You Will Survive. But Guidance Expectations Are Back to Stay.
If you found yourself feeling the need to bust out some Gloria Gaynor lyrics following the Q3 2020 earnings season, you were not alone. Many companies have been ‘surviving’ the pandemic much better than expected—or at least much better than they have been publicly estimating. In the second half of 2020, fewer than 10% of S&P 500 and S&P 400 companies provided full-year guidance for 2021, however, a majority did provide at least quarterly future earnings outlooks for the remainder of 2020. And many companies blew away those quarterly predictions during the Q3 2020 earnings season.
According to John Butters, FactSet Senior Earnings Analyst, in Q3 2020, the percentage of companies that beat EPS estimates was above the five-year average of 73%. The Street responded positively supporting the stock and delivering near average price increases. On the flip side, negative earnings surprises were punished with an average price decrease of -5%, nearly double the five-year average of -2.6%.
This response is likely due to the fact that all companies were, understandably, unsure of their future performance at the height of the pandemic. Even the most seasoned analysts and investors were unsure of the full impact of the year’s unparalleled events. When an organization under-promised and over-delivered, the Street took it as a good thing and strong evidence of the company’s ability to rise to the challenges. Companies that underperformed, however, may be viewed as continuing to operate in survival mode with a still-murky future on the horizon.
Either way, the passes have expired.
How ever you handled guidance in 2020, it is time to return to your pre-pandemic practices. We do not expect the Street to be as lenient going forward now that companies have gained almost a year of experience managing through COVID-related business disruptions. In other words, businesses that have learned ‘how to get along’ in the midst of an ongoing global pandemic will be expected to be more forthcoming—and more spot on—with their future estimates. Specifically, we can expect the Street to stop giving as much credit for positive surprises and to have even less tolerance for negative revenue and earnings surprises in the months and years ahead.
As you prepare your next set of figures, here are some tips that can help ensure you meet the Street’s renewed guidance expectation:
- Get back to a long-term mindset. If you have been giving quarterly guidance only, now is the time to resume yearly forecasts. Even though the pandemic is still a reality for people across the country, with more and more vaccines being distributed, a return to some sort of normal is expected sooner than later. Giving yearly guidance demonstrates your executive and management teams’ renewed confidence in your organization’s future as well as its ability to see beyond crisis mode and return to business as usual.
- Resist the urge to low ball. The Street appears to have excused low estimates in 2020. Do not expect that to continue. Transparency will be more important than ever as companies have had plenty of time to properly adjust to current market conditions. Maintain your organization’s credibility by being as forthright as possible when it comes to your future performance expectations.
- Give as much concrete information and relevant context as you can. If you believe your business will perform well in 2021, tell investors why, in as much detail as you can. Wherever possible, give data and realistic, quantifiable information to support your estimates. Include market information and trends along with any relevant qualitative information. The goal is to support the validity of your projections while clearly demonstrating that your business is focused on the long-term.
- Set growth targets and strategize on how to reach them. Your top team should be looking even further into the future than 12 months down the road. Rekindle discussions that you may have tabled in the heat of crisis and start talking about where your executives see the business in the next two years, three years, and five years. Start making firm plans to move your organization in the envisioned direction. And be sure to share as much detail as you can with your investors who will be keen to hear about your transition from survival to growth mode.
- Use what you have learned. For many companies, the pandemic instantly magnified weak spots in the business including areas of vulnerability or inefficiency. If you have shored up these areas, your business is probably better positioned to succeed in the future, whatever it may hold. Let the knowledge and experience you have gained over the past 12 months positively influence your projections and your guidance.
Remember, you have earned the right to be confident.
The pandemic is not yet over. And, even if it were, some degree of uncertainty exists in any environment. However, coming through the past year really has shown many companies what they are made of. If nothing else, your leadership team and workforce are 12 months wiser than at the outset of 2020. So, do not be afraid to be realistically optimistic about your company’s future—as long as you have the data to back it up!
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