Sloan Sessions: Earnings forecasts
TEXT OF INTERVIEW
SCOTT JAGOW: Last few weeks, we've been getting profit reports from just about every public company under the sun. Obviously, profits are a vital sign, but a couple of business groups are calling on companies to stop predicting how they'll do from quarter to quarter. I asked Newsweek's Allan Sloan, what's wrong with earnings forecasts?
ALLAN SLOAN: In a lot of cases, when companies forecast their earnings, they pick this number out of God knows where, and the number then becomes the goal for the company for the next quarter. And we've seen all through the late '90s and into early '00s, the dangers of companies managing short-term, trying to meet the numbers that they've promised Wall Street. And God help a company if the earnings come in a penny or two a share below the number because the stock gets pummeled, there's all sorts of screaming, there are all sorts of negative stories, so companies will do almost anything to make the short-term number, even at the expense of the long-term benefit of the enterprise.
JAGOW: But companies have a choice about this don't they? They can choose not to forecast their earnings, so why are they doing it?
SLOAN: Alright. Some companies like my employer, The Washington Post company, have in fact for years not forecast their earnings. For a lot of other companies though they consider themselves on a treadmill, where they feel having once started this they have to keep doing it. Only a handful of companies really have stopped doing it publicly. I think that what this is, is an attempt to give these companies political cover, because if everybody does something, or if a lot of companies do it, then your company won't get singled out for blame.
JAGOW: Who benefits form these companies predicting how they'll do the next quarter?
SLOAN: As far as I'm concerned, nobody benefits. The theory of all this is that solid, predictable growing earnings are what Wall Street wants and that a stock will fetch a premium price if its earnings are known and predictable in advance. I don't think that's necessarily true but companies are trying to maximize the price of their stock and many of them think they can do that by forecasting earnings and then meeting the forecast, or more likely, beating the forecast by a penny or two. In the late '90s this got to be an incredible game and people used to laugh at it and then there was something called the "whisper number" which was supposed to be the real number as opposed to the forecast number and it went on and on and on and it went into endless iterations.
JAGOW: And how does this reflect sort of the short-term thinking on Wall Street?
SLOAN: The joke on Wall Street is that long-term thinking is what will I have for lunch tomorrow? I think some predictability is good. If the company's really going to have a problem, you oughta let people know but the idea of providing guidance for every quarter in the entire year, it commits the company to things that maybe it would be better off not doing.
JAGOW: Allan Sloan is the Wall Street editor for Newsweek magazine. In Los Angeles, I'm Scott Jagow. Thanks for listening and have a great Monday.