No surprises please

Publicly traded companies tread carefully when making their earnings predictions

BY TONY ADAMS - tadams@ledger-enquirer.com --

When it comes to companies forecasting how much money they're going to make or releasing news regarding their income, the last thing Wall Street wants is a surprise.

Phil Tomlinson, chairman and CEO of credit-card processor TSYS, found that out in October 2005. In an earnings release, he almost casually mentioned that a major customer, Bank of America, was exploring the possibility of taking its business elsewhere — something it would eventually do — and that the outcome of negotiations could not be predicted.

The following day, TSYS shares were scorched on the New York Stock Exchange, tumbling out of the gate to post a nearly $2-per-share loss, a nearly 9 percent decline. The fall came despite the Columbus-based firm reporting a 23 percent profit during the quarter.

But Stock investors and analysts are constantly trying to predict the future. Thinking months, perhaps even years, ahead is a common phenomenon that can gyrate company stock prices higher and lower. And if traders get even a sniff that earnings guidance might be off down the road, punishment can follow.

"You can get penalized so bad if you miss your guidance number," said Jim Lipham, chief financial officer at TSYS, which does business globally, including in the U.S., Europe, Asia and South America.

"You really don't want to surprise the market with your operations," Lipham said. "You like to have some kind of guidance out there so they know where you're going or what you're trying to do. I think at TSYS we've always spent a lot of time analyzing the upcoming year."

More or less information?

That said, there have been calls from all sides — corporate America, industry groups, former securities regulators and even some shareholders — to end the practice of companies releasing earnings-per-share forecasts each quarter.

Giving investors less information on which to base their earnings expectations could introduce more volatility into financial markets, some say, and could let companies bury potentially bad news for longer. The issue first surfaced earlier this decade after business scandals at Enron, WorldCom and others were in part blamed on executives cooking their company’s books to meet their quarterly earnings-per-share estimates. According to critics of guidance, those cases highlight why investors place too much emphasis on whether companies beat, match or miss their profit estimates, down to the last penny per share. They say it can lead corporate managers to perform creative accounting to get ahead, maybe by moving up sales or delaying charges. Over the last five years, major companies like Coca-Cola Co., AT&T Corp., Google Inc. and McDonald's Corp. all announced they were stopping quarterly or annual earnings-per-share guidance. About 66 percent, or two-thirds, of companies give guidance, according to a 2006 survey by the National Investor Relations Institute of 654 of its members. That’s down from 77 percent in 2003. Among those who think guidance as we know it should come to an end is the Committee for Economic Development, a Washington think- tank whose members include former Securities and Exchange Commission chairman William Donaldson and former New York Federal Reserve Bank head William McDonough.

 

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