Nothing but the Real Thing

Why Coke and some other large-cap companies are getting out of the guidance game.

Here’s the million-dollar question from this year’s earnings season: Was Coca-Cola’s recent decision to stop supplying earnings-per-share forecasts a flight to quality reporting — or a flight from its shareholders?

The answer won’t likely to be discernable for at least 11 months. By revealing its EPS growth target for 2003 (11 percent to 12 percent), Coke made sure that the outcome of its controversial move won’t be clear for some time.

Nevertheless, Coke’s announcement that it is getting out of the guidance game (and similar edicts by fellow large-caps McDonald’s and AT&T) is sparking a broader debate about earnings forecasts.

Critics — and in particular, governance-rights activists — contend that companies should be providing as much information to shareholders as possible, not less. They argue that it’s up to investors to decide what to make of a company’s earnings forecast.

But defenders of Coke’s action say leaving predicting to analysts and market prognosticators could help restore investor confidence in corporate accounting.

What’s more, suggests David Nish, finance director of Scottish Power, a U.S.-listed company that doesn’t routinely provide earnings guidance, executives who supply frequent EPS outlooks but little context are providing shareholders with a “blinkered” view of their companies. “If there’s too much reliance on one figure,” he says, “there’s a risk that poorer decisions can be made [by investors]. Earnings can keep going up, but so can debt.”

When We Get Behind Closed Doors

Certainly, when a company’s management team offers only detailed results — not sketchy predictions — it removes itself from the turf staked out by Kreskin and Joan Dixon. By not offering forecasts, a company can move to a more conservative accounting regime and thus avoid nasty surprises down the road. Further, dumping earnings predictions can help erase much of the temptation to rejigger the books to hit the target.

Moreover, playing footsie with analysts can be hazardous to a company’s credibility. Management at Ford Motor ran into a problem when it predicted in December that the company would generate a 70 cent EPS figure in 2003. That projection topped analyst forecasts by as much as 30 cents. Reportedly, a number of research analysts slammed Ford’s sunny forecast as purely a marketing ploy. Some went as far as to claim Ford issued the upbeat prediction to help yank up a sagging credit rating.

A move like Coke’s, however, frees a company from that sort of second-guessing. Indeed, advocates of the beverage maker’s action say the company’s priorities are right on the money: delivering real, rather than apparent, shareholder value over the long haul.

In a response to questions from, Coke CFO Gary Fayard noted that the company’s finance team was heavily involved in the decision. “We believe that establishing short-term guidance prevents a more meaningful focus on the strategic initiatives the company is taking to build its business and succeed over the long term,” asserted Fayard.

Some observers aren’t convinced. When it comes to providing a true picture of corporate performance, many governance activists insist that less is not more. If a company abandons earnings guidance, they say, its managers are implicitly asking investors to trust them to build the company’s value behind closed doors. And in this post-Enron, post-dotcom era, trust is a rare commodity.


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