Recently Jamie Dimon was interviewed by Bloomberg, and commented that companies should stop giving earnings guidance. This is out of character for me, but I will explain why companies should offer earnings guidance. (Why is it out of character? Previously I have said that I don’t personally care whether firms that I own give earnings guidance or not… that still remains true.)
From the interview:
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said corporate leaders shouldn’t give earnings guidance because they can’t predict the future and should focus instead on long-term performance.
Some CEOs “start making promises they shouldn’t make,” Dimon, 59, said Monday in a Bloomberg Television interview with Stephanie Ruhle. “Don’t make earnings forecasts. You don’t know what’s going to happen every quarter. I don’t even care about quarterly earnings.”
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While many JPMorgan shareholders “completely appreciate” long-term investing, other market participants overreact to short-term results, Dimon said. The New York-based firm last week reported third-quarter profit that missed analysts’ estimates as a slump in trading and mortgage banking drove revenue lower from a year earlier.
Dimon is mostly right, as far as he goes, particularly when you think about a complex bank, where the accounting for profits over a short period is less than an exact science.
I’ve written at least two articles on earnings estimates:
In general, I think you have to have something like [adjusted non-GAAP (ANG)] earnings estimates in order for shareholders to have some measure of how corporations are tracking in their goals of building value. That doesn’t mean that corporations have to facilitate that, because the sell side will do it themselves if the company is big enough, the shares trade enough, or it raises capital often enough.
Dimon and other CEOs can sit back and let the earnings estimates be their own little sideshow. Still, there is a reason to give forward guidance. It lowers your cost of capital on average.
Forward guidance gives investors (and sell side analysts comfort that there is a business model there that is predictable in building value. I’m not talking about GAAP earnings, but ANG earnings because in principle they should reflect the true increase in the per share value of the firm after eliminating accounting entries that distort that effort.
Now don’t get me wrong. Not all companies craft their ANG earnings so honestly — they may even adjust differently period to period to make things look good. As with all things in the market, buyer beware.
But if companies can show that they have adequate control over their financial results such that they forecast future earnings and they honestly come to pass, investors will think the place is better managed than most, and reward it with a higher P/E multiple.
That is my simple argument.
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