The stock market wants certainty and transparency. It likes when management teams fully explain their business, its key drivers, and applauds when they give a detailed outlook regarding future financial performance. The market likes, even more, when management teams deliver on that outlook.
Under normal circumstances, a company’s financial outlook is digested by sell-side or “covering” analysts, that each publish their financial model and projections, which combine to form a consensus expectation for revenues, EBITDA and/or earnings per share. After the quarter closes, companies report their results and stocks tend to react positively or negatively based on how those actual results compare to consensus. If a company reports close to, or in line with consensus, there will be less volatility in the stock and more credibility bestowed on management.
Consequently, many companies pre-announce their results (three or four weeks prior to their quarterly release); typically when they are going to be materially above, or more likely below, consensus estimates. This keeps the lines of communication open with investors in times of duress and avoids a negative surprise. One could argue that frequent and transparent communication, not the actual results themselves, lead to higher valuation because at any given time, investors know they will get all the information they need to value the business in a timely manner.
The COVID-19 pandemic has turned this process upside down as this usually tight system of companies delivering against analyst estimates is in disarray. Scores of companies have seen sudden and material declines in revenue and profitability due to COVID-19, and most have withdrawn their outlook/guidance. This has left the analysts who determine consensus without a compass, which in turn, has resulted in a wide dispersion of expectations and material uncertainty (i.e. many companies are likely to report results that materially differ from consensus expectations).
WHAT TO DO?
With the first quarter in the books (for those companies that are on a calendar year), companies now know or have a very good idea of their revenues – a least a range of revenues. And with several weeks until they release earnings, many companies are likely debating the need to pre-announce results.
While one size doesn’t fit all, ICR generally leans toward more communication versus less, and advises some sort of pre-announcement of revenue or a range of revenue (with some added “color” around business trends). This will add greater certainty to the equation for investors in a very uncertain world.
A few points to consider:
- This will not be a typical earnings season. The swiftness and severity of business interruption related to COVID-19 may take time to fully assess. Pre-announce what you know and tell the market what you don’t know and why.
- There may be additional uncertainty around the timing of this quarter’s earnings, which may depend on your ability to complete a normal quarterly review process. (Note: the SEC has issued an order that, subject to conditions, provides companies with a 45-day extension to file most reports, including Form 10-Qs, that would otherwise have been due between March 1 and July 1, 2020 https://www.sec.gov/corpfin/coronavirus-covid-19). Again, as part of a pre-announcement, detail your situation, the possibility of a delay, and the reasons why.
- If you chose not to pre-announce, take extra care to ensure that those involved in the process are mindful of the company’s obligations under Regulation FD, particularly if IR or senior management is speaking to investors/analysts.
As of April 6th, 53 companies have pre-announced results. Almost all (about 94%) of them have provided a sales update, 26% provided commentary on earnings, and over 2/3 (68% of companies) spoke to other financial metrics in their release including segment details, gross profit/margins and expenses. In terms of sectors, Consumer Discretionary, Health Care, and Information Technology represented approximately 77% of the list.
Again, while Boards and Management teams will rightfully advocate different approaches to announcing results under these unique circumstances, we believe more certainty and transparency can only add to credibility and the valuation of the business.
