62% Is the Magic Number

If the market is going to be able to trade higher this earnings season, the percentage of companies beating earnings estimates needs to be equal to or higher than the 62% reading we saw last quarter. The market did well during the last earnings season because the earnings beat rate finally saw a quarter over quarter increase. Prior to the 62% reading, the number had gone down every quarter since the second quarter of 2007 when the bear market started. It's going to be hard to top 62% because analysts have been raising earnings estimates instead of cutting them this quarter.

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Comments

[richjoy403:]

Agreed, it is going to be difficult to beat 62%...but this is also going to be a very difficult quarter for earnings announcements.

What about others who say the 3rd quarter guidance will be more important than if 2nd quarter earnings are missed by a small number?...Is their view also valid?

Jul 09 04:42 PM

[xxxx:]

what happens when the stock price is out of line regarding earnings. they go up on good earnings, but are already higher than they should be. It is all just a joke.

Jul 09 04:54 PM

[David White:]

I am not so sure it will be hard to top meets/beats of 62%. The earnings estimates currently reflect a 34% decline in earnings from the year ago quarter (Q2 2008). Some analysts are estimating that actual earnings are closer to a 28% decline. If this is so, the 62% figure should be fairly easy to meet or beat.

I don't want it to sound like I think everything will go well this earnings season. In truth I am unsure of the outcome. Since all the estimates have been manipulated to allow for lots of meets/beats, the analysts will be paying much more attention to the guidance in the Q2's earnings reports. The markets have already run up in expectation of the recession coming to an end soon. If the overall market guidance issued does not show predictions of actual growth in the fairly near future, we may see the markets fall considerably from their current values.

Jul 09 05:44 PM

[whidbey:]

Will, AA was certainly well managed,.

"Nnot as bad as it might have been" certainly inspired me, but my clients were shaken. The commodities were touted as having been up in the quarter and the poor dears were disappointed having not watched the show long enough to know that the facts are" managed". Enuf said.

Jul 09 05:55 PM

[paulsjj:]

Bailout: Gangster technique for looting an entity into bankruptcy.

Jul 09 07:34 PM

[Ryu Mei Co:]

Companies have the earning target and will/must meet that target no matter what it takes. Moreover, I am seeing some the analysts' estimate, there are all still pretty low to me. FDO or Wal-Mart will surely beat the estimate under this current condition, that is a no brainer. Banks on the other hand are the tough one to see since they can do whatever they want to make it low nice and dandy. Yes, this 62% is easy to beat.

Jul 09 07:59 PM

[Prudent Man...:]

Earnings estimates are the holy grail? Get real.

Actual earning evaluations compared to previous periods and their trend are much more important than estimates. The percentage of earnings estimates missing the mark makes this a chancy metric for investors or traders to follow.

To set an arbitrary number of what a bunch of Wall Street sell side, investment banking analysts with conflicts of interests all over the place, is completely absurd. I have found that there has been virtually no primary research done by analysts and portfolio managers today. They get their information at their desk and that is insufficient for anyone to place their hard earned money to be based upon. Getting off ones butt and checking with suppliers, customers, lower level employees, etc. is a thing of the past at the expense of the investor.

Evidently many, who think they know about investing and maybe, sadly, even advise investors, don't understand that GAAP accounting is in itself only an evaluation. Estimating to the penny what Exxon/Mobile, Walmart, Coca Cola, Caterpillar, etc. is purely an educated guess and certainly not a liquidating value. Major companies have so many moving parts that the best an objective analyst or CFO can give the investing public is a range of earnings in an estimate.

Beating previous earnings is important not beating estimates.

Jul 09 08:02 PM

[Fitz919:]

Earnings estimates are just guesses, I put very little value in them, because those making the guesses all have their own agendas. It's like asking an accountant how much is 1 plus 1? His answer is always the same, "How much do you want it to be?"

Take today's Initial Jobless Claims Number--it came in at 565K on a "seasonally adjusted basis" which is simple code for "We cooked the books again." 614K was the cooked number last week. So when you compare the two cooked numbers, what do you have? Cooked Green Shoots. It's all the same useless nonsense. People guessing, or making the numbers be...what they want them to be. Too many people have believed in this nonsense, and the market's rally from March proves it in spades.

Jim Jones had alot of believers too...and they all drank the koolaid.

Madoff had alot of believers too...and where is he...and where are they?

Where has due diligence gone?

Buffett says "Don't buy things you don't understand." He also says never pay more than 50 cents, for something that's worth a dollar." Buffett is hinting at an investment strategy, and it's not seasonally adjusted, and you don't have to have blind faith in an analyst to figure it out.

Buy things you've researched, and really understand, because you have the facts, not cooked numbers...and buy them when the price is low, so you'll actually be able to sell them when it's high.

Remember...the Government expects businesses to not cook the books. But we must remember that the Government always cooks the books.

Jul 09 08:34 PM

[nmelendez:]

Yep AAA CDO's and derivatives...and a bridge in Bwooklyn fer sale..:)

Jul 09 09:52 PM

[BPYHO:]

I disagree, I think most companies set the bar so low that 70+% of them will beat estimates. I definitely think that there will be a 2nd crash but not before we have a little 10% earnings rally. THe crash will be in Aug/Sep when people realize oh sh!t, half the people I know are unemployed and this country is going bankrupt....

Jul 09 10:21 PM

[LilBob:]

I agree with the skepticism regarding earnings estimates. Failure to meet earnings estimates would actually be a positive for companies like Wal-Mart, where average employees receive so little compensation and so much of the marketed goods are imported that the entire entity ends up creating a net drain on the economy. To me what matters right now is the price of oil, import/export ratios and the strength of the dollar relative to foreign currencies. As long as oil doesn't hit any major spikes, the dollar falls just a little bit more versus the Euro, Pound and Yuan and we see continued improvement in our import/export ratio (made much more likely by a period of relative softness in the oil market) this country has a chance at recovery.

Jul 09 10:49 PM

[mountain view:]

BPYHO:

You cracked me up with your closing line. It may really be that simple ( "Oh sh!t, half the people I know are unemployed and this country is going bankrupt....")


On Jul 09 10:21 PM BPYHO wrote:

> I disagree, I think most companies set the bar so low that 70+% of
> them will beat estimates. I definitely think that there will be a
> 2nd crash but not before we have a little 10% earnings rally. THe
> crash will be in Aug/Sep when people realize oh sh!t, half the people
> I know are unemployed and this country is going bankrupt....

Jul 10 01:34 AM

[square to t...:]

You cannot be in this business and ignore short-term view points like the monthly comps in retail nor quarterly earnings. However, a savvy investor does the analysis to understand and estimate what will be the company's future free cash flow. After all, valuing a company by discounting a modeled stream of future free cash flows with the appropriate hurdle rate should carry more weight than beating a short term earnings expectation. It also should carry more weight that slapping a P/E on a stock as well. Sure, the market prices in a lot of the accounting games that are played with earnings. (Think FASB 87 (accounting for pensions) or how executive stock options were not expensed before the FASB change a few years ago.) But don't handicap yourself. If you can't do the FCF analysis yourself, then use a money manager or an independent research firm that does put a large weight of their analysis on companies' free cash flow. And "No." The large former i-banks that issue "buy" ratings on stocks they recieve fees to underwrite those same stocks' second equity offerings are not independent.

Jul 10 09:38 AM

[AndrewBaker:]

The figures we get from nearly all sources and the expected figures are all so manipulated that you can't draw much in the way of sensible conclusions from any of them. Overall the results will be poor, and the interpretation of them will depend on who is doing it. The reality will be hard and the market should fall, but having seen what's been going on in the last quarter, anything is possible ...

Jul 10 12:31 PM

[Maxe Paul:]

The earnings season will throw up higher volatility, which will see the VIX rally towards the high 40's IMO.

After a rally of epic junk proportions the earnings season will sort out the "earners" from the "burners" in cash terms.

Expect several companies to surprise on the upside, and as many to disappoint.

Adding to the volatility will be the usual maxim of buy the rumor and sell the fact on the results, or vice verse.

Jul 11 06:09 AM