Greater sell-side coverage increases demand for guidance, NIRI survey finds
The vast majority of US public companies are still providing forward-looking financial guidance of some sort, according to the latest NIRI survey on guidance practices.
Two years after the market meltdown and the Great Recession presumably reduced visibility to nil, fully 90 percent of companies provide forward-looking guidance in some form, down from 93 percent in the 2009 survey. Eighty one percent provide guidance on at least one financial measure, down from 85 percent in 2009, while 48 percent provide non-financial guidance, compared with 55 percent in 2009.
Despite all the rumblings in recent years about the atmosphere of short-termism on Wall Street encouraged by earnings guidance, the practice is well entrenched among survey respondents.
NIRI president and CEO Jeff Morgan, writing in an executive alert to members, makes the case for providing financial guidance. ‘Announcing guidance provides a public record of management estimates that can be helpful as a counterbalance to the analyst estimates against which companies are often ultimately held,’ he writes.
Morgan also notes that the changing market dynamics play into the guidance question. ‘The reality is that as the ranks of the sell side have dwindled, it is more difficult than ever for analysts to provide the level of expertise and the depth of coverage that once existed,’ he explains.
Based on the survey results, one could conclude that greater sell-side coverage increases demand for companies to issue guidance, which they comply with. Half of companies with no sell-side coverage and 64 percent with fewer than five analysts provide some guidance. That figure rises to 87 percent among companies with at least 10 analysts, and ranges between 95 percent and 100 percent of companies with 15 or more analysts.
Guidance policies should consider a company’s ‘internal forecasting strength, the key drivers of their businesses, industry norms and – perhaps most importantly – their ability to deliver on guidance consistently over a reasonably long period of time,’ Morgan notes.
Of those that provide non-financial guidance but eschew financial guidance, 57 percent have done so in the past, and most discontinued the practice more than one year ago. Those that provide guidance most often communicate annual estimates.
A total of 269 NIRI member companies responded to the online survey, which can be found here.
