Against an ever-changing environment due to the ongoing COVID-19 pandemic, we have an increasing number of clients thinking through the best approach to outstanding guidance. Should updates be made now? Should guidance be withdrawn entirely? Caveats added? Wait until next earnings call to comment? The answer is, it depends, but we recommend providing the best insight you can as soon as you can to maintain strong relationships with your investors.
As soon as issuers know that their guidance is materially inaccurate or out of date, they should look to preserve credibility and demonstrate deep understanding of their business by taking action to spread light, not heat. While safe harbor statements provide some cover, mitigating liability for inaccurate guidance being left intact, the reality is that with valuations down, investors will gravitate to quality. They will want to own companies that demonstrate they are in good financial health, have strong business continuity plans, have implemented them effectively and understand the costs associated with deploying them. Key to maintaining strong investor relations and sustaining a premium valuation relative to peers will be providing evidence of strong execution and that the core fundamentals of the business remain intact when year over year comps are likely to be terrible.
In the absence of accurate forecasts, sell-side analysts will seek to provide investors with insight on issuers’ exposure to existing known or perceived problems (e.g., lack of liquidity or few options to allocate capital) or the potential for future risks. And they will also provide their assessment of management’s ability to execute in challenging times. At the end of the day, the sell-side and the buy-side are still tasked with assessing growth prospects and understanding the risks to that growth trajectory. Both are uncertain today, but no company is completely in the dark.
Companies can pivot from their standard metrics and seek to describe the known impacts to their business – their ability to continue to produce/deliver products/services or changing demand whether as a result of logistical challenges or a new crisis mindset that will likely mute demand for goods. Consider how a protracted global health crisis or long term social distancing imperatives may impact the business positively as well as negatively. State, if you are able, that you are providing an alternate view of performance at this time to aid understanding but resist committing to reporting these alternate metrics in the future. The goal is to achieve accurate valuation of securities; effort should be taken to ensure that analysts are not promulgating false assumptions about an issuer’s vulnerability or immunity to the crisis. We recommend companies share history as to their navigation of previous shocks like the 2008 financial crisis and 9/11, for instance. Now is a good time to remind investors if your company has been continuously in business for 100 years. Conveying a sense of diligent calm in the face of uncertainty is key.
Bottom line: In lieu of typical financial guidance, provide insight about how your business works, known impacts, expected impacts to both production of and demand for your products and articulate whether and/or how your capital allocation priorities have changed.
Valuation is a relative exercise, and until some of the volatility in the broad market settles, it will be difficult to claim that shares are undervalued. Premium valuation will go to companies that demonstrated the ability to navigate troubled waters.