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05/02/03 . By Lynn Cowan and Richard Gibson . DOW JONES NEWSWIRES . USA
Motives Are Questioned As McDonalds Go Mum On Quarterly Guidance
WASHINGTON (Dow Jones)--Some of the most respected analysts and investors advocate that companies quit providing quarterly earnings estimates, but market participants are questioning the motives behind a few recently buttoned lips.
AT&T Corp. , McDonald's Corp. and Safeco Corp. (NasdaqNM:SAFC - News) are among the latest entrants to a brave new world: They are no longer giving bottom-line quarterly earnings estimates. They join Coca-Cola Co. (NYSE:KO - News) and some relatively old hands, such as Washington Post Co. (NYSE:WPO - News) , USA Interactive and Berkshire Hathaway Inc. (BRKA, BRKB), in ending the practice of telling analysts and investors what they expect to earn in a given quarter.
Ending quarterly guidance has its champions, among them Warren Buffett, a staunch believer that focusing on a quarterly earnings target can distract a company from its long-term growth goals. Steve Galbraith, chief U.S. market strategist for Morgan Stanley, believes that a host of accounting shenanigans - from channel stuffing to special purpose entities - stem from pressure on companies to achieve quarterly earnings, at the expense of long-term value.
Coke and other companies presented the long-term focus argument when they explained their decisions to halt guidance over the past two months; Safeco indicated it felt it would invite unwarranted regulatory scrutiny by issuing guidance it might miss. All of the companies said they will release enough data, ranging from budgeted capital spending to their anticipated tax rate, to allow analysts to complete their earnings models.
But analysts detect another motive in several cases: Companies that have consistently missed their own earnings forecasts, or are predicting a gloomy 2003, have decided that the future is too cloudy.
Allan Hickok of U.S. Bancorp's Piper Jaffray unit suggests that deciding not to give guidance may be a trend for under-performers. Hickok covers McDonald's, which had a dismal performance in 2002 and missed its fourth-quarter estimate.
"For the most part, companies that are doing well aren't afraid, ashamed or embarrassed to give their best thinking in terms of what they can earn," said Hickok, who doesn't own any McDonald's shares. "But if they're not doing well and the predictability of performance is difficult, I don't blame them for dropping explicit earnings forecasts."
On Jan. 16, the day it made the announcement, McDonald's stock fell 5%, to $ 15.85.
McDonald's, like other companies ending their guidance, said it will provide enough operational data to help analysts. The Oak Brook, Ill., hamburger chain said it will release the percentage that sales are expected to rise, how to translate changes in comparable-store sales into per-share earnings, and how many stores it plans to open.
John Glass, a McDonald's analyst for CIBC World Markets Corp., said the company's guidelines are vague. The company won't forecast same-store sales, which in the restaurant business have become a critical measurement. Nor is it publicly predicting profit margins.
"They need to provide a little more specificity to their numbers," said Glass, who doesn't own the stock. But given the recent turmoil at the company, " I'm not sure how much they can tell us right now."
Still, Glass said analysts often have been "spoon-fed. Calculating numbers is part of what we're paid to do."
In the case of AT&T, which reported a sharper-than-expected loss in the fourth quarter, Davenport Securities analyst Drake Johnstone is concerned that executives are no longer sure they can predict their business well enough to place a target.
"Certainly, one way you can take it is that they have zero visibility, and that doesn't inspire confidence," said Johnstone, who doesn't own stock in the companies he covers.
AT&T said it would stop providing guidance on Jan. 23, and its stock fell that day by 19%, due largely to its disappointing fourth-quarter results and 2003 outlook, which also came that day.
The move might have been better received if the company had waited until its earnings were on an upswing, Johnstone said. The Bedminster, N.J., telecommunications company reported a loss of $17.08 a share in 2002, a 10.4% decline in revenue, and predicted bleak economic conditions for 2003.
AT&T claims it will give analysts more data than before. Johnstone said there is enough telecom industry information for analysts to model earnings estimates, but that AT&T has been a bit of a "black box" in the past year because it has taken so many charges - three out of four quarters in 2002 included charges of more than $1 billion each.
'The Game' Is Over
Coke's announcement came two months after the firm warned it might not meet fiscal 2002 estimates. The company has had trouble forecasting earnings since the late 1990s, when economies in developing countries became rocky. Seventy- five percent of Coke's profits come from outside the U.S.
The Atlanta company gave earnings estimates for 2003 in December, when it said that would be its last per-share forecast, and told investors it would continue to provide information to help analysts.
"By no means are we not going to continue our robust dialogue we have with our investors," said Kari Bjorhus, a spokeswoman for Coke.
Coke's decision, which was made ahead of Safeco's, AT&T and McDonald's, was generally well received by the market. The stock closed flat on Dec. 13, the day it made the announcement.
Coke's decision may have been better received than AT&T's and McDonald's because it took the lead, and two of its board members, Buffett and USA Interactive Chairman Barry Diller, have been anti-quarterly guidance advocates for years, bolstering the company's move.
"The game of sitting around and waiting for management to tell you what management thinks the earnings will be is over," said Marc Cohen, a Goldman Sachs & Co. analyst who covers Coke but has never relied on the company's information. "I'm all for it."
Cohen, who doesn't own Coke shares, said he talks to customers and competitors, and subscribes to consumer data services to gauge Coke's business trends. He also does field surveys. Over Super Bowl weekend, for example, he sent a group to visit 150 stores.
Seattle insurer Safeco's decision to stop forecasting earnings on Jan. 27 was also well-received; its stock rose 1% that day.
Unlike other no-guidance companies, Safeco's business has been improving under Chief Executive Michael McGavick since he was hired in January 2001; last year marked its most profitable since 1998.
"I'm not upset they ended guidance as long as they keep increasing disclosure, which has been an ongoing process under McGavick," said Michael Lewis, an analyst with UBS Warburg, who doesn't own stock in the company.
Although no-guidance companies don't believe their decisions will usher in an era of stock volatility, analysts are divided. Howard Penney, who tracks the restaurant industry for SunTrust Robinson Humphrey in Atlanta, believes volatility will increase because "there are bigger disparities in estimates out there."
Other companies have halted earnings estimates but haven't seen such volatility. Glass noted that Outback Steakhouse Inc. (NYSE:OSI - News) hasn't provided a specific earnings outlook for years.
"If there's a number they put out there and miss, the stock can dive. But if they don't hit my number, who cares?" asked Glass.
There will probably be more companies that decide to suspend bottom-line estimates, but it's not expected to become a broad trend, said Joe Cooper, a research analyst at Thomson First Call, which tracks analysts' earnings estimates. In fact, just a month after Coke's announcement, Boeing Co. (NYSE:BA - News) , which already gives detailed delivery and revenue outlooks to analysts, said it would begin to issue earnings per share guidance instead of operating margin guidance. The company said it believed it would "more clearly communicate the outlook for future earnings."
"I think it will end up being a blend" of companies offering earnings guidance and those who don't, said Cooper.