Chris Hill: I want to talk for a minute, just a minute, about company guidance, because
we reference this all the time. It is always part of the story when it's earnings season.
But, I want to know how you guys use this as stock analysts. Matty, I'll start with you.
Matt Argersinger: I do take management guidance pretty seriously. I think when management
sets expectations for the year, or beyond that, it's a way for me to gauge what I think
the growth of the company could be, and it gives me ways to determine whether management
is able to control the destiny of the company, whether they're able to reach goals. What
I don't take very seriously, of course, is street guidance you get from analysts--
Ron Gross: Other than us. Argersinger: Well, yes.
Argersinger: Unfortunately, a lot of companies are very good at playing the earnings expectations
management game. They're great at under-promising and over-delivering on quarterly earnings
calls. For me, I don't know what the actual statistics are, but I feel like every time
I read an earnings release, and you see the reaction, it's always, "This company beat
by $0.02 or $0.03, or they beat revenue expectations by $10 million." It's no longer a surprise.
What is surprising is that the stock still reacts positively in general to that, when
it's really just all about a company managing expectations.
Hill: Ron, let's take a new company. If you start digging into a company and you buy the
stock, is that management on a tighter leash than a company that you've known for a while,
and a management team you've known for a while? I'm assuming it takes a little while to get
a sense of how they are when it comes to offering guidance and their vision for the near and
long-term future.
Gross: That's fair. Some companies and some management teams are better than others at
issuing guidance. And some industries lend itself to guidance better -- early-stage technology,
fast-growing companies, it's very hard to nail that, even if you're there every day
managing the business. More stable, blue chip type companies, you can kind of nail that
management guidance. You can make it much tighter and not have to make as many revisions
as you would with a high-tech company.
I think, if you're focusing on valuations and value, for example, like I do, it is helpful
to get management's thoughts on where a company will be a year from now, in terms of cash
flow and profits. The quarterly guidance is a little too much for me, it's a little too
granular. They constantly have to update it. I would be fine if they just stuck with one
year out. How does this year look like it'll shape up? That helps me to inform my models
and make a decision about a stock.
Hill: Are you the same way, Jason? If you could wave a magic wand and then companies
wouldn't give quarterly guidance anymore, would you wave it?
Jason Moser: Yeah, I wouldn't have a problem with that. I tend to always pay attention
to what management says they're going to do. I care more about what management says they're
going to do versus what any Wall Street analyst ever imagines they might be able to do. It
always makes me chuckle, businesses like TripAdvisor, for example, where they don't really offer
any guidance other than maybe a range of sales growth that they're looking at. But, we know
very well that management there is geared towards three- and five-year timelines there.
So, it makes me chuckle, the audacity of Wall Street, to sit there every quarter and say,
"Oh, they missed analyst estimates by this much money!" Well, those estimates are just
arbitrary guesses on your part.
So, yeah, to Ron's point, some companies lend themselves better than others to setting guidance.
But for me, the important part is that management is doing what they say they're going to do.
If that's happening, and you see the business continuing to perform fundamentally well,
over time, the stock market will recognize those good businesses. It's just a matter
of us being more patient.
Argersinger: We have to remember, earnings per share numbers, which are, of course, usually
the most prominent part of the earnings release, it's what analysts usually zero in on with
whether or not a company missed, or what they're guiding for in terms of EPS, those numbers
can be so manipulated ... I don't want to get in the weeds here, but the bottom line
is those numbers can be manipulated in a way that, really, most companies, especially financial
companies, or companies that have the ability to do that, can really report almost any number
they want, in terms of earnings per share. So, just be very aware of that.
Moser: Something as simple as share buybacks, for example, they always tout that as being
such a great thing. Plenty of statistics out there to prove that companies are pretty bad
at it. But, that's one very simple way they can reduce that share count, and therefore
boost earnings per share. Hey, that looks great for the quarter, you beat the estimates
and everything -- but really, is that a sign that your business is performing?
Gross: And I'll just wrap it up by saying, if you're a long-term buy-and-hold type of
investor, you can absolutely ignore the quarterly noise. And you probably can even ignore the
annual noise, management guidance or analyst guide, as long as you feel the company is
on track and building and growing over time, and management is making the right moves.
The rest can get a little bit too granular, it can be too noisy, can lead you to make
poor decisions. Buy and hold good companies that are executing well.
Hill: You went in a slightly different direction. I thought you were going to say you can ignore
the quarterly guidance and ignore the annual guidance, as long as you keep listening to
Motley Fool Money. Gross: (laughs) That's what I meant to say!