GE CEO Jeff Immelt will be giving his annual state-of-the-company address from the Saturday Night Live studios this afternoon. The scuttlebutt is that he will announce that GE will stop giving earnings forecasts.
A cynic would say that GE is making this decision now because it is sick of missing earnings forecasts. And the cynic would probably be right. But that doesn’t mean it isn’t a good idea.
Giving earnings forecasts is a horrible idea.
Because it sets companies up for one of three outcomes:
- Beating the number, which, after a few “better-than-expected” quarters makes most observers conclude that the company just lowballs the guidance (which any prudent manager would).
- Meeting the number, which forces everyone to conclude that the company really missed its number, because what idiot would choose not to have some margin for error, or
- Blowing the number, which pisses everyone off and makes the company look incompetent.
The reason 90% of companies give guidance, presumably, is that analysts and investors tell them to. The logic? If you don’t give guidance, consensus earnings estimates will be all over the place. And, someday, if analysts get too optimistic, you might…MISS ANALYSTS’ ESTIMATES!
This advice is just lazy and self-serving. When a company gives guidance, analysts’ estimates are not estimates: They are dictation. Guidance makes the analysts and investors’ life easier (less thinking), but it doesn’t make them better analysts or investors. It also doesn’t make the stock price any higher or less volatile.
Also, having public earnings targets encourages companies to make nearsighted decisions that hurt the long-term value of the company just to “make the number.” It encourages companies to play accounting games to “smoothe” earnings. It inhibits the company’s ability to react to changes in the macro environment that are beyond its control, such as this one.
Missing analysts estimates is really no big deal: If analysts were too optimistic, that’s their problem. The stock tanks for a while, analysts blame you for their own stupidity for a few days, and then life returns to normal.
Missing your own earnings guidance, however, is a big deal: You set investors up for disappointment. You failed to deliver.
Don’t believe us? Look at Google. Google’s stock went from $85 to $742 without the company ever once giving guidance. And then it went from $742 to $250 without the company ever once giving guidance.
If Google had given guidance, it would now be preparing to spend its Q4 conference call apologizing for having to cut its guidance. But as it is, Google never failed to deliver anything. It just ran its business and let Wall Street worry and wail.
And what do you think the stock would have done if Google had given guidance? We’ll bet you a share of GE stock that it would have done exactly the same thing.
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