Brio360 today announced the release of its inaugural Public Company Guidance Trending Report. To illuminate earning guidance trend, Brio360 compiled and analyzed earnings guidance dataset from S&P 500 and Nasdaq 100 index companies for the last four years. “Various academic studies have shown the importance of financial guidance to the functioning of capital market. We believe Brio360’s analysis added useful new insights to CFOs, financial professionals and the investment community,” said Peter Ho, Managing Partner of Brio360. According to Brio360’s analysis, over 90% of the companies in the dataset provide some form of financial guidance and the proportion of companies providing guidance remains stable in the last four years.
Impact of Covid, Supply Chain Disruptions and Inflation
In the first half of 2020, over 200 companies, or more than 40% of companies in the dataset withdrew financial guidance. In 2021, the number of companies providing guidance bounced back to the same level before the pandemic. Geopolitical risks, supply chain disruptions and record inflation have overshadowed the impact of Covid in 2022. Despite the increased uncertainties in the global economy and stock market indices entering bear market territories, the number of companies withdrawing guidance remain low, at 1%, at the end of Q3 2022. “The level of financial guidance withdrawal in the early phase of Covid is unprecedented. Despite the heightened economic uncertainties this year, we are pleasantly surprised by the resilience of companies’ financial guidance this year, “ Peter Ho commented.
Prior to Covid, the number of upward guidance revisions to downward guidance revisions (“Up Down Ratio”) was slightly above 1.00x. 2020Q2 was the only quarter in the dataset where companies issued more downward revisions than upward revisions. Up Down Ratio bounced back strongly as companies took advantage of increased demand in 2021. Although economic risks continue to increase in 2022, Up Down Ratio remains in positive territory. Yet, there is a clear deterioration in trend. In the last few quarters, Up Down Ratio has started to soften, sliding down from 2.04x in Q4 2021 to 1.10x in Q3 2022. Companies in Consumer Discretionary, Real Estate and Telecommunications are issuing more downward revisions in 2022 than last year while Companies in Energy continue to experience strong upward revision momentum.
|Q3 YTD 2022
|Companies providing guidance
|Companies withdrew guidance
|Up Down Ratio
Financial Metrics used in Guidance
While earnings per share (EPS) is one of the best-known guidance metrics, companies in the dataset utilize a broad range of indicators in their outlook. To facilitate analysis, Brio360 groups financial guidance metrics into eight categories.
Percent of Companies with the following Guidance Metrics* – Primary Valuation Drivers
Percent of Companies with the following Guidance Metrics* – Indirect Valuation Drivers
*Numbers do not total to 100% since companies use metrics in multiple categories
While most guidance metrics used are well known drivers to valuation model, two metrics, Tax Rates and Charges are indirect valuation drivers. Cashflow and EPS are the most commonly used guidance metrics among primary valuation drivers, followed by Revenue. It is noteworthy that more companies issue guidance on Tax rates than Cashflow or EPS. On average, companies provide guidance in four categories. The choice of financial guidance metric is shown to be correlated with the company’s industry group. Cashflow metrics are most frequently used in Consumer Staples, Energy, Industrials and Utilities while Revenue and Gross Margin are more prevalent for companies in Technology and Healthcare.
Guidance for Current Fiscal Year and Beyond
Companies issue financial guidance covering different time horizon, including current fiscal quarter, current fiscal half, current fiscal year, next few fiscal years or combinations thereof. While majority of datapoints address outlook within a year, more than one third of companies and over 5% of datapoints include financial metrics beyond the next twelve months. “Our data analysis has shown that it is a misconception that companies only focus on short-term guidance. CFOs are clearly looking into the future beyond the current fiscal year,” Peter Ho noted. Companies in Energy and Utilities tend to provide guidance furthest into the future. Within the current fiscal year, the most common approach is to issue guidance on fiscal year only, followed by both fiscal year and fiscal quarter. Companies in Technology are more focused on fiscal quarter than companies in other industries.
While many companies provide point estimates in their guidance, some utilize range and boundary estimates to further quantify the level of guidance uncertainties. The proportion of companies with point estimates and range estimates are similar and they are significantly more prevalent than boundary estimates. Within companies providing point or range estimates, there are variations across different financial metrics. It is more common for companies to provide point estimates in Cashflow while it is more prevalent for companies to provide range estimates in EPS and Profit. For companies providing range estimates, the average width of the range is 4% for all metrics. The average and standard deviation of width of EPS and Profit ranges are significantly higher than those of other guidance metrics.
Brio360 is an independent business advisory firm serving CFO offices in the middle-market and emerging growth firms. Brio360 works closely with clients across industries to create long-term shareholder value by developing robust financial analytics and asking the tough strategic questions.
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