SHOULD MANAGEMENT GUIDANCE BE ELIMINATED?
By Selena Maranjian

Motley Fool
/17/should-management-guidance-be-eliminated.aspx
July 17 2007

I’m an Armenian-American. That means that I scan the scrolling list of
credits after a movie for Armenian names. It means my ears perked up
to learn that Principal Skinner on The Simpsons is Armenian. And it
also means that when I see a financial article written by a fellow
Armenian, I’m rather likely to read it. That’s why I found myself
reading a Vahan Janjigian piece from Forbes.com the other day, on
"Why Eliminating Guidance Is a Big Mistake."

Let me back up, though, and define terms. In case you weren’t aware,
Wall Street analysts and company management don’t keep to themselves.

Analysts should be studying their assigned companies and coming up
with their estimates of the companies’ future numbers and intrinsic
values. But they often do this with the help of management, because
most company bigwigs like to tell the world what to expect in the
coming quarters or years.

For example, the management of Bed Bath & Beyond (Nasdaq: BBBY) said
in its latest quarterly conference call with analysts that the company
is aiming to have more than 1,300 domestic Bed Bath & Beyond stores in
the near future, which reflects a goal of 60% growth in the U.S. Then
there’s Parametric Technology (Nasdaq: PMTC), which reported recently
that its expected sales level in the coming quarter and year will
be below previous estimates, because of falling license revenues in
the U.S. and Japan. And BlackBerry maker Research in Motion (Nasdaq:
RIMM) recently upped its estimates for its coming second quarter to
between $1.37 and $1.49 per share, on sales of between $1.30 billion
and $1.37 billion.

All that kind of information gets factored into many analysts’
estimates, which in turn inform investors’ opinions and decisions
regarding many companies.

Pros and cons So is this a good thing? Well, yes and no, if you ask
me. On the one hand, who knows a company most intimately, and who’s
in the best position to offer educated opinions on how it will fare
in the future? Its management. It seems silly to ask them to keep
their mouths shut.

On the other hand, what motivates management? Many times, keeping the
share price rising is a paramount concern. And a share price can be
influenced via guidance from management. Imagine, for example, that
the CEO of Home Surgery Kits (ticker: OUCHH) expects his company to
take in $1 billion in 2007. If he announces that he expects revenues
of $900 million and then the company reports $950 million, the company
will look good for having beaten expectations.

Janjigian offered other thoughts. For starters, he pointed out that
the Securities & Exchange Commission requires companies to report
their financial results on a quarterly basis. Thus, while some
criticize managements for offering quarterly outlooks that create an
unhealthy focus on short-term results, it’s the SEC requirement that
gets investors to focus on the short term.

He then suggested that without company guidance, estimates from
analysts would become less accurate, creating larger surprises when
earnings are released. He concludes by asking, "In an era in which
regulators are trying to promote more disclosure, how much sense does
it really make to tell corporations to stop providing guidance?"

He also pointed out, rightly, that while some object to the volatility
resulting from companies missing or beating expectations, that
volatility can present very useful and profitable entry points for
bargain-hunters.

What to do So what should we make of all this? Well, let’s live
with the reality of management guidance, but with an informed
perspective. Don’t take every number at face value. Know that it’s
routine for companies to be off the mark — after all, it’s impossible
to really know exactly what the future holds.

In the meantime, you can get more perspective from these articles:

The Earnings Estimates Game 3 Stocks That Missed the Mark P&G Loses
the Expectations Game And if you’d rather leave all this analysis to
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Longtime Fool contributor Selena Maranjian does not own shares of any
companies mentioned in this article. Bed Bath & Beyond is a Motley
Fool Inside Value recommendation and a Stock Advisor pick. Try any
one of our investing services free for 30 days. The Motley Fool is
Fools writing for Fools.