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Real Earnings: Beat The Street Just A Fanciful Game

  • Written by Syndicated Publisher No Comments Comments
    December 6, 2011

    In a game of  ‘beat the street’ companies and analysts are busy downgrading corporate earnings. By the time earnings are reported, companies will often ‘beat the street’ on those carefully downgraded estimates.
    Please consider Earnings outlook may be deteriorating rapidly

    Earnings season is just over a month away, but the early signals are not comforting.

    Companies cutting forecasts outpace those raising estimates by the greatest ratio in 10 years, and some sectors, such as materials, have seen a dramatic fall in expectations for the soon-to-be ended fourth quarter, according to Thomson Reuters data.

    It is a stark reminder that even as U.S. economic data has improved in recent weeks, the euro zone debt crisis and concerns about slowing growth in China still cast a long shadow.

    Estimates for fourth-quarter S&P earnings growth have tumbled over the past two months as global macroeconomic headwinds prompted analysts to slash forecasts.

    According to Thomson Reuters, 88 S&P companies have issued negative earnings preannouncements for the fourth quarter, compared with 25 positive announcements, creating a ratio of 3.5, the largest since the second quarter of 2001.

    Don’t Worry Companies Will Still “Beat the Street”

    On August 17, 2011 I wrote Earnings Collapse Coming Up; Don’t Worry Companies Will Still “Beat the Street”; Value Traps and Road to Ruin

    Of all the inept reasons to be bullish about equities, “beat the street” hype is near the top of the list. The fact is, in aggregate, ever since Reg-FD (full disclosure) companies always beat the street.

    In Surprising Optimism in Face of Weekly Global Equity Carnage; Foolish Comments of the Day; “Beat the Street” Bullsweet I noted nearly every quarter, even in 2008 and 2009 the majority of firms beat estimates. Here is the way the process works:

    • Corporations give analysts “tips” regarding profit expectations.
    • Those profit expectations are purposely low.
    • Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can “beat the street”.
    • If corporations are going to miss and need an extra penny, they change tax assumption or make other “one time” adjustments as necessary.
    • Corporations beat the street by a penny with “pro-forma” (after adjustment) reporting.

    Percentage of Companies that “Beat the Street”

    click on chart for sharper image

    The last time companies failed to “beat the street” was third quarter of 1998. At the earnings trough in third quarter of 2008, 58% of companies in the S&P 500 still managed to “beat the street”.

    The above chart from Understandings Earnings Estimates by James Bianco on the Big Picture Blog.

    Christmas sales may be up, but what about profits? It is taking bigger and bigger discounts to excite customers.

    Car sales are up, but it is important to note that shipments to dealers are counted as “sales”. Dealer inventories are at record highs. It will take discounts to move them.

    Employers are generally running pretty lean as hiring sure did not pick up. Reduced sales and reduced margins will also cut into profits unless employers shed more workers.

    Higher energy prices will take a toll unless companies can pass along the costs. Here’s a hint: most can’t. There is little pricing power anywhere. But hey, don’t worry. Companies will beat the street. They have every quarter since 1998.

    Mike “Mish” Shedlock
    http://globaleconomicanalysis.blogspot.com

    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.
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