Upfront: Evaluating Quarterly Earnings Estimates

McDonald's Corp. and AT&T made business headlines in 2003 when they announced they would no longer provide quarterly earnings guidance to Wall Street analysts. Following the precedent set by The Coca-Cola Co. and Berkshire Hathaway Inc., these companies reported that they were more interested in building long-term value than managing short-term expectations.

The trend is continuing, according to the National Investor Relations Institute. Its 2006 survey of earnings guidance practices found that the proportion of participants that offer quarterly earnings estimates slid from 61 percent in 2005 to 52 percent, and the proportion of respondents providing annual earnings guidance spiked from 61 percent to 82 percent.

Businesses that have abandoned quarterly earnings guidance may be on to something. Parson Consulting's analysis of quarterly and annual earnings-per-share projections vs. results points to a notable gap in analysts' ability to peg quarterly estimates compared with annual projections. For the second quarter of 2006, only 14 percent of companies on the Standard and Poor's list met analysts' expectations, while almost 40 percent matched the forecast for the full previous year, according to the study.

"It's a chicken-and-egg quandary," says Patrick Neeley, Parson Consulting's managing director of practices in Chicago. "U.S. companies have traditionally been more conservative in their quarterly guidance. Following suit, analyst forecasts have also proven to be much more accurate over the long term."