Thursday, May 18, 2006

Earnings Guidance Revisited

Shares of Dell Inc. (DELL) have been on a long and steady decline. In February, the company warned that first quarter results would fall short of expectations. Just over a week ago, DELL again lowered first quarter guidance for both earnings and revenues. In fact, the stock has been declining for over a year. Why? Because investors realize that growth is slowing.

And what is DELL's remedy for slowing growth? Today, management announced that it will no longer provide quarterly earnings guidance. DELL is joining the "no guidance" crowd. This crowd is being cheered on by the likes of Warren Buffett, who believes guidance puts too much emphasis on short-term results. He prefers measures that stress the long term.

However, the fact is that companies like DELL do not stop giving guidance because they've suddenly discovered the virtues of long-term management. They stop giving guidance because they realize they can no longer meet expectations. And if they can't meet expectations, they'd rather keep mum. This makes them a riskier bet.

I've written extensively about this issue on and in the Forbes Growth Investor. I'm happy to report that Steve Forbes agrees. He makes some excellent comments about guidance and the attempts to do away with it in his column in the June 5 issue of Forbes magazine. He also quotes me on page 28. This issue hits the newsstands this weekend.