Coca-Cola to Stop Giving Forecasts
Coca-Cola Co. vowed Friday to stop making quarterly profit forecasts, calling Wall Street’s preoccupation with near-term results a distraction from long-term planning.
Giving short-term guidance to analysts “prevents a more meaningful focus on the strategic initiatives,” said Douglas Daft, chief executive of the Atlanta-based soft drink giant.
Dozens of other corporations already have ceased making earnings projections.
Some money managers questioned the need for Coke’s move, saying it could make the company’s share price unstable.
But corporate reform advocates said they hope the action sparks a trend similar to the expensing of stock option costs. Coke was among the first big companies promising to take that step in 2003.
“Corporations ought to be in the business of making things, not counting things,” said John Bogle, founder of mutual fund company Vanguard Group Inc. in Valley Forge, Pa., and a longtime critic of quarterly earnings guidance.
Investors offered a muted reaction to Coke’s announcement. Its shares slid 2 cents to $45.85 on the New York Stock Exchange after Coke offered what it said would be its final earnings estimate, reaffirming profit projections for this year and next. The stock plunged 10% on Oct. 16 after the company trimmed its forecast, citing disappointing Latin America sales.
Bogle said companies obsessed with “beating their numbers” can be tempted to make ill-advised decisions, such as a quick asset sale, or use overly aggressive accounting techniques.
Others agreed. “The concept of not giving quarterly guidance anymore is actually a helpful thing,” said Bill Nygren, manager of the Oakmark mutual fund in Chicago, which does not own Coke shares. “Quarterly guidance is part of the cycle that has focused so much investor attention on the short term.”
Some portfolio managers, however, asserted that strategic planning and short-term projections are not mutually exclusive.
“Companies that have strong internal controls tend to have a good sense of where the business is heading, and I don’t see the harm in sharing that information,” said Larry Puglia, manager of the T. Rowe Price Blue Chip Growth fund in Baltimore and a Coke stockholder.
Some also warned that maintaining “secrecy” as to where profits are going could make stocks such as Coke more susceptible to big swings. “If you save up surprises until the earnings announcement, that’s going to add to the volatility,” said Chuck Hill, research director at Boston-based earnings tracker Thomson First Call.
Nonetheless, Hill said that if Coke follows the example of chip maker Intel Corp. and provides enough “tools” for analysts to make accurate estimates, investors will be well-served. Intel does not “spoon-feed” analysts an estimate, Hill said, but it provides guidance about research spending, marketing costs, tax rates and other items that affect the bottom line.
Billionaire Warren Buffett, a Coke director and shareholder, is being seen on Wall Street as the driving force behind the change, just as he was in the recent options accounting shift. A Buffett representative didn’t return calls seeking comment.
After Coke announced this year that it would expense options -- giving shareholders a more accurate picture of its compensation costs -- nearly 70 other major corporations followed suit. But it remains to be seen whether the same thing will happen when it comes to ending quarterly earnings guidance.
“Most companies are reasonably comfortable with their disclosure practices,” Puglia said, noting that many put in safeguards after Reg FD, the Securities and Exchange Commission ban on selective disclosure, was passed two years ago. “I’m not sure Coke will be broadly influential.”
But Bogle said he suspects Buffett is leaning on other corporate leaders. Buffett’s investment arm, Berkshire Hathaway Inc., is among dozens of U.S. companies that offer no quarterly guidance, and Gillette Co., the consumer products giant in which he also owns a major stake, stopped giving such estimates two years ago.
“If companies like General Electric Co. and Citigroup Inc. follow suit, you could start to get a wave,” Bogle said.
