IndustryInsights

By James T. MacGregor
Vice Chairman, The Abernathy MacGregor Group Inc.

Between now and the end of January, most corporations will tell their shareholders something about their expectations for 2009, perhaps as formal earnings guidance, perhaps as more general qualitative commentary. From what we hear, many of them are considering eliminating earnings guidance, and quite a few are contemplating dropping all varieties of forward-looking commentary altogether.

Cutting back may make sense. Cutting off the information flow altogether is a bad, possibly suicidal, idea.

In normal times, we’d probably applaud some of this newfound reticence. We’re definitely in the “less is more” camp where formal earnings guidance is concerned— we’ve seen too many companies tied in knots by guesstimates and wishful thinking dressed up to look like future financial reality.

These, however, are definitely not normal times. There are a lot of panicky investors out there, ready to sell, sell, sell on the faintest hint of weakness or uncertainty (it doesn’t even matter to these investors if the hint is true, as long as they believe others will think it’s true). There are also, in fairness, a lot of still-rational investors out there, but they are being very, very careful where they tread. Both groups are crying out for help, for facts, for at least some kind of guidance. We think companies, purely in the interest of self-preservation, need to give them whatever help they can.

Help does not mean classically structured earnings guidance. Movie buffs will remember Ed Harris as a beleaguered Houston Mission Control officer in “Apollo 13.” Bad news keeps flooding in from the troubled spacecraft: “This system isn’t responding.” “That system has failed.” “The other system is low on power.” Finally, Harris cries out, “What have we got on the spacecraft that’s good?” later vernacularized to “What’s good on the bird?” And from the answers to that question arise the solutions that brought Apollo and crew safely back to earth. That’s what investors need to know about today’s equities: What’s good on the bird?

Consider: Investors usually buy or sell on the basis of either an estimation of a company’s future earnings prospects, or an appraisal of the overall value of the company as a business enterprise. But who can credibly guess at future earnings when consumers are collectively sitting on their hands, paying down debt, deferring non-essential major purchases and husbanding cash? What’s the point of valuing a business if almost no one has access to the capital needed to buy it? These statements are oversimplifications— but the entire economic situation is oversimplified: Uncertainty is pandemic, and the natural reactions are caution and/or panic. Increasingly, companies are priced neither on value nor earnings growth, but on likelihood of illiquidity or a rumor-driven “death spiral.”

Right here, right now, investor relations is a corporate survival tool. So, more broadly, is corporate communications. Investors today have a different information need than at anytime in recent memory. IR is uniquely placed to discern and satisfy that need.

We find a lot of savvy investors asking these two questions: 1. Which companies are most likely to get through this chaos in fairly good shape? And 2. Out of the first group of companies, which ones have the best chance of a fast return to prosperity and/or gains at the expense of more troubled competitors? A lot of companies like talking about their fast return to prosperity, but not about getting through the chaos. This is backward. If survival is even slightly in doubt, few investors will be able to pay attention to anything else.

What’s the needed information? Lazy analysts and investors take company-issued earnings guidance and build their spreadsheets upward from the bottom. That model doesn’t work so well these days. Good analysts and investors, with or without companyissued guidance, take a fact from here, a number from there, an observation from somewhere else, and fit them into their own deep understanding of how the world works.

What IR can do is to marshal useful, indicative facts and numbers and observations; then, help investors to understand and use them to shape and reinforce a credible perception of the company. A desirable perception could be: Management is doing the right things. The core business can withstand additional stress. There’s big potential once the economy stabilizes.

These are the kind of questions we see companies being asked: What percentage of your revenues are under long term contract? What’s the status of your credit lines? What’s happened to your conversion ratio on new business leads? What’s in the product pipeline? How’s your liquidity? Any major new business wins? Losses? What has outsourcing done to your variable costs? What’s happening to days-outstanding accounts receivable? Are your vendors delivering on time? Are they asking for new payment terms? Any headcount reductions or facilities closings you haven’t announced? Have you stress-tested your expectations for a much-worse-than-expected 2009 and 2010? Can big projects be postponed, or are they being lost? And so on.

No one is expected to answer everything. But where there’s a firm fact to be found (one whose disclosure causes no competitive harm), getting it into general circulation helps to build a foundation of confidence beneath a company’s investor perceptions. Even arguably negative facts are preferable to silence. When there’s little or no information, investors are likely to assume a worst-case scenario. Even skimpy factual reassurance differentiates a company from others who have gone mum.

Most companies are limited today in their ability to provide conventional earnings guidance or long-term goal-setting and earnings-driver discussion. Right now, that’s OK. What they can do is present the solid data they have at hand. Those who do will be, over time, rewarded. Those who don’t may be penalized rather quickly.

To discuss this thought piece and related issues about guidance please contact James MacGregor, vice chairman or Lex Suvanto, managing director of the Abernathy MacGregor Group. They can be reached at (212) 371-5999, or at jtm@abmac.com and lex@abmac.com.