By David Berman
When Goldman Sachs Group Inc. (GS) reported third-quarter earnings of U.S.$5.25 a share on Thursday morning, it was difficult to figure out exactly whether this was good news or bad news.
The earnings were up spectacularly over the third quarter of 2008, so that’s good news. They also beat expectations among Wall Street analysts, which is also generally seen as a good thing.
But Goldman Sachs appears to have tripped over a little something called “whisper” earnings – the latest earnings expectations among analysts which haven’t found their way into published reports, but nonetheless are circulating among those in the know.
Earlier this week, Goldman Sachs’ whisper earnings were $4.90 a share – but that was before JPMorgan Chase & Co. (JPM) reported outstanding third-quarter earnings of its own on Wednesday that topped consensus expectations. Hours later, the whisper earnings for Goldman Sachs jumped to $6 a share. Goldman fell short, and the stock fell 2.3% on Thursday afternoon.
Which raises the question: What exactly are these whisper earnings and why do they drive stock prices?
Analysts regularly update their earnings estimates in published reports, and these numbers are used to calculate consensus expectations. These are the official earnings in analysts’ reports that you see mentioned on news sources such as Bloomberg and First Call. But, as the Goldman Sachs example so clearly demonstrates, they can be rendered meaningless by the time a company reports its actual earnings.
Sometimes, late-breaking news can influence an analyst’s expectation for earnings, before he or she has the time to publish another report. As well, analysts are frequently too conservative in their expectations (most companies beat official earnings expectations), and often have suspicions that earnings will be higher.
“Analysts are taught to be conservative,” said Shannon Puls, managing member of Earnings Whispers, a Missouri-based company that tracks, well, earnings whispers.
“So you’re going to give a number – and as all different kinds of information comes in, you’re going to have a different number. But to actually formalize a new report and issue a new number and submit that to whomever, that takes a lot of work and you’re not necessarily able to do that.”
But should investors pay more attention to whisper earnings than official forecasts?
Whisper earnings, far from residing on the fringes of investing, have been the subject matter of academic studies and other serious research. You can find some of these studies at WhisperNumber.com. But that doesn’t mean they are without criticism, and much of the debate revolves around whether whisper earnings are more accurate than official analyst forecasts.
“I find that whispers have little information value,” said Michael Dewally, a finance professor at Marquette University, in a recent article in the American Journal of Business. “They are not more accurate predictors of earnings than analyst forecasts. Indeed, the opposite appears to be the case.”
However, as the Goldman Sachs example shows, whisper earnings can’t be ignored. They are playing an important role in the stock market these days as investors fret over whether the rebounding stock market can be justified by underlying earnings – and earnings expectations change fast.
