Wall Street Journal
More Companies Put Brakes
On Frequent Forecasts
April 11, 2006; Page C3
Google Inc. may not be so unique after all.
Securities analysts bemoan the Internet search-engine company's now-infamous policy of declining to speculate on its future income. More companies are following suit, refusing to offer quarterly earnings estimates to analysts and investors. Some of these companies are giving out guidance on where they think their annual figures are headed; others are staying mum.
The National Investor Relations Institute, in a survey of its members in March, found the percentage of publicly traded companies giving out guidance dropped to 66% from 71% in the prior year. Of companies that give forecasts, quarterly earnings guidance fell to 52% from 61% a year ago. The percentage furnishing annual earnings guidance increased significantly, to 82% from 61% in last year's survey.
Officials at the institute praised the shift from quarterly to annual guidance. NIRI sees the trend as evidence companies are trying to move Wall Street away from "short-termism," said Louis Thompson Jr., president of NIRI, an organization of investor-relations professionals.
Mr. Thompson's remarks refer to a popular view that when corporate managers must chase financial goals only three months out, they aren't properly engaged in establishing long-term, sustainable growth strategies. It is something of a chicken-and-egg problem: Chief executives gripe that Wall Street forces short-termism upon them by focusing on quarterly results in research reports. Analysts counter that companies use guidance as a way to lift their stocks, offering target numbers below what they see only to magically "beat" their forecasts come earnings day.
Regardless of who started it, the obsession with meeting -- and beating -- quarterly numbers has become a destructive force, many feel. Investment guru Warren Buffett has complained about the phenomenon.
European companies have long objected to quarterly earnings guidance and quarterly reporting of results. While many countries have copied U.S. rules and require quarterly accounts, in the United Kingdom, companies only report their results every six months. And in Asia, Japanese companies have long boasted of not being driven by short-term results and instead focus on fiscal-year data.
"If you miss [the earnings forecast] by one penny, the stock gets hammered," said NIRI Chairwoman Maureen Wolff-Reid, president of Sharon Merrill Associates Inc., a Boston investor-relations firm.
It appears even Wall Street analysts are questioning the vaunted benefits of quarterly guidance. In recent testimony before a congressional panel, Candace Browning, Merrill Lynch & Co.'s head of global securities research and economics, sharply criticized the practice.
Focusing on quarterly earnings has "overshadowed the rest of the [analyst's] job," Ms. Browning said, adding that companies can easily manage quarterly earnings by tweaking advertising expenses or technology investments or accelerating recognition of revenue.
"This process creates an echo chamber that drowns out investor debate and distills what should be a complex message about a company's operations and performance into a single number -- dictated by the company itself," she said in prepared remarks for the U.S. House Financial Services' subcommittee hearing on fostering accuracy in corporate-financial reporting.
Among companies announcing limitations on guidance is Motorola Inc., which said in January that it would cease giving quarterly per-share earnings forecasts starting this summer. The Schaumburg, Ill., communications-equipment maker joins a list of companies that restricted guidance, including Coca-Cola Co., Washington Post Co. (Mr. Buffett's Berkshire Hathaway Inc. owns stakes in both) and Campbell Soup Co. And Intel Corp. said it will cease giving a midquarter update on its prospects. The Santa Clara, Calif., computer-chip maker refrained from giving earnings guidance, though it does give quarterly outlooks for revenue and other financial measures.
"It's our belief that providing a midquarter update put too much attention on quarterly results and not enough attention on long-term strategic goals," Intel spokesman Tom Beermann said.
NIRI officials said a majority of public companies provide Wall Street analysts with a wide assortment of financial measures, even if not the precise quarterly earnings number.
McDonald's Corp. weaned analysts off quarterly and annual earnings guidance a couple of years ago. Liz Kluge, a director in investor relations, described the Oak Brook, Ill., fast-food chain's challenge of nailing all the variables that went into the estimates, such as foreign-currency exchange rates. "There was a lot of confusion, and we missed estimates frequently, and it created a lot of volatility in our stock," she said.
McDonald's gives Wall Street monthly sales data and increasingly refined annual data, such as sales expectations from new stores, to help analysts create their own forecasting models.
Analysts can do a lot with such nonearnings measures, said Oppenheimer & Co.'s Michael Smith, who says he can generally craft a good picture of how the restaurant chains he follows will perform. But he doesn't dismiss the value of quarterly numbers.
"You can see how people outside Wall Street think analysts are too short-term-oriented," he said. "On the other hand, we need benchmarks, and you get the picture of a long-term trend sometimes by watching quarterly trends."
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