Paying Attention to Company Guidance

Question:

Every earnings season, companies give guidance on either the next quarter or for their fiscal year. How much stock do you put into the guidance? You’ve mentioned Sarbanes-Oxley and that CEOs don’t “pound the table” anymore. How can an investor use this information?

Answer:

The Sarbanes-Oxley Act of 2002 increased standards for all U.S. public company boards, in that top management must now individually certify the accuracy of financial information. Still, many companies provide guidance. In our opinion, you have to pay attention to guidance, because the market still moves on the guidance a company provides.

No one should know the health of a business’s operations like the company’s management. If they don’t understand what’s going on in their business and cannot forecast their results, with at least some accuracy, why are they in charge? Why would you have confidence in them? Earnings are the bread and butter of stock prices. Therefore, knowing where those earnings are headed is imperative for investors.

Earnings surprises are probably the best indication on how well you can follow earnings guidance. Roughly less than 3% of companies surprise—to the upside. It is also not surprising that management is conservative with their numbers, then try to outperform. We also look for how many times earnings guidance has been revised. So far this year, earnings guidance has been pretty consistent.

Investors need to understand what goes into guidance. For example, in the Energy sector, so much affects the price of crude oil, and that price affects almost every energy company. In our opinion, it is difficult to put much stock in earnings guidance from the Energy sector. Materials are also a volatile sector in which earnings are difficult to predict.

At Henssler Financial we believe you should Live Ready, which includes understanding how to use company guidance. If you have questions regarding your investment strategy, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.

Disclosures

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