Give No Quarter

Making the morning media rounds on June 8, 2018, were Jamie Dimon, Chair and CEO of JPMorgan Chase & Co and Warren Buffett, Chair and CEO of Berkshire Hathaway, advocating for an end to quarterly earnings guidance.  As they laid-out in a Wall Street Journal op-ed piece, quarterly earning guidance is a key contributor to the short-termism prevalent in today’s market and is detrimental to the long-term health of companies and the economy overall.

I agree that annual or long-term guidance is preferable to quarterly guidance. I experienced the benefit of a such switch some 15 years ago.  At my former company, giving quarterly guidance was like being on a treadmill; for a myriad of reasons we often found ourselves watching the numbers and issuing mid-quarter guidance updates.  When making our switch, we articulated a long-term business framework, set 3- to 5-year sales and return on invested capital targets and provided perspective on commodity trends and tax rates to help inform margins and EPS expectations.  The change freed up management’s attention for other things and marked the beginning of a new multi-year golden age at the company.

However, I disagree with the contention that companies providing quarterly earnings guidance are contributors to the market’s short-termism.  I think in many ways this is akin to blaming the victim.  I understand how, in the competition for capital, companies can believe that giving quarterly guidance is a reasonable adaptation in a market environment where:

  • Not all investors are long-term focused: witness the influence of hedge funds in the market or the prevalence of high frequency trading and other strategies that buy/sell on factors other than business fundamentals.
  • Not all companies belong to the S&P 500, operate in attractive markets or industries, or are blessed with good analyst coverage, all of which help companies attract targeted investors.  It can be tough for small cap companies or those challenged industries to get the attention of long-term investors.
  • Factors outlined in a previous blog post, such as easy access to information, technology to speed decision making, low transactions costs and multiple investment vehicles (i.e., equity, debt, options, futures, etc.), reinforce a short-term focus among investors.

Quite frankly, given the points above, I don’t think quarterly guidance makes a difference to the companies who provide it.  It simply provides another inflection point for the market to trade around.  That’s why I believe annual or long-term guidance is the better approach and recommend it to others. As I experienced, it enables a longer-term focus within the company and eliminates a key distraction.  Further, if articulated well, long-term guidance – one that encompasses a framework of the business and its prospects – can build a deeper understanding of the business among investors, enabling them to better value the company.

A good resource for companies thinking of making this change is a 2017 Focusing Capital on the Long Term (FCLT) report, which not only debunks six common quarterly guidance myths, but also outlines an approach similar to that used by my former company and includes specific company examples.

Lisa Ciota
Lead-IR Advisors, Inc.

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