When a Fort
Wayne-based steelmaker predicted its third-quarter earnings would
outperform analysts' estimates earlier this month, investors
suffering from malnourished portfolios went into a feeding frenzy.
Steel Dynamics Inc.'s stock price soared more than 17 percent
Sept. 12 - the day after the company said it expected to beat
analyst estimates by as much as 16 cents.
Publicly traded companies often provide guidance or forecasts on
their earnings and financial performance to keep stakeholders
informed and surprises to a minimum when the real earnings numbers
After all, the one thing investors hate is a surprise.
But with jittery regulators scrutinizing corporate America's
accounting practices, companies are becoming conservative and in
some cases even tightfisted with their financial forecasts, analysts
Revised earnings guidance helps lessen the surprise for investors
and analysts "so all the wheels don't fall off the wagon on D-Day,"
said Steven Artuso, analyst with Pittsburg Research in Great Neck,
Analyst estimates are based on a company's financials, past
performance, future outlook and industry conditions, Artuso said.
"It's a little bit of art and a little bit of science," he said.
Through guidance, businesses keep investors informed, gaining
their trust and developing a rapport with analysts and institutional
investors who invest in the companies.
Typically, businesses offer guidance when they feel their
earnings could come in lower than analyst estimates, said
Raghavendra Rau, assistant professor of finance at Purdue University
in West Lafayette.
"They do that to prevent investors (from) penalizing the company
after the earnings come out lower than the analyst estimates," Rau
Guidance is a way companies keep analysts "in the loop," said
Dennis Houlihan, managing director with Houlihan Asset Management
If analyst estimates are way off the reported earnings, the
analysts look bad and may retaliate by calling into question the
credibility and honesty of management, Houlihan said.
But providing an earnings estimate is viewed as a crutch for
analysts who are spared having to crunch the numbers themselves,
some finance experts say.
Earnings estimates provided by companies make life easier for the
analysts because it provides them with a reference point, Purdue's
"Analysts do their own analysis, but I wouldn't be surprised if
the (earnings estimate) the company is providing is kind of a focus
number for analysts," he said.
Artuso, the Pittsburg Research analyst, said he uses company
estimates as a guide when doing his own calculations.
Another downside to guidance is it sometimes forces management to
commit to financial results it can't always meet. If the estimate is
not met, the company can take the flak from a disappointed
Or management can achieve the "estimates" through accounting
acrobatics - often without skirting the law.
"There is a lot of leeway which accounting rules provide," Rau
One such such accounting trick involves capitalizing certain
costs that ought to have been expensed, Artuso said.
In such a case, a company spreads costs - that should have been
reported up front - over a period of time.
"Instead of taking the $1 million loss in a single quarter,
you're spreading the $1 million over a year," Artuso said.
After markets closed Sept. 11, Steel Dynamics said it expected
third-quarter earnings could approach 60 cents per share citing
increasing steel prices. Analysts had suggested a more modest 44
cents per share.
The next morning, investors gobbled up the steelmaker's stock
which climbed to a high of $15.03 during the day and closed at
$14.78, up $2.20. The company has lost some of that gain since and
was trading for about late last week .
Providing earnings guidance is not standard practice for Steel
Dynamics, said Fred Warner, investor relations manager.
"It's rare that we provide guidance about earnings numbers at
all," Warner said.
Steel Dynamics typically offers general forecasts on volume and
price trends at a conference call after each quarterly earnings
Only when the company is "virtually certain" that analysts'
estimates on earnings numbers are significantly off the mark will it
make a pre-earnings announcement such as the one it made early
September, Warner said.
The guidance was offered to correct the analysts' estimate the
company believes is incorrect, he said.
Two-thirds into the third quarter, Steel Dynamics knew with "some
degree of certainty" the analyst estimates were wrong based on the
shipments it had made and its costs for the quarter, Warner said.
"Therefore we had a high degree of confidence that the quarter's
results are going to be in this case substantially higher than the
analysts consensus estimates," Warner said. "We thought that (the)
information that was available to the public . . . required
correction or an update."
Steel Dynamics' third quarter ends Sept. 30. The company expects
to report earnings Oct. 14 after markets close.
Investors and analysts singed from the fallout of the Enron,
WorldCom and Tyco scandals are holding chief executive officers and
their boards more accountable than ever.
At the slightest hint of financial hanky-panky investors are
voicing their displeasure and sending stock prices into free fall.
As a result, companies are likely to be conservative and low-ball
earnings estimates and forecasts because they'd rather "pleasantly
surprise" investors, Houlihan, the investment adviser, said.
Companies are refraining from hyping their guidance because of
potential lawsuits and negative media reports if revised estimates
are not met, Houlihan said.
"If (the company says) things are looking up for the next two
quarters, and all of a sudden if that doesn't materialize," Houlihan
said, "you've got a bunch of pissed-off shareholders and analysts
that could come back to the company claiming fraud."
Businesses are going to be as conservative and cautious as
possible, Artuso echoed. They don't want to raise expectations and
then not meet it, he said.
But while being cautious in upgrading earnings estimates,
corporate America is also likely to be aggressive in alerting the
investment community if the estimates are too high, Artuso said.
Companies are more likely to fess up today if they think their
earnings are going to come in short of the estimates - even if it is
by a small margin, Artuso said.
If they don't, they could face the wrath of investors who
hungered for positive news but ended up being served unappetizing
"I don't think (businesses) want any bombshells to really hit
their stock," Artuso said. "The market environment really would be
unforgiving today if they don't meet (the) estimate."