In this podcast episode, we discuss the need for issuing earnings guidance to the investment community, including tips regarding the nature of that guidance. Key points made are:
Need guidance to keep investors from making guesstimates about company performance; without guidance, there will be more stock price volatility, which attracts short sellers and drives away institutional investors. This in turn drives down demand for the stock, which reduces its price.
Smaller companies have no analyst coverage, so they need to use guidance to fill in the knowledge gap.
Do not provide guidance when you are not sure about future performance, such as when the company is engaged in a series of acquisitions.
If the quality of guidance issued is poor, avoid issuing it until you can improve the company’s forecasting systems.
Guidance is usually for a range of projected results, with the range widening for periods further in the future. Guidance could be stated in dollars or percentages.
An alternative is to just discuss the company’s general strategy, or to release a range of operational information that analysts can use as the basis for their own financial models.
Need to keep providing guidance for a long time; otherwise, the market will react negatively, resulting in a price decline.
Should release guidance right after the quarterly Form 10-Q report is released.
More frequent updates tend to reduce price volatility.
If analyst estimates look wrong, issue guidance to put them back on track.
Never issue aggressive guidance, since the stock price will spike and then crash when the company cannot meet its own estimates. Avoiding aggressive guidance also reduces the risk of having fraudulent financial reporting.
Best to issue guidance that is slightly conservative.