Forward guidance is a key investor focus, yet there is room for management subjectivity
Investors generally believe that with an insider’s view of the business, management should produce better estimates than anyone else looking in. However, there is room for application of management’s subjectivity and judgment when producing these estimates, in our view, sometimes even leading to perennially conservative or aggressive forward guidance.
We find some companies consistently beat or miss guidance
Comparing 10 years of initial sales guidance with actual results, we find 29 consistent “guidance beaters” (average sales beat of 3.6% per year) and 19 consistent “guidance missers” (average sales miss of -5.2% per year).
Guidance beaters outperform in the long run, but may underperform shortly after announcements
Since 2005, the 29 consistent guidance beaters have returned 12.0% more per annum vs. the missers. Conversely, in the one month after guidance release, we find that the consistent guidance missers have outperformed, likely due to their more aggressive guidance which leads to heightened near-term expectations by the market.
4 names that are attractively valued and likely to beat FY3/16 guidance
We screen for stocks that have historically consistently beaten guidance, and we think will likely beat in FY3/16 as well. These stocks are also supported by attractive valuations: Fanuc, Hitachi Kokusai, Nippon TV and NSK.