What guidance is
Guidance is a forward-looking statement a company makes about its own results. The common forms:
- A range, such as full-year revenue of $780 to $800 million. This is the most common form.
- A point estimate, such as adjusted EPS of $1.60.
- A directional statement, such as "low single-digit growth" or "margins similar to last year."
- Long-range targets, such as a margin goal for three years out, usually given at an investor day.
Guidance is voluntary. Many companies give none, some give only one metric, and practice varies by industry. Banks tend to guide on expenses and net interest income, retailers on comparable sales, software companies on revenue and free cash flow.
Much guidance is on an adjusted (non-GAAP) basis. SEC staff interpretations allow a company to leave out the quantitative reconciliation for a forward-looking non-GAAP measure only if it says it is relying on that exception and identifies the information that is unavailable and its probable significance. When adjusted EPS guidance excludes items the company cannot yet quantify, the GAAP result for the year is not bounded at all. Our piece on forward P/E vs trailing P/E covers how this feeds into valuation multiples.
The kinds of guidance change
| Change | What the company does | What the market usually reads | First thing to check |
|---|---|---|---|
| Raise | Lifts the range | Business is running ahead of plan | Whether the raise exceeds the quarter's beat |
| Cut | Lowers the range | Plan is slipping | Whether the cause is one-off or recurring |
| Narrow | Tightens the range around a midpoint | Visibility has improved | Where the new midpoint sits against the old one |
| Reaffirm | Repeats the range | No change in outlook | Whether consensus sits above or below the range |
| Withdraw | Pulls the range without replacing it | Management cannot forecast | The stated reason and any financing exposure |
| Initiate | Gives guidance for the first time | New reference point | Whether it is GAAP or adjusted |
A reaffirmation is not neutral by default. If consensus sits above the top of the range, a reaffirmed range tells investors the company does not expect to reach the street's number. If consensus sits below the midpoint, the same words read as confidence.
Why guidance moves stocks more than results
A completed quarter is one period. Guidance covers the rest of the year and sometimes the next one. If a stock is valued on next year's earnings, a 5% change in that estimate matters more than a 5% beat on a quarter that is already over.
Three mechanisms drive the move:
- Estimate revisions. Analysts update their models toward the new range within days. The forward earnings figure that sits under the valuation changes, and the price follows.
- Multiple change. A raise suggests the business has momentum, which can lift the multiple investors pay. A cut suggests the plan was too optimistic, and investors often discount the next forecast too. The price falls by more than the earnings change alone.
- Credibility. A company that has met or exceeded its ranges for years earns trust in its next one. A first cut after a long record of raises often moves a stock more than the size of the cut implies, because investors reprice the reliability of every future forecast.
The second and third effects are why a small cut can produce a large drop. The market is repricing the forecaster as well as the forecast.
How to read a guidance change
The headline ("raises full-year outlook") rarely tells you what changed. Work through the numbers.
Compare the midpoint with consensus. The midpoint is the company's central estimate. The relevant gap is between the new midpoint and the consensus estimate before the release, not between the new and old ranges.
Strip out the quarter just reported. If a company beats the quarter by $10 million and raises the full year by $10 million, it has not raised the rest of the year at all. If it raises by $5 million, it has cut the remaining quarters. This is the most common misreading of a raise.
Work out the implied remaining periods. Subtract year-to-date actual results from the new full-year range. The result is what the company now expects for the quarters left, and it can be compared directly with the consensus for those quarters.
Check what is excluded. Note any change in the assumptions: currency, acquisitions, share count, tax rate. A raise driven by a weaker dollar or a lower tax rate says less about the business than one driven by volume.
Read the call for the reason. Management usually explains the change on the call. Analysts' questions often show which part of the range they doubt. Transcripts help here; see our review of earnings call transcript tools.
A worked example
The figures below are illustrative. Company A is hypothetical.
Company A sells industrial equipment and reports its second quarter. Before the release:
- Prior full-year revenue guidance: $780 to $800 million (midpoint $790 million).
- Consensus full-year revenue: $795 million.
- Consensus second-quarter revenue: $195 million.
- First-quarter actual revenue: $190 million.
Company A reports second-quarter revenue of $205 million, a $10 million beat, and raises full-year guidance to $790 to $806 million (midpoint $798 million).
The headline is a beat and raise. The detail:
- The midpoint rose $8 million, less than the $10 million quarterly beat.
- Year-to-date revenue is $395 million ($190 million plus $205 million).
- The implied second half is $395 to $411 million, midpoint $403 million.
- Before the release, consensus implied a second half of $410 million ($795 million minus the $190 million first quarter minus the $195 million second-quarter estimate).
The company has raised the year and lowered the second half, from the street's $410 million to $403 million. The new midpoint of $798 million sits only $3 million above consensus. An investor who reads the headline expects the stock to rise. An investor who works the numbers sees why it might not.
Guidance between reports
Guidance can change outside the earnings calendar, and those changes often move stocks the most because no one has positioned for them.
- Pre-announcements. A company may release preliminary results or a revised outlook before its scheduled report, usually when results will differ materially from expectations. Form 8-K Item 2.02 applies when a company publicly discloses material nonpublic information about results for a completed quarter or year, so a pre-announcement that includes preliminary results for a finished quarter falls under it.
- Standalone outlook updates. A forecast change with no completed-period results is often furnished under Item 7.01, Regulation FD disclosure, or simply issued as a press release. Information furnished under Items 2.02 and 7.01 is not deemed filed for purposes of Section 18 of the Exchange Act unless the company says otherwise. Our guide on reading an 8-K for catalysts covers the items.
- Investor conferences. Management may update the outlook in a webcast presentation. Under Regulation FD, a company that intentionally discloses material nonpublic information to analysts or investors must make it public simultaneously, and for a non-intentional disclosure it must do so promptly. A Form 8-K or another method reasonably designed to give broad, non-exclusionary distribution satisfies the requirement.
SEC staff interpretations of Regulation FD say that privately confirming earlier guidance can itself be material, and that a statement that management is "still comfortable" with a forecast is no different from a confirmation. That is why many companies decline to comment on guidance between reports. Silence is the default, not a signal.
A guidance change between reports is a soft catalyst in most cases: it gives information but does not force a value. Our piece on hard vs soft catalysts covers the distinction.
Withdrawn guidance
A withdrawal often moves a stock more than a cut. A cut gives the market a new number to anchor on. A withdrawal removes the anchor, so investors widen the range of outcomes they consider, and the low end of that range sets the price for holders who need certainty.
The reason matters:
- If the company is in a pending sale or merger, withdrawal is routine and says little about the business.
- If demand has changed sharply and the company says so plainly, the withdrawal is honest uncertainty.
- If the company has debt coming due or tight covenants, withdrawn guidance can signal that lenders and the company are working through a problem. Check the maturity schedule; see what a debt maturity wall is.
When guidance is withdrawn, build your own range. Our guide on building a base and worst case sets out the method.
Where this goes wrong
- Reading the old range instead of consensus. A raise against the old range can be a miss against what was priced.
- Missing the implied cut. Raising the year by less than the quarter's beat lowers the remaining periods.
- Treating adjusted guidance as earnings. Adjusted EPS guidance can exclude large, recurring costs. Check what is left out.
- Ignoring the forecaster's record. A company that has cut guidance three times in two years should not get full credit for its next range.
- Assuming silence means stability. Companies rarely confirm guidance between reports. No update does not mean the outlook still holds.
- Overreacting to one revision. A single change rarely settles a long-term thesis unless it bears directly on the point the thesis rests on.
- Expecting the move to match the change. The stock can move far more or less than the revision, because credibility and positioning matter as much as the number. Options can show how large a move is priced; see estimating an earnings move from options.
How to use guidance in a thesis
- If your thesis rests on the company reaching a specific number, write down the guidance and consensus before each report and note the implied remaining periods.
- If the company has a record of conservative guidance, compare each new range with its past beats, not only with consensus.
- If guidance is adjusted, track the GAAP figure separately and note what is excluded.
- If guidance is withdrawn, check the stated reason, the balance sheet and any pending transaction before forming a view.
- If the company gives no guidance, consensus is the only anchor, and it is built from fewer facts.
Dombey's published research records the guidance and consensus going into each report and judges the change against both; see the research archive.
The bottom line
A guidance change is a company revising its own forecast, and it often moves a stock more than the quarter's results because it changes expected earnings for the periods the price rests on. Compare the new midpoint with consensus, strip out the quarter just reported and work out what the range implies for the remaining periods. Treat withdrawals as a loss of the anchor and check the reason and the balance sheet. The headline word, raise or cut, is the least informative part of the release.