Publications
Partners
One of the features of financial results releases in the US that has fortunately not made its way to South Africa, is guidance. Companies in the US will offer guidance for the subsequent quarter, year and sometimes even further ahead with every set of results they release.
This will be in different forms, with some companies only offering a range of what is expected from revenue and earnings per share. Other companies add divisional sales and more. The idea is that it helps investors get an insider view of the company’s future.
I said it’s fortunate that we don’t have it in SA, because I feel that investors get far too fixated on the guidance. Often, companies will low-ball the numbers as no CEO wants to miss their own stated guidance. But they’re also bland and seldom tell of any imminent trouble, especially if, like the Covid-19 pandemic, nobody sees it coming. The only real benefit perhaps comes in when things are booming. Then guidance will help investors understand the reigning boom and when it will start to flatten off.
But, suddenly, we find ourselves in a totally different world where the results that are now hitting the market are totally useless. So, a company giving me details of revenue and profits up to the end of February 2020 is merely a lesson in history. It’s interesting but has no bearing on the future. With this in mind, what should we be looking for?
Many listed companies on the JSE have already issued some level of Covid-19 guidance, with healthcare stocks offering great insight into how they are functioning right now, ahead of the pandemic seriously breaking out in SA. Standard Bank, for example, has warned that the first quarter of 2020 will see earnings down some 27%, largely due to increased provisions for bad debts.
But the problem remains. So far pretty much everybody has underestimated the actual impact of Covid-19. And I am not passing blame here. What we’re currently experiencing is unprecedented, with the last pandemic being the Spanish flu of 1918. That was before vaccines were even a concept.
In other words, the guidance coming out of JSE-listed companies recently is worth the read, but we must understand that it really is written in sand and can change from day to day. Offering any guidance out to next year remains a guessing game.
Meanwhile, there are some tricks that I have always used to gauge future performance, and they can be useful in these unprecedented times.
Most companies will have a short paragraph or two on their outlook that they include with results. Furthermore, the annual report will often offer some level of outlook for the future. They’re seldom on the level of US companies in terms of actual hard numbers and, more often, they’re just the company’s view of the current operating environment.
My trick is to always go back five years and read previous outlook statements. I can then compare the old outlooks with what actually happened in the years after that statement was issued.
What you very quickly pick up is which companies put in real thought and, as such, share truly useful information in their outlook statements. Some CEOs or, as the case may sometimes be, chairpersons write insightful outlooks while others largely say extraordinarily little.
There was a CEO of a company, which is now delisted, who, when the company was still listed, stated each year that the past year was tough but that the following one would be better. Yet, every year remained tough; either the CEO was lying to us or he had no grasp of reality.
So, read the outlooks, but first review previous statements and understand the weakness of prediction during a pandemic and understand how good the company usually is at guidance to investors.
This is an extract of the cover story that originally appeared in the 7 May edition of finweek. For the full story, you can buy and download the magazine here.
