The downside of upside: Morning Brief

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Friday, May 7, 2021

Earnings guidance is lacking right now. There are good reasons why. 

Corporate earnings and the process that goes into forecasting these results is one of our favorite topics here at The Morning Brief. 

We've recently explored why results are topping estimates at a record clip, why strategists keep raising their forecasts, and the risks that come with high expectations

Since the COVID-19 pandemic began, the tendency from many management teams has been to suspend forecasts until more clarity around the impacts of the pandemic can be estimated. Data from Bank of America Global Research published earlier this week, however, showed companies have offered guidance in the first quarter at the fastest clip since 2015. But we're building off a low base. 

So some businesses are beginning to see the other side of the pandemic and willing to tell investors what comes next. But in a note to clients published Thursday, Nick Colas, co-founder of DataTrek Research, outlined why companies are still better off saying nothing about the future.

Current Wall Street estimates for earnings growth this year is 14%, Colas notes. And so in offering guidance, management teams are tasked with answering why their company will grow profits less than the market, more than the market, or in-line with the market this year. This is the standard task of any guide, but in a pandemic confidently forecasting next quarter's growth is more challenging. Better to avoid the practice altogether. 

"As analysts," Colas writes, "it’s easy enough for us to see how companies get [to 14% earnings growth]: incremental profit margins are always large right after a deep recession. But it’s another thing entirely to deliver those sorts of results in what is still a very uncertain environment."

Colas adds — "When you think about this from the typical CFO’s perspective, you realize: This is a really good reason to not give guidance for the rest of the year."

And this earnings season has shown clearly why the balance of risks lies more with saying something rather than continuing to stay quiet. 

On Wednesday evening, Etsy (ETSY) came out with results that beat Wall Street expectations for the first quarter. But the company's stock has been a big pandemic winner — shares went from a low of ~$30 to a high of ~$220 from March 2020 to February 2021 — and expectations to deliver on growth implied by the stock's rally ramped up. 

So when Etsy's management said in its press release that, "We currently expect Q2 2021 GMS to decelerate along with the rest of e-commerce as we lap the tremendous 2020 growth rates" the stock got hammered. Etsy didn't even offer a full-year forecast for its business, but merely noting that growth might decelerate in the second quarter was enough to knock more than 10% off the company's stock price. 

A similar dynamic played out with Netflix's (NFLX) results a few weeks back. Netflix said in its shareholder letter that "the extraordinary events of COVID-19 led to unprecedented membership growth in 2020, as it pulled forward growth from 2021, and delayed production across every region." Like Etsy, the company also warned that growth would slow in the current quarter. And like Etsy, Wall Street hated this news — shares of Netflix are currently trading more than 10% below where they were before earnings. 

And this punishment for offering even this much of a view into current trends is why, for Colas, the trend of declining to offer forecasts is so pervasive and, frankly, preferable in today's environment. 

"If you have spent years building credibility with the Street, you don’t want to lose it by guessing about 2021," Colas writes. "As a result, many companies are still not providing earnings guidance, so analysts have to go old-school and generate estimates on their own. These have been way too low, which is just fine with CFOs."

By Myles Udland is a reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

What to watch today

Economy

  • 8:30 a.m. ET: Change in non-farm payrolls, April (1,000,000 expected, 916,000 in March)

  • 8:30 a.m. ET: Unemployment rate, April (5.8% expected, 6.0% in March)

  • 8:30 a.m. ET: Average hourly earnings, April month-over-month (0.0% expected, -0.1% in March)

  • 8:30 a.m. ET: Average hourly earnings, April year-over-year (-0.5% expected, 4.2% in March)

  • 8:30 a.m. ET: Labor force participation rate, April (61.6% expected, 61.5% in March)

  • 10:00 a.m. ET: Wholesale inventories, month-over-month, March final (1.4% expected, 1.4% in prior print)

  • 10:00 a.m. ET: Consumer credit, March ($20.000 billion expected, $27.578 billion in February)

Earnings

  • 6:00 a.m. ET: Cigna (CI) is expected to report adjusted earnings of $4.41 per share on revenue of $40.17 billion 

  • 6:30 a.m. ET: Cinemark Holdings (CNK) is expected to report adjusted losses of $1.46 per share on revenue of $92.67 million

  • 7:00 a.m. ET: DraftKings (DKNG) is expected to report adjusted losses of 44 cents per share on revenue of $239.41 million

  • 7:00 a.m. ET: Plug Power (PLUG) is expected to report adjusted losses of 7 cents per share on revenue of $78.21 million 

  • Before market open: Nikola (NKLA) is expected to report adjusted losses of 28 cents per share on no meaningful revenue

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