SunWorks Inc (SUNWQ)

[Chiinkwia1]

Future guidance helps investors plot their profits

Q: Why are companies’ outlooks so important?

A: A company delivers solid revenue growth. It beats earnings forecasts. But the stock goes down anyway. The reason often has to do with the “outlook.”

Many — but not all — companies’ managements will guide investors on what to expect from profitability in the upcoming period. This outlook or “guidance” can often be more important to investors than the results from the just-reported period.

That’s perfectly understandable. Investors are attempting to price stocks based on what the company’s earnings will be three to six months from now, not what they were in the prior period. Past results are important to investors, but mainly to help understand the future.

It’s not just a theory. Consider online retailer Priceline, which saw its shares drop $101.60, or 7.5%, to $1,253.04 Wednesday. The stock price decline occurred despite the company reporting nearly 18% higher revenue and betterthan- expected adjusted quarterly profit of $10.54 a share.

The problem traces back to the company’s guidance for the future not being as bullish as some hoped. The company now expects to earn between $11.60 and $12.50 a share in the second quarter. That is sharply below the $14.87 a share expected by investors.

Matt Krantz

[e-mail] USA TODAY 5/5/2016