Corporate America is becoming disenchanted with the increasingly discredited practice of feeding company profit forecasts to investors.
A consensus is forming among chief executives, regulators and analysts against the quarterly ritual that encourages management to pursue narrow, short-term targets at the expense of more sustainable growth.
Pfizer is the latest big company preparing to join Citigroup, Intel, Motorola, Ford and General Motors by abandoning earnings guidance in favour of issuing more detail on underlying performance. Google and the New York Stock Exchange took the same approach when they went public recently.
In Washington, the House financial services committee is understood to be planning a hearing on the dangers of guidance as part of a review of corporate disclosure.
Even on Wall Street, the mood is turning. Merrill Lynch recently urged its global research analysts to discount company guidance when preparing forecasts.
On Thursday, James Cayne, chief executive of Bear Stearns, also warned that earnings guidance was “not a good idea”.“It’s all part of a growing trend,” said David Chavern, chief of staff at the US Chamber of Commerce. “
The support of the chamber, Congress and business leaders such as Warren Buffett provide a good reason for CEOs and CFOs to approach their boards about stopping giving guidance.
At the same time, more companies are missing their numbers as it becomes harder to sustain recent record profits growth. Candace Browning, Merrill’s head of global research, said: “A lot of companies are nervous that if they drop guidance, it will send a negative signal.”
The reaction reflects a growing fear of hedge funds, which often benefit from the short-term trading opportunities guidance can create. “It’s not just the hedge funds, even long-only funds have shortened their time horizons far more than management should,” said Richard Bernstein, Merrill’s chief US strategist. “This mismatch matters because it inc-reases volatility and therefore the cost of capital.”
A study by McKinsey last week also concluded it was a myth that regular earnings guidance led to lower volatility and higher share valuations – two reasons traditionally cited in favour of such disclosure.
Pfizer, the world’s biggest drugmaker with $51bn in sales, is typical of those trying to replace what it sees as the heavy Wall Street reliance on sales and earnings guidance with a “dashboard” of information allowing investors to produce their own analysis of earnings and sales potential.
“That’s the endgame,” said David Shedlarz, Pfizer vice chairman. “In fairness, you have to give them time to get used to it.”
In the meantime, congressional hearings may give more companies the excuse they need. “This is part of a wider review into the clarity of corporate reporting under consideration by the committee,” said Peggy Peterson, deputy staff director for the House committee on financial services. “There are lots of studies out there that look at whether earnings forecasts affect long-term performance and our members are concerned about this.”
Additional reporting by Christopher Bowe in New Yorl