Earnings Guidance in Mexico: Dos and Don’ts

We are starting a blog on Mexico Investor Relations issues, and aim to post once a week or so. This can be accessed via LinkedIn, Medium, Twitter or our own website. Our first contribution is regarding earnings guidance – When and how should Mexican companies give public earnings guidance?

There is clearly no single answer that applies to all companies, and will depend on the predictability of a company’s earnings, the external environment, how many analysts and investors cover the company and what management is comfortable sharing from a strategic and competitive perspective. 

In general, we are in favor of a company giving some public guidance. A public commitment to earnings guidance can help build confidence in the future outlook of a company and thus improve the valuation. Making such guidance public, as opposed to selectively disclosing it to analysts and investors when in contact with them, can ensure fair disclosure and keep a company on the right side of regulations and be fair to all. Guidance can help define and communicate effectively corporate strategy in a quantitative manner, as it implicitly indicates whether the company is prioritizing growth or capital preservation, margins or market share, and so on. 

But guidance comes with its risks as it commits the company to variables on which it has no full control. (Changes in the outlook for GDP growth, inflation, interest rates and the exchange rate can throw guidance off for no fault of the company). Missing guidance, due to exogenous or endogenous factors, can help exacerbate negative market reaction to what is anyway a difficult quarter. Simply put, managing guidance disclosure is another issue to have to worry about.

In view of this, we recommend giving guidance 1) About once a year and usually as part of the quarterly report, so that it is not given undue attention, and only updated when clearly going to exceed or fall short by a wide margin. This gives analysts the chance to ask questions on guidance in the quarterly call 2) Guidance needs to be reiterated or revised in an annual Investor Day 3) Guidance should consist of a mid-size range for growth for sales, EBITDA or earnings, (10% to 14% growth, for example). In the real world, it is impossible to be precise about earnings guidance so it’s better to be upfront about that and discuss ranges. We prefer growth numbers rather than precise sales or earnings figures. 4) Some indications of the assumptions behind the guidance – expected exchange rate and CAPEX for example – is helpful. 5) Guidance for one year ahead is usually enough, although it’s fine to set out long-term goals (25% ROE in 2025 for example), subject to stable economic growth.

In the text below, we look at guidance policy of some select listed companies. This is based on publicly available information and we recognize that many companies manage guidance on an analyst to analyst basis or in their conference calls.

Walmex: Doesn’t include guidance in its financial reports but does include non-financial guidance-related information in some of its corporate presentations. These guidance metrics are about expected growth and trends.

Fomento Economico Mexicano: Mentioned guidance during 2Q19 call but specifically said it will not go on record and provide any financial metrics/estimates for the future.

Grupo Financiero Banorte: Banorte has a guidance section included in the conference call presentation. The financial guidance includes:

• Loan Growth (ex-Gov)
• NIM Expansion
• Expense Growth
• Efficiency
• Cost of Risk
• Tax Rate Net
• Income
• ROE

Coca Cola Femsa: Has a sustainability goals section in Corporate Presentation.

Arca Continental: Guidance seems ad-hoc. In 4Q18 report “AC´s guidance for consolidated volume growth in 2019 is approximately 2%, on a comparable basis.”

Grupo Bimbo: Guidance section in the Bimbo Day presentation. Metrics included are:

• Top Line
• EBITDA growth
• Tax Rate
• CAPEX

Outside Mexico, guidance is often more structured, given that such companies are subject to huge media and legal scrutiny.

Microsoft: Releases revenue guidance in conference call and webcast.

Apple: Releases quarterly guidance on the following metrics:

• Revenue
• Gross Margin
• Operating Expenses
• Other Income/(Expenses)
• Tax rate

Amazon: Gives quarterly guidance for the following metrics:

• Net Sales
• Operating Income

*Doesn’t take into account potential acquisitions.

Miranda-IR Team – Ana Maria Ybarra, Damian Fraser, Marimar Torreblanca.