Most companies do a poor job of predicting their own sales and earnings, making it hard for investors to gauge performance, according to...
Most companies do a poor job of predicting their own sales and earnings, making it hard for investors to gauge performance, according to a new report from The Hackett Group.
After studying 70 large U.S. and European companies’ internal forecasts — not necessarily the numbers trumpeted to Wall Street — the strategic advisory firm says most companies miss the mark for the next quarter’s results by more than 5 percent, either up or down. “I think it’s cause for concern,” says Bryan Hall, finance practice leader for The Hackett Group. It means investors can’t put much faith in the earnings and sales estimates companies do publicize.
Forecasting is getting more difficult amid economic weakness and stock volatility, Hall says. Company size, industry or years in business have little bearing on accuracy. But processes are important. Most companies still use spreadsheets rather than more sophisticated software. Also, companies that use rolling forecasts rather than fixed forecasts that reset just once a year fare better, as they can quickly adapt to changes.
Accounting firm KPMG reached a similar conclusion in a report late last year. It found that 78 percent of 534 firms missed their forecasts by 5 percent or more. Roughly twice as many firms surveyed beat expectations than fell short.
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Many companies told KPMG they didn’t mind beating expectations — stock prices tend to bounce when companies beat their publicly announced earnings guidance. But KPMG says underestimates are as problematic as overestimates. If, for example, sales beat internal expectations, the company likely will have difficulty meeting demand.
Accurate forecasters’ stocks rose 46 percent over the past three years, KPMG says. Poor forecasters’ shares rose only 34 percent.