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Christmas came twice for UK retailer Next. It increased its forecast for full-year revenue and pre-tax profit on Tuesday, on the back of better than expected seasonal sales. Investors who have now watched the company upgrade its forecasts five times in the past year may feel like they have unwrapped this gift before.
Next is one of many that has a habit of setting the bar low and then clearing it with ease. In the US, in a typical quarter, almost two-thirds of companies in the S&P 500 do better than the market was expecting, according to LSEG I/B/E/S data.
That sort of consistency looks suspiciously stage-managed. Beating expectations reflects well on management, even when the bar is set conservatively. Stock analysts are, of course, free to deviate from the company’s own projections, and some do, but safety lies in cleaving to the corporate line.
Investors too can get behind companies that under-promise and over-deliver; it’s the reverse that jars. In the UK, the 64 companies that issued profit warnings in the third quarter of last year saw their shares decline by a median 14 per cent, according to EY Parthenon.
For Next, the gift of beaten expectations does indeed seem to keep giving: its shares bounced 4 per cent on the day of its results, well ahead of the broader market. But it doesn’t work for everyone. Facebook owner Meta Platforms and tech wunderkind Palantir are among those that recently published surprisingly good numbers, only for their stock to slump.
In cases where companies beat analysts’ forecasts and still fall, it may be that investors had already factored in an even higher “surprise” — likely to be the case with Palantir. Meta raised guidance in a less cheering way, boosting its capital expenditure plans for the coming year far beyond earlier analysts’ estimates.
Although it may seem that companies such as Next are being strategic in their expectation management, C-suite bias naturally tilts to the bleaker outlook. Estimates were heavily marked down during Covid-19 and the concomitant lockdowns and then heartily trounced: US companies notched up aggregate surprises of 15 and 23 per cent in the past two quarters of 2020, according to FactSet.
Last year’s threatened tariffs prompted a flurry of downgrades; several airlines, automakers and even trainer maker Skechers pulled guidance altogether. Many overcame their reluctance as the year went on and returned to setting targets that — in the US, in aggregate — they surpassed in the ensuing quarters.
Will companies be able to manage this feat in the year ahead? The bar is inching higher, with analysts pencilling in almost a 16 per cent rise in US earnings, according to LSEG I/B/E/S — up from 13 per cent last year. Yet with analysts and management teams benefiting from this ritualised quarterly performance, the chances are the “beats” will keep on coming.
louise.lucas@ft.com
