Our local meteorologists were a little wide of the mark with their forecast last week. They warned of gusty winds, powerful thunderstorms, and even the possibility of baseball-sized hail. So we moved our vehicles into the garage and waited for the “storm”, which amounted to four or five raindrops before the clouds parted and the sun emerged.

It’s nobody’s fault. Even with the latest instruments and computer models, predicting weather patterns is still an inexact science.

The same can be said for financial forecasting. From top to bottom, there are innumerable variables that intersect every inch of the income statement … supply chain disruptions, fed policy, regulatory shifts, — yes, even the weather. How many times have we seen a company blame a sales shortfall on some capricious act of Mother Nature?

Even when things go according to plan, projecting how much money a business will earn is sometimes little more than a “guesstimate”. Management is in constant discussion with customers and has a birds-eye view of industry trends and still can’t always give stockholders more than a broad target to aim for rather than a precise bullseye.

Most will guide within a range – and then adjust on the fly if needed.

Consider Ford Motor (NYSE: F). The latest outlook from the automaker calls for 2025 EBIT (earnings before interest and taxes) to make landfall anywhere between $7.0 and $8.5 billion. That’s a wide $1.5 billion cone of uncertainty.

Walt Disney (NYSE: DIS) is anticipating “double-digit” operating income growth in its entertainment division. Does that mean 15%? Or 12%? Or rounding up to 10%? Keep in mind, the first quarter of the fiscal year is already in the books, so management is only attempting to peer nine months into the future.

To be fair, most companies leave a little wiggle room. And these guys have plenty of question marks to deal with. Ford is grappling with the impact of raw material cost inflation, tariffs, dealer inventory levels and foreign currency translation. Disney must gauge advertising demand, assess content licensing income and try to project the number of Disney+ and Hulu streaming service subscriber additions.

There are countless data points to plug into the equation.

And it only takes one or two unpredictable factors to nudge (or even shove) the final number one way or another. The further ahead we look, the hazier the crystal ball. Among the dozens of Wall Street analysts who follow Meta Platform’s (NSDQ: META) every step, earnings estimates for 2026 range as weak as $22 per share and as strong as $33.

They are all over the map.

Still, that scattergram reflects at least some kind of consensus opinion on where the business is traveling. Sometimes, the road ahead is all but obscured, like trying to drive with a muddy windshield. Anyone who knows the danger of missing a hairpin curve can appreciate the safety of earnings visibility.

The Difference Between Guessing and Knowing
It happens almost daily. An otherwise solid business posts quarterly profits that fall a penny or two shy of Wall Street’s targets. Or maybe it releases revenue guidance a hair below what the market was looking for.

Expectations are everything, and punishments can be severe — just as positive surprises can be richly rewarded.

Michael Mauboussin’s Expectations Investing delves into this topic in some detail and gives investors a novel framework for spotting discrepancies between price and value. I’ve got a well-worn copy on my bookshelf.

The value of any asset (from stocks and bonds to rental properties) is a function of its future cash flows discounted back into today’s dollars. So it stands to reason that the more transparent and predictable the income stream, the surer our calculation of what a business is worth – and by extension, the upside (or downside) potential of the stock.

Of course, that all stems from sales.

Take most businesses… a coffee shop, an auto dealership, a hardware store. They all start each new quarter (each new day, in fact) with the cash registers at zero. The best we can do is estimate how many lattes or sedans or hammers will be sold over the next 90 days.

But demand can (and does) change quickly… for just about any reason. Pricing can soften too. Either can throw projections out the window, drawing a swift rebuke from the market.

Look no further than Target (NYSE: TGT), whose topline growth has completely stalled. Not that long ago, the retailer was anticipating up to a 2% increase in comparable same-store sales for the fiscal year. But the final number just came in at an anemic 0.1%. In dollar terms, that’s a couple billion less than expected.

And with store traffic down for ten straight weeks now, comps are expected to flatline in 2025. Chief Financial Officer Jim Lee said the tepid outlook reflects “a wide range of potential scenarios and uncertainty”. In fact, the company has so little confidence in its short-term forecasting ability that it just suspended quarterly sales guidance.

That’s tantamount to saying we can’t even give you a rough idea how much shoppers will spend over the next three months. No wonder the stock has slumped to a multi-year low.

At times like this, I gravitate to business that have future sales already in the bag. By that, I mean they have already locked up hefty purchase commitments, but the transactions just haven’t been counted yet.

These companies don’t really start the next fiscal quarter at zero. They know in advance that a certain number of widgets are already in the sold column. Any new sales will only add to the total. How? Because there are previous orders still in the queue. They have simply been too busy to manufacture and ship the items.

In other words, the company is sitting on a stack of confirmed purchase orders and only needs to deliver the merchandise for the sales to be recognized on the income statement. Converting these orders into revenue is often just a matter of weeks or months.

Yes, I’m referring to backlog.

Boeing (NYSE: BA) currently has a backlog of 5,500 commercial and military jets worth $521 billion. This isn’t some kind of projection or guidance figure. I’m talking about signed-and-sealed orders that have already been placed by China Airlines, British Airways and dozens of other customers.

These are contractual orders, so the guesswork has been taken out of the equation. It’s just a matter of manufacturing the planes and shipping them out the door — or hangar, as the case may be.

Boeing still hasn’t fully recovered from recent missteps. Still, it’s reassuring to know that without a single new call from customers, the company has half a trillion in sales in the pipeline.

“Backlog” is defined as sales orders that have been received, but not yet fulfilled. Call it a head-start on the next quarter or next year. This unfinished work builds up when companies consistently have more demand than they can handle (not a bad problem to have) and must put some of it on the back-burner for later.

Here’s how I like to explain this situation…

Picture a football team scoring 49 points in a game. Then let’s imagine that the scoreboard operator couldn’t keep up and credited the team with only 35 points at the final whistle — so the remaining 14 points were carried over to the start of the next game.

Now, this team’s high-powered offense will probably score again and again over the next four quarters and add to the total. But even if the offense goes cold and gets shut out in the next game, it still has at least two touchdowns on the board, quite possibly enough to carry it to victory.

Backlog is highly visible, predictable, and quantifiable. Since the transactions have already occurred, projecting future revenues is a bit like forecasting yesterday’s weather.

Take Beazer Homes (NYSE: BZH), a mid-sized builder with an active presence in a dozen states from California to North Carolina. The company delivered more than 900 new homes to customers last quarter at an average price of $508,000, generating revenues of $460 million.

Meanwhile, it received orders for 932 more. The backlog now stands at 1,507 units. This figure would gradually be whittled down if not replaced by fresh incoming orders. But at the very least, even if demand dries up, we know that Beazer has enough work to keep it busy for five months, a “rainy day” fund worth $816 million.

Now, that doesn’t mean these companies are completely immune to recession. They aren’t bulletproof. During a slowdown, they will see a slump in new orders just like anyone else. But here’s the difference — they at least have a pipeline of existing product orders that will continue to feed revenues and earnings for a while until activity picks back up.

That helps explain why backlog-heavy companies such as IBM (NYSE: IBM) and defense contractor General Dynamics (NYSE: GD) have not only maintained dividends during lean times, but increased them – both hiked payouts even during the harsh 2008/2009 recession as well as the pandemic.

While guaranteed revenues can be a luxury during shaky economic conditions, it’s arguably even more important to monitor changes in backlog levels to gauge underlying demand trends. That’s what initially drew me to Okta (NSDQ: OKTA).

The cybersecurity vendor employs the term “remaining performance obligations” in lieu of backlog. But whatever you call it, the dollar value has swelled by 25% over the past year to reach $4.2 billion. About half of that will be recognized over the next 12 months – a sizeable head start.

Keep in mind, this follows what was already a record-shattering free cash flow haul of $284 million last year.

Even more encouraging is the swifter growth in large-scale enterprise customers (those generating $100,000+ in annual revenues. Okta has been landing them left and right and now has nearly 5,000 of these big fish on the client roster.

These corporate clients feed a steady stream of high-margin (80%+) subscription-based revenues. Recent bookings aside, Okta has only scratched the surface of its addressable market. As data breaches and other digital attacks become a constant (and increasingly sophisticated) global threat, organizations must rely on trusted partners with proven solutions.

And 19,000+ have turned to Okta to help validate the identity of employees and customers to protect their networks.