WALL STREET JOURNAL.
Companies Routinely Steer Analysts to Deliver Earnings Surprises
With nudges and phone calls, analysts are urged to lower their
estimates, making it easier for companies to beat them; ‘a rigged
race,’ says Barry Diller
AT&T store in New York City’s Times Square. Before announcing
earnings in April, the company’s investor-relations employees
encouraged analysts to look back at an executive’s comments that
suggested revenue might be hurt because some customers were
waiting longer to upgrade their mobile phones. PHOTO:
RICHARD DREW/ASSOCIATED PRESS
Aug. 4, 2016 11:58 a.m. ET
shares rose after it
reported quarterly revenue that
narrowly topped the average estimate from analysts.
surprise wasn’t as surprising as it looked. Before AT&T’s
announcement, investor-relations employees at the telecommunications
giant encouraged analysts to look back at comments made by finance
chief John Stephens in early March, say analysts who spoke with the
company. He had implied some customers were waiting longer to upgrade
their mobile phones, an important revenue source.
Analysts at three research firms cut their sales estimates by an
average of about $1 billion in the week before AT&T issued
first-quarter numbers. William Blair & Co. analysts cited Mr.
Stephens’s comments. The average estimate of all 22 firms following
AT&T fell $323 million in three weeks, according to FactSet.
AT&T wound up reporting $40.54 billion in quarterly revenue, beating
the lowered target by $76 million.
Quarter after quarter, about 75% of companies in the S&P 500 index
meet or exceed analysts’ earnings forecasts, a statistic that has held
up in good times and bad. One reason for such consistently impressive
results is that some companies quietly nudge analysts’ numbers, almost
federal rule bars companies from
selectively disclosing material nonpublic
information but doesn’t prohibit private conversations in
which companies can gently push analysts in helpful directions, as
understand the rules, and we follow them diligently,” says Mike Viola,
senior vice president of investor relations at AT&T, based in Dallas.
Some analysts, investor-relations officials, securities lawyers and
executives say the signals have become so commonplace that the
all-important question of whether a company beat estimates is more
about theatrics than reality.
Companies send the signals to make themselves look better—and boost
their stock prices—even though their fundamentals haven’t changed at
all. And the signals often go to just a small number of analysts,
giving them and their investing clients a potentially unfair
Barry Diller, chairman of
Expedia Inc. and IAC/InterActiveCorp,
says analysts and investor-relations executives work together to keep
estimates low. “It is a rigged race,” he says, adding that the problem
exists even at those two publicly traded companies.
analysis by The Wall Street Journal found that earnings estimates
often decline steadily after the end of a quarter. That can turn what
might have been an embarrassing “miss” for the company into a positive
Journal examined daily changes in analysts’ estimates at S&P 500
companies since the start of 2013, comparing the estimates with what
the companies ultimately reported for each period.
Nearly 2,000 times from the start of 2013 through this year’s first
quarter, companies would have missed the average earnings estimate if
analysts hadn’t changed their numbers in the 40 trading days before
the company’s quarterly earnings report.
about one-fourth of the instances where companies would have missed
the average earnings estimate, the average projection fell enough that
the company wound up meeting or beating analysts’ expectations
instead, the Journal’s analysis shows. The 40 trading days cover the
period from when companies typically have a good sense of the
quarter’s performance to the day before earnings are announced.
Lowered earnings forecasts helped 66
each meet or exceed earnings expectations
during at least three of 13 quarters examined by the Journal.
and seven other companies met or beat reduced estimates
in about half the quarters.
Viacom says its analyst interactions are consistent with industry
practice. Citigroup says it provides financial updates at conferences
between earnings releases. Coca-Cola, CBS and U.S. Bancorp wouldn’t
opposite almost never happens. Companies wound up missing earnings
estimates just 1% of the time after being on track to beat them 40
trading days earlier, the Journal’s analysis shows.
stakes are high. In the past five years, the share price of companies
in the S&P 500 that fell short of analysts’ average earnings estimate
dropped 2.2% on average in the two days before and after reporting
quarterly results, according to FactSet.
Companies have different ways of coaxing analysts to shrink their
estimates. Investor-relations officials sometimes point out to
analysts where their estimates are in relation to other analysts.
Analysts whose forecasts are far from what companies end up reporting
risk losing credibility with clients and could get less access to
company management. Those are reasons to listen if a company calls
with a suggestion, according to analysts.
“Companies have called to ask if I was aware of their guidance and
incorporated it into my models,” says Jeffrey Harte, a banking analyst
at Sandler O’Neill + Partners LP in Chicago.
Roger Freeman, who left the stock-research industry in 2014 and now
works at a technology startup, says: “If someone is trying to get your
numbers down, they will highlight all the negatives and not positives,
and you’ll come away thinking: ‘Gee, that sounds pretty bad,’ and
sometimes take your numbers down.”
Securities and Exchange Commission says companies may privately
comment on analysts’ financial models as long as the companies are
correcting historical facts in the public domain or sharing “seemingly
inconsequential data,” even if analysts use the information to draw
SEC says companies shouldn’t use private discussions to selectively
communicate material nonpublic information “either expressly or in
code.” A federal rule called Regulation Fair Disclosure was adopted in
2000 to stop companies from leaking earnings forecasts to selected
analysts, who passed along market-moving information to their clients.
Office Depot Inc.
paid $1 million to settle SEC
allegations that the retailer had
selectively informed analysts that it wouldn’t meet their forecasts by
talking down analysts’ expectations in one-on-one phone conversations.
company’s shares tumbled after it began contacting the analysts, and
Office Depot ended up publicly disclosing a profit warning in a
SEC said Office Depot didn’t regularly make such calls to analysts.
The company didn’t admit or deny wrongdoing as part of the settlement.
Office Depot store in New Albany, Ind. In 2010, the retailer
paid $1 million to settle allegations that it selectively called
analysts to inform them that Office Depot wouldn’t meet their
Photo: Luke Sharrett/Bloomberg
modern landscape of earnings announcements and consensus estimates was
created in the 1970s when federal regulators began requiring companies
to issue quarterly financial reports. In 1976, a unit of brokerage
firm Lynch, Jones & Ryan began collecting analysts’ earnings estimates
and tallying “surprises,” or results that beat or missed expectations.
least six firms now collect and disseminate estimates that often
include earnings per share, sales, profit margins and cash flow.
Investors usually focus much of their attention on revenue and profit
Near the end of each quarter, an elaborate dance occurs between
analysts and companies. The companies want to avoid missing
expectations, and analysts are striving to come up with the most
Some companies refuse to have any contact with analysts. Matthew
Stroud, who used to run investor relations at
Darden Restaurants Inc., says he
wouldn’t answer calls from analysts before it reported results. He
tells companies he does consulting work with now to do the same.
Analysts “may pry and probe, and there’s the chance you could
inadvertently give someone a sense of tone around earnings,” says Mr.
Stroud, now at Arbor Advisory Group LLC, an investor-relations
Johnson & Johnson
doesn’t field calls from analysts between quarter end
and its earnings release, though investor-relations personnel will
occasionally answer “fact-based questions” sent by email, the company
Near the end of the first quarter, AT&T
steered analysts back to
Mr. Stephens’s comments at a
Deutsche Bank AG
conference on March 9, say five analysts who spoke to
the telecom company.
AT&T’s finance chief said last year’s fourth quarter included
“a slowdown in the handset upgrade cycle.”
He added that he “wouldn’t be surprised to see that continue.”
Jeffrey Kvaal of Nomura Securities says AT&T’s investor-relations team
“is very diligent” before earnings releases “about making sure that
the comments from the executives are reflected in the commentary from
the sell side.”
week before the announcement, Mr. Kvaal cut his first-quarter sales
estimate by $837 million to $40.54 billion, citing lower equipment
sales. Two days before the results, the William Blair analysts cut
their sales estimate by about $1 billion. With one day to go,
Buckingham Research Group reduced its sales estimate by more than $1.1
billion, also noting the slower pace of upgrades.
Analyst James Breen of William Blair says he talks to
investor-relations personnel at AT&T “all the time.” He adjusted his
forecast because the previous estimate hadn’t taken into account the
comments from AT&T’s management at several investor conferences. Mr.
Breen says he also didn’t want to be an outlier compared with other
analysts who follow AT&T.
Viola, AT&T’s investor-relations chief, says “companies can and do
talk with analysts about their latest, publicly available information.
That’s the job of investor relations, and it benefits the investing
adds: “Analysts change their estimates for many reasons, and do so
throughout the quarter.” About half the changes in the first quarter
were made a week or less before the April 26 earnings announcement.
AT&T says it falls short of analyst estimates about as often as it
meets or beats them when looking at five commonly followed financial
measurements. In the second quarter, AT&T narrowly missed analysts’
According to data from FactSet, AT&T met or beat the average earnings
target in 10 of the last 13 quarters and missed by a penny per share
has surpassed the average earnings estimate in 19 of the past 20
quarters. Several analysts who follow CBS say its investor-relations
staff regularly contacts them to discuss their financial models.
analyst says CBS is “more aggressive than most” media companies in its
interactions with analysts. A CBS spokeswoman wouldn’t comment.
This spring, many analysts were struggling to figure out how Goldman
Sachs Group Inc. would fare amid the first quarter’s market
turbulence. From mid-March to mid-April, 16 analysts cut their
earnings estimates by an average of 41%.
released results April 19, it had
$2.68 a share in earnings, more than 10% higher than the lowered
target. The stock rose 2.3%.
Around the end of the first quarter, the bank’s investor-relations
staff answered calls from analysts, many of whom routinely check in
with the firm when updating their financial models and targets.
Some conversations included discussions about comments from rival
executives at investor conferences during the first quarter, some
Michael DuVally, a Goldman spokesman, says the discussions were
appropriate, partly because analysts “are overloaded with data.” He
adds: “Serving as a resource for public information is a sensible
Some analysts who called Citigroup’s investor-relations department
near the end of the second quarter say they were referred to comments
made by Chief Executive
Michael Corbat at a June 2
Corbat had said the bank’s second-quarter profits were
likely to be “roughly flat”
compared with the first quarter, when Citigroup earned $1.10 a share.
In late June, the average earnings estimate for the second quarter was
$1.18 a share. The number drifted down to $1.10 a share by July 14,
the day before Citigroup announced results.
After the quarter ended June 30, analysts also trimmed their revenue
estimates for Citigroup by $237 million to $17.52 billion.
Citigroup spokesman Mark Costiglio says investor-relations personnel
didn’t provide any updates to Mr. Corbat’s comment. Any discussions
with analysts “rely entirely on public disclosures the company has
made as of those dates,” Mr. Costiglio adds.
July 15, Citigroup
reported second-quarter profit of
$1.24 a share, nearly 13% higher than the average estimate. The bank’s
revenue of $17.55 billion topped analysts’ latest target by about $31
Citigroup executives said the bank’s performance was better than Mr.
Corbat anticipated because of improved market conditions and a pickup
in trading activity near the Brexit referendum on June 23.
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