Corporate guidance or as it is more commonly known, earnings guidance, is nothing more than information from a company regarding the company’s financial future, including projected earnings and other data.
Earnings guidance typically includes revenue estimates, earnings, margins and capital spending estimates. The information can be valuable but is far from a sure thing. As a matter of fact, there are protections built in to forward-looking statements like guidance for both the company and shareholders.
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Companies are not required to provide earnings guidance but it is common practice and most companies provide guidance in some form. Typically, guidance is provided when quarterly earnings are released.
In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA). This legislation helps protect companies from being sued because they did not achieve the results they indicated in company guidance. The law also helps provide parameters for how forward-looking statement are constructed.
Impact On Share Prices
Guidance can have both a positive and negative impact on the price of a company’s stock prices. If the guidance is higher than what analysts expect, share prices can go higher. If the guidance is lower than expectations, share prices can be driven down.
When the actual earnings results are published, if they are higher than previous guidance, this can drive prices up. The opposite is true if actual numbers are lower than previous guidance. If guidance is close to actual results, investors tend to have more confidence in guidance moving forward. Generally, this is a positive for the company – even if the guidance is not particularly positive.
As time goes on and a company realizes its original guidance is likely not going to pan out, it can issue new or revised guidance. If a company does this frequently, trust will probably be low. There could be an exception for a company in a particularly volatile part of the market or an area that has experienced a lot of upheaval.
Another way a company can adjust or revise guidance is to simply issue a press release saying previous guidance may be off (in either direction). While there are strict laws governing the construct of guidance, remember companies are not required to issue it, so it can take different forms.
Predicting The Future
At its essence, guidance is an attempt to predict the future. Even if all parties involved are 100% honest, the task of predicting is difficult. As it turns out there are incentives for companies to shade guidance one way or the other. For example, issuing intentionally low guidance knowing the company will probably outperform (and share prices will go up as a result) is a huge concern.
Analysts are one way to combat management shading of guidance. Competent, trustworthy analysts and their opinion about a company’s guidance can serve as a sort of “truth serum” investors can use to evaluate corporate guidance. A great way to access analyst opinions on FinanceBoards.com is via any of the several analyst estimates widgets the site contains.