an example. After Cook’s announcement, the Apple stock dropped about 10 percentage points before stabilizing down more than 6 percent. “Without this guidance,” says Lev, “the bad news probably would have come in April at the end of the quarter. So for about four months, new shareholders would have paid an inflated price.” And if not for the quarterly guidance, that inflated price could have lasted even longer.
Lev says Apple has good reasons to buck the trend: Quarterly guidance is still the norm in the tech industry. “If most of your competitors are guiding, if you won’t guide it’s a very bad sign,” he says. “It’s a sign either you are not confident as a manager or you are hiding information.”
Forecasts can also serve as legal cover for corporations, says Lev, because it is usually viewed by judges as a “mitigating factor in shareholder lawsuits.” The guidance can serve as evidence a company was forthcoming in flagging risks to investors who lose money and attempt to sue as a result.
Still, corporations continue to move away from the practice. They are not legally required to predict per-share earnings or detailed sales forecasts, and many are trying out different strategies. Home improvement retailer Home Depot, like many companies, issues an annual earnings forecast, which it updates each quarter when the company releases its earnings report. Energy giant BP has a five-year “road map” of its strategy it shares with investors.
Quarterly guidance “very clearly focuses management’s attention on the quarter-to-quarter game instead of their long-term plans,” says Williamson, calling that “detrimental.” On the other hand, companies that embrace the “road map” method of investor communication lure more long-term investors and free executives to focus on other metrics that contribute to growth, argues the FCLT — for example, shifting focus away from sales in a given quarter to, say, a multiyear equipment purchasing plan that might yield higher sales down the road. “Companies have stepped back” from regular guidance, says Judith Samuelson, head of the Aspen Institute’s Business and Society Program, “realizing they’re spending an awful lot of important management executive time looking at a very short time frame.”
Recent history holds examples that serve as an incentive to shift emphasis away from a quarterly earnings target, says Samuelson. She cites Volkswagen, Wells Fargo and — going back a bit — Enron as companies that famously cut corners to hit their forecasts. Those decisions eventually resulted in massive fines, public backlash, government investigations and, in the case of Enron, a massive bankruptcy and prison time for executives. “If an executive is measuring the value of the company and setting direction by looking at ticks in the stock price, that’s going to set the tone across the enterprise,” Samuelson says. “And then it gets pushed down layer by layer to essentially meet that number.”
That may be, but Lev questions whether fewer companies issuing quarterly guidance will really counter short-term thinking, which he blames more on bad executives than the markets. “Financial analysts provide earnings forecasts whether the company guides or not,” he says, “and there will be a pressure to meet the forecasts.” Google, for instance, doesn’t issue quarterly earnings guidance but “makes great efforts to meet analysts’ forecasts.”
Which, according to Samuelson, is yet another reason to move away from guidance. She says that while companies “may have reasons to forecast for all kinds of reasons internally,” there’s no real incentive for them to do the work of outside analysts and media commentators. “They really ought to be concerned about their long-term investors who really don’t care about how the stock performs on a daily basis,” she says. Corporate America increasingly seems to agree.
- Kimberly Adams, OZY Author Contact Kimberly Adams