Earnings guidance: planning and pretence

"Currently it is difficult to provide forecasts . . . due to a large number of uncertain factors." New targets will appear when "it becomes possible to make a rational projection." So said SoftBank, the Japanese telecom/ internet conglomerate, on Monday after the close of trading. The market will have its say on this laconic approach on Tuesday; the key "factor" seems to have been higher investment.

Might the missing forecast simply not matter? There is an alleged link between reliable forecasts and good stock performance. It is a basic tenet of modern finance theory that investors are willing to pay more for less volatile earnings. To generalise: investors do not like surprises. So companies that set and hit public targets should be worth more. And there is a causal - if fragile - link between targets (or "guidance") and prices. Analysts tailor their forecasts to fit the companies'. And analysts' mean forecasts are the basis for the price-to-earnings ratio so often used to express a stock's relative value. Guidance sets expectations; meeting or missing them moves shares.

But forecasts are not magic. Value, over the long run, is a function of business fundamentals and these cannot always be planned a quarter or a year in advance. Things change and guidance must follow. Changes in computing forced even metronomic IBM to renounce its long held 2015 target of $20 a share in earnings.

Seen this way, the guidance ritual looks like a matter of minor changes to when investors find out what. Public targets may keep management out of legal hassles and reduce the temptation to insider trade. But there are costs, and not just in management's time. Pressure to hit targets may make management myopic, hurting long-term profits (there is someevidence of this; and of limited valuation support from guidance).

A lower cost way to set expectations - without fostering the illusion of precision forecasting and or forcing analysts into a mindless herd - is to add disclosures about the contribution to earnings of different business segments and the factors affecting each. Amazon has long given anodyne sales and profit forecasts, but revealed little about where profits come from. Progress came last quarter, when figures from web services were added.

Skip the projections, rational or otherwise. Tell us more about the present, instead.

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