Does guidance really matter?
After all, guidance is just what the name suggests: an educated guess as what companies think could happen in future -- with the operative word being "think."
Clearly, guidance is going to be wrong sometimes and right sometimes, with the former being more common than the latter as the time period over which guidance is being offered gets longer.
Still, guidance does seem to matter, as seen in the recent jump of St. Jude Medical's (NYSE:STJ) share price, which recently went from $66 to $68 in the space of a few hours.
The reason? You guessed it: The company raised guidance, after experiencing higher sales growth than it had expected in Q4. The business now anticipates earnings per share of $0.97-$0.99, up slightly from the previous guidance of $0.95-$0.97. The news was well received, and the main reason the company beat its guidance was improved demand across the spectrum of St. Jude's products.
For instance, defibrillator sales were up 5%, pacemaker sales increased by 1%, and cardiac rhythm management sales improved by 5%. It appears as though the market was encouraged by St. Jude's surprise to the upside, as during 2013 it had seen irs top line hurt by various costs, including restructuring costs and safety concerns surrounding one of its products.
Of course, St. Jude remains slightly behind many of its sector peers in terms of the rate at which EPS is expected to grow during 2014 and 2015. However, the key takeaway is that there could be further upgrades to such company forecasts as a result of being ahead of previous guidance for Q4 2013. St. Jude is forecast to increase EPS by 6% in 2014 and by 8% in 2015. This compares reasonably well with the wider market, with mid-single-digit EPS growth being roughly in line with the S&P 500's forecasts for the coming two years.
As mentioned, sector peers such as Stryker (NYSE:SYK) and Covidien (NYSE:COV) are slightly ahead of St. Jude on EPS growth forecasts, with both companies forecast to increase EPS by 8% in 2014. Meanwhile, they are expected to increase EPS by 10% and 11%, respectively, in 2015. (Note that St. Jude and Stryker have calendar year-ends and Covidien has a September year-end.)
However, in St. Jude's defense, its price-to-earnings ratio is discounted compared with sector peers, with the company having a forward P/E of 16.6. This compares favorably with forward P/Es of 17.2 and 17.1 for Stryker and Covidien, respectively, and highlights the fact that higher growth forecasts must seemingly be paid for via a higher P/E.
For St Jude to see its P/E tick upward so that it is in line with its sector peers, it may need to deliver consecutive quarters, or even a run of quarters, in which it beats guidance. This could be the catalyst to change market sentiment, and were this to lead to EPS forecast upgrades in 2014 and 2015, then St. Jude could be a stock to watch over the medium to long term.
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Fool contributor Peter Stephens has no position in any stocks mentioned. The Motley Fool recommends Covidien. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.