You get lots of opportunities to see how your favorite
sports teams are doing. Your beloved (insert baseball team
name here) take the field 162 times during the regular
season. You might wager on the games, but you've presumably
got more money invested in stocks. Yet the managers of your
companies take the field only four times per year: putting
their talent on display in quarterly reports.
Thus it's with a lot of anticipation and sometimes
excitement that investors await these revelations from
companies. Indeed, some
analysts on Wall Streetare paid to estimate what those
numbers will be. And when a company reports its earnings,
investors draw conclusions based on whether the numbers beat
or missed average analyst estimates.
Then there are the less publicized "whisper numbers,"
unofficial estimates that often circulate among wealthy
investors and Wall Streeters. They, too, are used as
yardsticks against which a company's reported earnings are
evaluated.
Problems
But there are problems with this system. For starters,
analysts often come up with their estimates based largely on
information provided by the company. So a smart company might
want to offer somewhat conservative guidance to analysts, in
order to increase the chances it will deliver a positive
earnings surprise and
look compelling. You'll also sometimes see investors
react positively when a company increases its guidance, that
is, says it expects to make more in the current quarter than
it had previously said.
Now that we're in the
Sarbanes-Oxleyera, companies are not permitted to
selectively distribute information, so while some
well-connected types might once have developed earnings
estimates based on information others didn't get, that's less
likely to happen now.
Smart investorsshouldn't pay too much attention to
estimates because even when a company beats them, its stock
might slump, and vice versa. Check out these results from
last week, for example:
Company
CAPS Stars
(out of 5)
Reported Quarterly EPS
Beat or Missed
Stock Reaction
After Hours
Stryker (NYSE: SYK)
****
$0.69
Met expectations
3.5%
SanDisk (Nasdaq: SNDK)
****
$0.75
Beat by $0.49
10.2%
Eli Lilly (NYSE: LLY)
****
$1.20
Beat by $0.18
0.4%
Key Corp. (NYSE: KEY)
**
($0.50)
Missed by $0.09
(4.7%) Continued... |