Corporate Guidance

[schin]

I wanted to know how companies can feel confident about their revenue and profit guidance into 2025? Or future quarters in general? 

 

I know everyone has models, but:

 

on one hand, people say it's so hard to forecast because we don't know a lot of variables like interest rates, events like Ukraine, 2nd and 3rd order effects of ChatGPT/AI/ML advancements... so, it's hard to foretell stock movement.

 

but, on the other hand, how can companies feel so confident they know their numbers for the next 4 quarters?

 

For example, are the revenue/FP&A models so good for banks like JPM, BAC, Deutsche Bank -- that they know how their trading, M&A pipeline will be in 6 months?

 

Is anyone in the corporate industry that can chime in?

[linus_md]

https://www.bloomberg.com/news/articles/2023-05-23/company-earnings-guidance-is-wrong-about-70-of-the-time
 

Their forecast are simply bad. I believe there should be a lot of academic literature on this topic.

[schin]

1 hour ago, linus_md said:

https://www.bloomberg.com/news/articles/2023-05-23/company-earnings-guidance-is-wrong-about-70-of-the-time
 

Their forecast are simply bad. I believe there should be a lot of academic literature on this topic.

 

Most likely... I wanted to know how accurate companies can be about earning.....  Like Elon Musk with Tesla -- can they really gauge short term demand and their CFOs can get close enough. I heard a lot from Jane Frazier at Citigroup that they can their ROIC numbers above 10% by 3 quarters from now. I know you can control your costs...but, how easy it is to match the revenue side.. .Or at the corporate level, they can do some accounting deferrals to "hit the numbers".

 

I know there are surprises, but do CFOs really have strong models to factor in growth and expenditures.

[DooDiligence]

I'd rather hear "guidance" on operational matters and leave the numbers projections off.

"We're gonna do this, that and the other thing. Tune in to the next five or ten 10K's to find out how it all worked out financially."

[schin]

On 2/1/2024 at 7:56 AM, linus_md said:

https://www.bloomberg.com/news/articles/2023-05-23/company-earnings-guidance-is-wrong-about-70-of-the-time
 

Their forecast are simply bad. I believe there should be a lot of academic literature on this topic.

@linus_md - Yes, I don't understand how Jaime Dimon and other banks can predict they will hit their ROTCE estimates so easily.

[schin]

On 2/1/2024 at 9:34 AM, DooDiligence said:

I'd rather hear "guidance" on operational matters and leave the numbers projections off.

"We're gonna do this, that and the other thing. Tune in to the next five or ten 10K's to find out how it all worked out financially."

@DooDiligence - I am with you. I just don't how banks can predict how the economy is going to do and how their IB arm will do.... which results in their ROIC numbers... like how does Jaime Dimon know even if JPM will be close 2 quarters from now... there's so many factors. Conversely, how can Jane Frazier know they will hit their targets in 2025?

 

I know you can deliver the cost cutting side -- but, who knows if there is another GFC or Silicon Valley Bank situation 3 quarters from now...... why even give that guidance as you say.... 

 

I like have Ubiquiti doesn't have a conference call or press release... same with BRK... you get what you get... But, most are in the other camp.... I felt it's a bit of tea leaves.. I just wanted to know if there is a secret sauce.

[Gamecock-YT]

On 2/1/2024 at 1:29 PM, schin said:

 

 

For example, are the revenue/FP&A models so good for banks like JPM, BAC, Deutsche Bank -- that they know how their trading, M&A pipeline will be in 6 months?

 

Is anyone in the corporate industry that can chime in?

 

Where I worked we were always told not to put something in the forecast unless we were absolutely sure it would happen because you would always have to speak to it once you put it in. And even then you forecast conservatively so you'd discount the revenue based on how certain you were. But our internal forecasts would go out 2-2.5 years into the future and they would be updated quarterly: 0+12, 4+8, 7+5, (9+3 sometimes), and 10+2. (Months of actuals) + (Months of forecast).  We did have pretty good visibility into M&A, IPO timelines and what we expected the P&L impact to be, but you always wanted to overdeliver your forecast instead of underdelivering. 

 

Edited February 10 by Gamecock-YT

[schin]

11 hours ago, Gamecock-YT said:

 

Where I worked we were always told not to put something in the forecast unless we were absolutely sure it would happen because you would always have to speak to it once you put it in. And even then you forecast conservatively so you'd discount the revenue based on how certain you were. But our internal forecasts would go out 2-2.5 years into the future and they would be updated quarterly: 0+12, 4+8, 7+5, (9+3 sometimes), and 10+2. (Months of actuals) + (Months of forecast).  We did have pretty good visibility into M&A, IPO timelines and what we expected the P&L impact to be, but you always wanted to overdeliver your forecast instead of underdelivering. 

 

@Gamecock-YT Is it only in your industry (finance)? Or can your forecasting work with oil companies, which can be at the whelm of spot prices?

 

Or one just has to look at hedges in the disclosure to see how risky a company is trying to be. 

[Spekulatius]

You can only forecast things you can control. An oil company can’t control prices, they will make a forecast around and assumed price band and forecast production typically, but they can’t forecast earnings.

 

Almost any company will start their operating year with a forecast for internal budgeting purposes. That will include Capex , investment and staffing plans.

Edited February 10 by Spekulatius

[schin]

@Spekulatius - Understood.  So, when you hear the estimates and comments from Citigroup and PBR-A --- do you put any weight to them? One is in financial and one is in oil....  You have something, and you pray they are right.. but, how accurate can Jane Frazier be -- considering there are capital market events that she cannot control in 2024 and 2025 that can help or hurt her earnings.  Can she accurately forecast what the Fed will allow her in buybacks and dividends without a bureaucrat being pissed that they told them what they should do.. versus the Fed telling what they can do. 

 

I know roughly what I am going to make this year, but I actually don't know how good my stock portfolio will generate.... But, then again, I don't have shareholders or wall street analyst to predict... 

[lnofeisone]

Depends on the industry you are in. I've supported model development for several CFO shops. We usually had ranges, and then scenarios planned, i.e., if this happens (e.g., your workforce quits or demands higher pay), then the range gets adjusted like so and so. The complexity of models goes up with more business lines, geographic diversity, etc. At some point, models become more directional or you have a forest of sub-models that average out to be generally correct. Really hard to model discontinuities like rapid interest rate hikes, COVID, Ukraine/Russia war, etc.

[SharperDingaan]

Most management in o/g knows their sensitivities extremely well; they will generally hedge some production at X to guarantee the funds to pay for planned capex, lock in the occasional opportunistic gain, but everything thereafter is left at market. Simply because o/g investors WANT the market exposure, as it creates share price volatility to trade against. The reality of course being that investors recognise that the intangibles are significant value creators; hedge them away and you also remove most of the investment opportunity. 

 

SD

 

Edited February 11 by SharperDingaan

[ValueArb]

I often thought the lesson of GE was the better a company was at making its public forecasts the more likely it was they were manipulating their earnings if not committing outright fraud.