How GE dropped EPS guidance

Of all the changes made to General Electric’s investor relations work over the last five years, one of the most far-reaching and beneficial has been the firm’s decision to drop quarterly and annual EPS guidance.

The success of the move – implemented at the start of 2009 – even prompted other companies to get in touch with GE and ask how it did it, according to Trevor Schauenberg, head of GE’s IR department.

‘Looking back it was difficult for six months during the financial crisis, but it is very powerful now and we’ve had several firms call to ask how we did it because they are looking to do the same thing or have done it since then,’ he says.

The multinational conglomerate with annual revenue close to $150 bn has been one of the leading lights of IR in the US for many years. Since the inauguration of the IR Magazine US Awards in 1996, GE has won numerous awards, most recently best crisis management in 2012.

It was unsurprising, therefore, that GE was prepared to take the initiative over an issue such as guidance, announcing at an investor day in late 2008 that from the following year the company would provide only a simple framework of targets for the investment community to work with.

Timely move?

At the time, some commentators suggested GE could have been influenced in its decision by the uncertainty surrounding the global economy. Schauenberg, however, states unequivocally that this was not the case. ‘Management and our board had discussed the change much earlier in the year before the financial crisis evolved,’ he says.

The move received immediate praise from one analyst. Credit Suisse’s Nicole Parent, who later left to co-found independent research firm Vertical Research Partners, said it made ‘perfect sense’ given the size of the company. More important for GE, though, has been the financial freedom the change provided over subsequent years.

‘As a result of the changes, much more management time and focus is spent on running our businesses to win competitively over the long term versus a micro focus on quarterly EPS objectives,’ explains Schauenberg.

‘During the financial crisis we doubled our R&D, did some dramatic restructuring to improve the long-term cost structures of our businesses, and invested heavily in our international capabilities. While that sacrificed short-term EPS, we have best-in-class organic growth and are generating double-digit earnings growth in both our industrial and financial businesses.’

Keeping it simple

In the past, GE provided more than 100 guidance points across its various businesses, covering areas such as orders, revenues, cash flow and earnings. The company’s new framework, by comparison, is marked by its simplicity.

‘We’ve moved to a framework that is very basic, yet clear enough to help analysts build models on the company,’ says Schauenberg. ‘For example, we provide targets around organic revenue growth – 5 percent-10 percent for this year. While we do not offer specific EPS growth, we do provide directional targets by business unit regarding profit growth. A single + indicates single-digit growth, a ++ indicates double-digit growth.

‘Since launching the framework in 2009, we’ve had 15 quarters where we’ve met or exceeded consensus without providing quarterly EPS guidance, so I think it’s been fairly successful.’

The project hasn’t been all plain sailing, however. The framework came under pressure during the financial crisis when investors were desperate for reassurance about the state of banks or financial business units.

As a result, attention turned to GE Capital, the financial services unit of GE that lends to consumers and small and mid-sized companies. To give an idea of the size of GE Capital, last year it contributed 31 percent of the parent company’s total revenue. Before the financial crisis, it was closer to half.

‘When financial stocks were under pressure, we did not have a guidance number to confirm or adjust,’ Schauenberg says. ‘We eventually issued a statement that GE Capital would remain profitable, which helped provide some guidance to our investors during a very uncertain time.’

Price adjustments

Concerns over the state of GE Capital took the stock price down as low as $7 in April 2009. But a combination of easing credit conditions, the shrinking of GE Capital and better investor education around the unit has helped the stock climb back above $20 today.

Summing up, Schauenberg says GE is in a much better position to plan for the long term following its guidance change.

‘It has allowed us to have a lot of flexibility around how we run the company,’ he explains. ‘This change has helped us shift our focus to run the company for the long-term economics. If we have a good restructuring project for the firm and our investors, we’re able to move forward without being overly concerned about a one-cent impact on a given quarter.’