To Guide or Not to Guide

Should companies provide financial guidance to the investment community?  That is the age old question, at least in investor relations circles.  Ask 10 CFOs and you’ll probably get 10 different answers. Add 10 IROs to the mix and now you’ll likely have 20 different answers.  As usual, there is no one size fits all solution.
 
A Skadden, Arps alert debated the pros and cons.
 
Pros:
 

  • Gives analysts reliable data points from which to assess their own projections.
     

  • Reduces investor uncertainty.
     

  • Potentially averts trading volatility.

 
Cons:
 

  • Encourages short-term thinking.
     

  • Creates disclosure issues.
     

  • Distorts investors’ perceptions.

 
Chad Stone, CFO of Renewable Energy Group, told CFO Magazine that “Offering an indication of our expected performance creates an opportunity for investors and analysts trying to understand and model our business.”  He believes that the absence of quarterly guidance would make it difficult for the investment community to understand how his company will perform.
 
Stone is not alone.  A survey by the National Investor Relations Institute found that more than three quarters of those who responded continue to provide
financial guidance.  Of those, 37 percent give quarterly earnings guidance and 39 percent give quarterly revenue guidance.
 
On the other side of the debate, Diane Morefield, CFO of Strategic Hotels & Resorts, believes that quarterly guidance is too short-term focused.  “I would simply hate being boxed in by guidance every three months,” Morefield told CFO Magazine.
 
Many NIRI members agree.  The number of companies providing some type of financial guidance has fallen from 81 percent in 2010 and 85 percent the year before.
 
As a big proponent of transparency, and making it as easy as possible for the investment community to understand your business and financial expectations (especially true for micro-cap companies), I am firmly in the guidance camp.  Whether it’s a revenue range for the quarter or year, point guidance for EPS, or a qualitative discussion of the trends likely to impact future performance, some information is better than none in getting stakeholders on the same page and managing expectations.

 

Laurie Berman, lberman@pondel.com