March 14, 2009 / 12:24 AM / 10 years ago

Tight-lipped U.S. firms pay for their silence: study

NEW YORK (Reuters) - It pays to communicate but Corporate America is doing less and less of it with investors as the U.S. economy falls deeper into recession, undermining market confidence in the process, a new study showed.

General Electric's logo is still visible on a closed General Electric Co. facility in Lynn, Massachusetts March 6, 2009. REUTERS/Brian Snyder

The number of companies in the Standard & Poor’s 500 index with a consistent track record over the past 10 years of issuing quarterly earnings per share guidance is down 36 percent in the last 10 months, according to Thomson Reuters Proprietary Research.

Well-known companies such as General Electric, Microsoft, Costco Wholesale, and Nucor have stopped giving consistent earnings guidance.

“They are just pulling back because they don’t want to continue to have to put out numbers that they cannot meet on the street,” said Martin Sass, chairman and chief executive officer of MD Sass, an investment management firm with $6 billion in assets under management.

“It has devastating implications for their credibility, their stock prices, and the like,” he said.

The Thomson Reuters study found companies that gave up a consistent schedule of earnings guidance from June 2008, when the credit crisis began to spread in earnest, have paid a price in the market.

David Dropsey, the study’s lead author, said when this group of companies is combined with companies that do not consistently offer earnings outlooks, their 12-month forward p/e ratios were 12.4 versus 12.7 for companies that maintained their guidance in earnings projections.

Shoppers manoeuvre their way through the aisle at Costco Warehouse in Arlington, Virginia, May 29, 2008. REUTERS/Molly Riley

Forward price-to-earnings (p/e) ratios are a key measure of investor confidence.


But the report also said that if companies start to re-fill the information void, regardless of what earnings per share projections say about corporate health, investors might just have confirmation that markets are poised for a rebound.

“It could mean that we are finally out of this gloomy economic condition and we can start to hope that better times are ahead,” Dropsey said. “It is better to have the known negative than no information at all. Nothing kills the market faster than the unknown.”

The Thomson Reuters study found over a 10-year period that 209 companies in the S&P 500 could be classified as “consistent guiders.” The financial sector was the worst among this group over the last 10 months while technology companies, often near the top, are now second to the materials sector, the study showed.

Financial companies, which are suffering billions in asset write-downs, are playing a large role in this deterioration in earnings guidance. The S&P financials index has fallen 78.5 percent from its peak in May 2007.


In October 2000, when Regulation FD was installed by the Securities and Exchange Commission to create a level playing field with respect to disclosure of information, the number of S&P 500 companies issuing formal earnings guidance soared, peaking at 410 in the fourth quarter of 2002.

Microsoft CEO Steve Ballmer speaks during a news conference at Mobile World Congress in Barcelona, February 16, 2009. REUTERS/Albert Gea

But that number has fallen off. Starting in 2004, the number fell below 300 and in 2005 below 200 for a brief period.

Over a 10-year period, the average number of companies offering guidance, whether consistently or not, is 229, according to Thomson Reuters data.

“Correlation studies have shown that companies that offer guidance tend to have lower betas (lower volatility),” the report said.

So far, 150 firms gave Q1 2009 earnings guidance, down 16 percent from the average of the last three quarters.

Companies like GE, a staple of the American stock market for generations of investors, famously quit the guidance issuance game in December, unwilling to offer clues to its future performance while the global economy is falling apart.

Sass agreed with the research conclusion that more reports “will reflect a higher confidence about the future.”

However, he is deeply skeptical of the accuracy of the guidance both from management and Wall Street analysts.

So is Bank of America/Merrill Lynch chief U.S. investment strategist Richard Bernstein.

“We pay very little attention to guidance at all. It’s basically public relations to manipulate investor thinking, and has little to do with true fundamentals,” Bernstein said in an e-mail response to questions.

Editing by Jan Paschal

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