Companies Helped And Hurt By Guidance

By Eric Fox | October 27, 2009 AAA

Many professional investors and analysts defend the practice of companies providing guidance on earnings and revenue to The Street. One argument in defense of this practice is that it leads to less volatility in the market.
Statistics from third-quarter earnings season seem to contradict this defense, although, admittedly, the evidence is not comprehensive enough to give us a definitive answer to the question of volatility.

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Estimate Implications
So far during earnings season, the average price change on the first trading day following earnings reports has been down 0.95%. If you break that statistic down, companies that have beaten earnings estimates have returned 0.25%, while those companies missing have been trashed by the market and are down 5.58%.

Many stocks have done much worse than down 5%. TriQuint Semiconductor Inc. (Nasdaq:TQNT) committed the sin of hitting its earnings guidance, but missing the top line by $4 million in revenue. The company also lowered guidance on earnings and revenue for its upcoming fiscal fourth quarter. The stock lost 25% of its value after the report.

Sometimes guidance and analyst estimates can be so convoluted due to all the non-cash charges and non-operating expenses that are excluded when public companies report. Volterra Semiconductor Corporation (Nasdaq:VLTR) fell 15% after reporting its third quarter earnings.

Did the company meet or miss its guidance? Who knows? Reuters reported that the company's 19-cent earnings were within its guidance range of 18-20 cents, while Barron's headline has them missing average estimates maintained by the analyst community, which was at 20 cents.

Guidance Winners
Some times, of course, there is no doubt at all, and companies blow out their number. Lexmark (NYSE:LXK) beat its guidance by 20 cents, and raised its numbers for the next quarter. During the conference call, Paul Curlander, the CEO of Lexmark, said "stronger than expected customer demand resulted in good sequential growth for Lexmark, exceeding our expectations for both revenue and profit in the quarter."

Another big winner was Werner Enterprises (Nasdaq:WERN), which beat its earning guidance by $0.06 and moved 12% higher the next day.

Problems With Guidance
Several companies stopped giving guidance at all during the recession due to the difficulty in predicting business. In early 2009, NetSuite (NYSE:N) announced it was not providing "explicit" guidance on revenue. James McGeever, the CEO of NetSuite said "the current global macro economic uncertainty has resulted in our visibility not being as strong as it has been in prior years and as such, we aren't giving explicit annual 2009 revenue guidance."

The percentage of companies providing guidance is currently at 60%, according to a survey in May 2009. This is down from 66% in 2006.

The Bottom Line
Investors may never know definitively whether guidance provided by management to the investment community helps or hurts. However, with the amount of volatility the market has seen the last two years, it's hard to make the case that guidance moderated that price volatility. (For more, see Earnings Forecasts: A Primer.)

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