Earnings forecasts suffer amid economic upheaval

As if corporations needed another reason to stop offering quarterly earnings guidance, apparently more and more companies are struggling to make these forecasts even remotely accurate.
FEB 18, 2008
By  Bloomberg
As if corporations needed another reason to stop offering quarterly earnings guidance, apparently more and more companies are struggling to make these forecasts even remotely accurate. "Corporations are getting worse at hitting the mark," said Bryan Hall, head of the finance practice at The Hackett Group, a research firm based in Miami. And he has evidence to back this up: About two of every three companies surveyed by Hackett indicated that they were unable to offer accurate quarterly earnings guidance last year, compared with only a third of companies that said the same in 2005. While the number of companies that missed their targets doubled last year, according to Hackett, the companies also reported that they were off their earnings forecasts by anywhere from 6% to 30% — a sizable blind spot. Of course, the markets were more volatile and tumultuous last year than they were in 2005, when growth and corporate-earnings streams were steadier and, hence, more predictable. Now subprime issues, a weakening dollar and rumblings of a recession have made it more challenging to predict accurately earnings on a quarterly basis. Troubles during the fourth quarter of last year, in particular, "unwound a lot faster than many companies were able to account for in their forecasts," said Stephen Biggar, director of U.S. equity re-search at Standard & Poor's in New York, noting that the 0.6% economic growth rate during the quarter also missed most observers' target of 1.2%. Regardless of the market environment, there can be significant consequences for missing an earnings forecast, including a sharp, swift decline in a company's stock price. "You're sticking your neck out, doing something you're not required to do, just so you can increase visibility," Mr. Biggar said. "Ultimately, in some cases, it may not be worth it, because you risk taking a hit if you come up short."

CFO RISK

The risk involved in forecasting earnings might also come back to haunt a chief financial officer if his or her company comes up short on its quarterly predictions. "You can't have your CFO not knowing, or at least not telling you, if your company is going to miss its forecasts," Mr. Hall said. Consider Motorola Inc. of Schaumburg, Ill., whose CFO, David Devonshire, said he would step down early last year after the technology company revised its first-quarter earnings estimates and lowered its revenue projections by $1 billion. Overseas, Karl-Henrik Sundstrom, former CFO at Telefonaktiebolaget LM Ericsson of Stockholm, Sweden, was abruptly re-placed in October, just days after the wireless company said that its profits and sales were lagging its forecasts. With so much on the line, some say that companies stand to lose too much while gaining too little by continuing to offer quarterly earnings estimates. "There's so much judgment that goes into the earnings figure that it really is kind of a meaningless, arbitrary figure that a company is held accountable for," said William Donaldson, a trustee for the Committee for Economic Development in Washington and former chairman of the Securities and Exchange Commission. Mr. Donaldson, who is now the chairman of the CED's -subcommittee on corporate governance, has been urging companies in recent months to stop taking such a short-term focus on their business. "We find an awful lot of CEOs say that sometimes they will postpone projects or won't make certain investments in their businesses, because of these short-term commitments to hit their forecasts every quarter," he said. "It's counterproductive to running the company for the long haul." This may explain why many companies have opted in recent years to stop issuing quarterly earnings predictions altogether, including Best Buy Co. Inc., The Coca-Cola Co. and McDonald's Corp. About half of all companies now provide quarterly earnings guidance, according to the National Investor Relations Institute in Vienna, Va., compared with the 62% that did so in 2005. "When you are making quarterly forecasts, then the burner is on you to meet that guidance," said Jeffrey Morgan, president and chief executive of NIRI, who echoed the sentiments of Mr. Donaldson, noting that such short-term pressure "makes it more difficult to make business decisions." As a result, more companies have begun emphasizing the importance of forecasting long-term earnings, Mr. Morgan added, citing NIRI data that show that 82% of companies now offer some form of annual-earnings guidance, compared with 61% in 2005.

Latest News

Alaris Acquisitions CEO: AI-driven staff reductions could boost RIA valuations
Alaris Acquisitions CEO: AI-driven staff reductions could boost RIA valuations

CEO Allen Darby sees a coming shift in M&A dynamics as AI eliminates clerical roles at RIAs, leaving buyers and sellers to negotiate who benefits from the added margin.

Private equity in 401(k)s is 'inevitable,' says Meketa Capital CEO
Private equity in 401(k)s is 'inevitable,' says Meketa Capital CEO

Michael Bell explains how the PE push in retirement plans will benefit investors, why warnings around risks may be overplayed, and what it will take to get plan fiduciaries comfortable with private investments.

IRA rollovers from DC plans to hit $1.15T by 2030, LIMRA says
IRA rollovers from DC plans to hit $1.15T by 2030, LIMRA says

Research highlights the dominant role of workplace retirement plans and breaks down the major factors dictating workers' IRA rollover decisions.

GReminders unveils autonomous AI assistant for financial advisors
GReminders unveils autonomous AI assistant for financial advisors

The wealth tech firm is rolling out its "Do Anything" assistant as leaders and strategists tout the next evolution of artificial intelligence.

Court strikes down SEC CAT funding plan, puts broker-dealer costs under fire
Court strikes down SEC CAT funding plan, puts broker-dealer costs under fire

Appeals court overturns SEC’s CAT funding plan, broker-dealers face new uncertainty.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.