Procter & Gamble (NYSE:PG) was stuck between a rock and a hard place.
The consumer products giant has no idea what direction the economy is going — nor does anybody else — but it had to play Wall Street’s earnings game. CFO Jon Moeller matter-of-factly explained on Friday’s earnings conference call that “Our guidance ranges will be a little bit wider than normal this year, reflecting a broad policy uncertainty, ongoing high levels of volatility and market growth rates, input costs and foreign exchange, as well as uncertainty both upside and downside related to pricing across the portfolio.”
“A bit wider” was an understatement. The Cincinnati-based company said it expects to earn between $4.17 and $4.33 per share during the current fiscal year. That’s guidance so wide you could drive a convoy of 18-wheelers through it. It was ludicrous but necessary.
If P&G had told analysts “We are unsure whether we will meet Wall Street expectations (which were $4.26) for the coming quarter,” investors would have punished the company for its honesty by sending the stock of a cliff. Instead, the world’s largest consumer products company played the guidance game by carefully ratcheting down expectations to a range so wide that, barring the U.S. entering the Great Depression Part II, P&G should meet them.
With the economy careening toward uncertainty, look for companies to give themselves plenty of earnings guidance cushion. Some, such as Time Warner (NYSE:TWX), are keeping it vague. The company said it expects adjusted earnings per share to grow by “at least the low teens.” Bloomberg noted that “In May, the company forecast an increase in adjusted earnings per share ‘in the low teens’ off of a base of $2.41 in 2010.”
Other companies employ the “even a broken clock is right twice a day” philosophy.
For instance, Weight Watchers International (NYSE:WTW) recently set its full-year fiscal 2011 earnings guidance to a range of $3.85 to $4.05 versus an earlier projection of $3.75 to $4 per fully diluted share. Speedway Motorsports (NYSE:TRK) recently reiterated its full-year guidance of f 90 cents to $1.20 per share from continuing operations. Its wide range was because of the “continuing negative impact of uncertain economic conditions, as well as the timing and pace of economic recovery. High or increasing food and fuel prices or unemployment could significantly impact our future results.”
Earnings guidance might be a game, but the stakes are high. Billions of dollars in market capitalization can be erased if companies fail to make Wall Street’s grade by even a penny. That’s why companies are afraid of giving a truly honest forecast for the next quarter, which might be “we don’t know.”
Johnathan Berr did not own any of the aforementioned stocks as of the writing of this article.
