Deep Concern over Consensus Earnings and Short-term Volatility
April 7, 2017 | posted in Corporate Governance
Rivel Releases Unprecedented International Study on Guidance Showing Deep Concern over Consensus Earnings and Short-term Volatility
Public Management Teams Fear Clout Wielded by Data Aggregators; Board Has More Influence on Guidance in Europe vs. North America; Majority of IROs Have Strong Influence on Setting Guidance.
Rivel Research Group, a global leader in investor market research and analytics, yesterday revealed key findings from the largest global study of its kind on guidance. Between February and March 2017, Rivel conducted the guidance study among 976 North American and European companies, encompassing all market caps from small to mega cap.
A major finding is that when it comes to consensus data established by data aggregators, fully 76% of management teams in North America (and even 53% in Europe) are “somewhat” to “very concerned” about meeting quarterly consensus earnings and revenues established by data aggregators. Management teams are equally concerned about the short-term volatility that can occur when results do not align with consensus.
The study also found that Investor Relations Officers (IROs) have clout in this domain. The great majority in North America and Europe has modest to substantial influence on guidance-setting practices. The board has significantly more influence on guidance in Europe vs. North America; 82% have substantial to modest influence in Europe whereas only 46% have substantial to modest influence in North America.
Verbatim comments from IROs and corporate management:
“We are always conscious of consensus, and know that our investors use it to benchmark earnings.”
“By giving guidance on the revenue margin it enables the analyst community to model more accurately their forecast numbers and this helps to prevent having real outliers in the consensus numbers.”
“Several years ago, the company missed revenue estimates and guidance multiple times. The guidance policies since that time have been conservative (under-promise and over-deliver) based on many conversations with the buy-side.”
“We moved to full-year EPS guidance as a means of narrowing the range of estimates on our stock and keeping sell-side engaged to update their models when necessary.”
“We try to make sure on certain industry-wide metrics (capital efficiency, production growth %, etc.) that we keep up to the top players according to analysts’ estimates.”
“Where they were having difficulty making estimates, we provided additional guidance points to improve their ability to forecast as well as enhanced the actual detail we report quarterly.”
“We provide more guidance now than we used to in order to reduce the range of estimates.”
“As the current environment punishes companies for missing earnings estimates in both the media and investor perception, we have felt the need to provide guidance to level set on expectations. In addition, our company is going through substantive change in the business that is very challenging to model in the near to medium term. This volatility exacerbates the issue with missing expectations.”
Rivel concludes that, while we know that meeting consensus is important, the study results really demonstrate the necessity of managing expectations directly with your shareholder base, managing all sell-side expectations and making sure that sell-side/data aggregator projections are correct and in-line with the company’s guidance.
I would add that to maintain good communications with analysts and investors, beyond (or instead) of issuing an earnings guidance number, IROs explore alternate methods to communicate that will not sacrifice transparency. Rather than providing raw quantitative quarterly earnings guidance, companies can highlight more qualitative information regarding business fundamentals, the drivers affecting those fundamentals, results, trends, market forces, the general business climate and the company’s intermediate and long-term goals. Remember, SEC rules and regulations require that management discuss in its filings the known trends and uncertainties that have impacted historical results and are likely to impact future periods. Provided properly, this enhanced qualitative disclosure should increase transparency and provide analysts and investors with the mosaic they need without placing undo emphasis to make forecasts and then meet these short-term estimates and goals… conceivably at the expense of long-term goals or creating exasperating and fluctuating short-term environment.
“We are extremely pleased and proud to contribute greater insight to the understanding and practice of guidance around the world,” said Brian Rivel, President of Rivel Research Group. “Given the engagement of such a large number of management teams at global public companies who contributed to this study, these are the most representative and reliable guidance data yet published. While we know that meeting consensus is important, the study results really demonstrate the necessity of managing expectations directly with your shareholder base, managing all sell-side expectations and making sure that sell-side/data aggregator projections are correct and in-line with the company’s guidance.”