What do Coca-Cola, Gillette and The Washington Post Co. have in common? For one thing, they all boast Warren Buffett, one of America's most successful investors, on their boards. Not coincidentally, they also refuse to provide earnings guidance. Indeed, it seems they have set a trend, as more and more firms announce that they, too, will stop providing guidance.
Many experts applaud this development. They say guidance inappropriately forces investors to focus on the short run at the expense of the long run. They argue that managements that provide guidance are committing a disservice by encouraging this kind of myopic behavior. By eliminating guidance, they say, investors will stop overreacting to earnings announcements that miss the mark by a penny or two. Instead, investors will pay more attention to management's long-run business plans. And, as everyone knows, long-run success is much more important than short-run results.
Yet the long run is really nothing more than a consecutive string of short runs. Indeed, short-run achievements are the best indicator we have of whether the firm is on track to achieve its long-run goals. If guidance is eliminated, investors will not stop focusing on quarterly earnings announcements. They may no longer be able to compare those numbers to management's own projections, but they certainly are not going to stop scrutinizing them.
So defenders of this latest trend in the corporate sector are in the awkward position of arguing that investors are better off having less information. Of course, the information will still exist. After all, well-run firms have to make short-run plans. This is part of the budgeting process. Management will still know what it expects for short-run sales and profits. It simply won't tell the investing public. As a result, we will have greater uncertainty. And greater uncertainty means more risk, which by definition means lower stock prices.
Ironically, many of those who call for an end to guidance have also criticized the analysts for doing such a poor job of forecasting quarterly earnings. Perhaps some analysts have done little more than regurgitate what they were spoon-fed by the corporations that they cover. Most analysts, however, do painstaking research and try to identify where management's assumptions may be off the mark. Yet if all this analysis hasn't resulted in more accurate earnings projections, why in the world does anyone think that the elimination of guidance will make things better? Without guidance, the gap between actual earnings and the consensus estimate, which is already large, will only be larger.
The bigger fear, of course, is that bad management teams will hide behind the "no guidance" shield. The companies mentioned above are reputable and appear to be well run even in these difficult economic times. And having Buffett on their boards certainly gives them a great deal of credibility. Most companies, however, don't have someone of Buffett's stature, whose presence could minimize the damage from a disappointing quarterly earnings report. Unfortunately, some of these firms may find it all too convenient to simply keep bad news hidden just a little bit longer in the hope that it will simply go away over the next quarter or two.
In the end, the market will decide if less information is preferable to more. The anecdotal evidence so far suggests that investors have little doubt about this issue. For example, shares of AT&T plummeted 20% the day it announced that guidance would no longer be provided. Coincidence? Perhaps. After all, AT&T also announced disappointing financial results at the same time. It's too bad Warren Buffett doesn't have a seat on AT&T's board.
Vahan Janjigian is the editor of Forbes Growth Investor.
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