According to Barron’s, 106 companies on the S&P 500 have already suspended guidance, and it’s likely that number will rise as more companies report earnings over the next few weeks. (Read my previous column on what this quarter’s “earnings season” might look like.) Everything that has to do with this crisis is unprecedented, including having so many companies refuse to say what kind of earnings or revenues they expect to generate over the next several months.
What is guidance?
Most companies like to set expectations of what’s to come over the coming year. Typically, at around the end or the start of a fiscal year, they’ll announce to the world what kind of revenues and earnings they expect to generate over the next 12 months. Some might give this kind of guidance before every quarter, while others might do it once for the entire year.
These figures help analysts come up with their own reports for the companies they follow. Using guidance as a starting point, they crunch their numbers and determine whether they believe the business will beat their expectations or fall short. If a business exceeds their figures, the stock price usually rises. If it doesn’t, the stock price drops. “The company knows best what earnings and revenues will be,” says Ryan Modesto, CEO of 5i Research, an independent investment analysis firm. “Most analysts are heavily anchored to that guidance.”
Companies will sometimes adjust their guidance during the year, either higher or lower, which sends a signal to the market that the business is either doing better than initially thought, or it’s doing worse. Most companies try to be as accurate as they can with their guidance, because being too optimistic or too conservative can cause people to wonder if management knows what it’s doing, says Modesto.
Why are companies suspending guidance right now?
The world today is very different than it was in January, when a lot of companies, and especially those with a December 31 fiscal year end, would have given their 2020 guidance.
No one knows just how devastating COVID-19 will be on business, other than things will get ugly. Most companies have never experienced anything like this and have no idea what kind of revenues they’ll bring in when their doors are closed or if they’ve shifted sales entirely online. As well, with no one knowing when the economy will open up again, it’s impossible to predict what kind of earnings might be generated throughout the rest of the year. If you don’t know what business will be like, you can’t give guidance.
“Companies are in a totally different environment than they were in three months ago when they gave full-year guidance,” says Modesto. “Management teams need to take the time to figure out what the impact will be. Even if they say earnings will be down 30%, that’s not really helping if it’s not right. They need to take a step back and assess the situation.”
There is no legal requirement for a company to give guidance and many businesses don’t try to telegraph their earnings in normal times anyway. (Most large-cap companies give guidance, says Modesto, as their business models are more stable, so it’s easier to predict future earnings.)