Investors are in a panic because there are more 'missed earnings' news releases than ever before
Investors are in a panic because there are more 'missed earnings' news releases than ever before. Here's the scenario: Company XYZ issues an earnings warning and suddenly the IR phones start ringing, chat rooms go crazy, rumors abound, accusations fly and ultimately XYZ stock takes a hit. Sure, there are more 'missed earnings' news releases than ever before, but then again, there are more 'on-target earnings' news releases than ever before. In fact, there are more earnings news releases period, though missed earnings seem to command all the attention.
In the past, when XYZ had suspected it would miss earnings, it would talk to Wall Street and nudge expectations gently downward. This meant that when XYZ made its official public earnings announcement, fewer people were surprised and the stock experienced a more incremental drop.
Of course that scenario changed completely when Regulation Fair Disclosure came along and forbade those types of candid conversations. Now when analysts ask XYZ, 'How is the quarter going?' the company dryly replies, 'No comment - see our news release.' Yes, in the age of fair disclosure, everyone is surprised at the same time.
As a result, companies are taking radically different approaches to dealing with earnings guidance. For instance, Ohio-based auto insurance company Progressive has begun reporting a slew of detailed financial data on a monthly, instead of quarterly, basis. At the other end of the scale, consumer products giant Gillette says it has cut out short-term guidance altogether, including current quarter and current year. Meanwhile, internet travel site Travelocity.com gives guidance only once a quarter, though it may update its guidance if it suspects results will be materially different.
While issuing mid-quarter or monthly guidance might help to satisfy Reg FD requirements, it might also create a legal nightmare for corporate counsel. If firms update their guidance shortly before quarter end and then miss their numbers, they're more vulnerable to shareholder lawsuits.
Will fear of litigation lead more companies to follow Gillette's tight-lipped model? Or, on the other hand, will the need for periodic adjustments cause more companies to follow Progressive's monthly model?
The answer may depend on how these practices impact peer groups. For instance, if a frequent-update company revises its numbers downward, investors might assume the same trends apply to rival companies and cash out across the board. These rival companies are then faced with the choice: keep quiet and suffer the consequences, or issue their own updates, even if it's just to say, 'We're on target.'
Like it or not, the press release seems to have become the standard communications medium, and companies have to figure out how frequently they want to use them. The question is not how to issue a warning, but how early.