Apple vs. Bank of America: When "Whisper Numbers" Come Home to Roost

Some of you who have been following earnings releases will be forgiven for not understanding why the market punished Apple (AAPL) after it released better-than-expected earnings (19%+ EPS surprise), while Bank of America (BAC) increased from $20/share to $32/share after showing that its net income decreased by 41%.

AAPL's stock was down at one point by 10%. Its growth prospects are still quite good, as market penetration in China is incomplete. BAC, on the other hand, will have major problems with its acquisition of Countrywide (CFC) as more and more notices of defaults [NODs] occur. In fact, in recession-resistant Santa Clara County, NODs recently spiked.

The market makes no sense sometimes, except when it does. Earnings guidance is a game played between companies and analysts. When Apple (AAPL) tells Wall Street it expects 10% increase in sales, it does so with a wink. Apple gives the Street lower numbers so it can beat those numbers come earnings time. The Street, of course, is a formidable player. It accepts Apple's lowered expectations with a wan smile and then dumps it if the numbers aren't dramatically higher. The real numbers required to maintain or increase share price are sometimes referred to as "whisper numbers." Wall Street accepts the lower numbers on paper but demands that the company meet its whisper number later on. It's a strange song and dance that serves no one well.

AAPL went down while BAC went up because shares prices are based on how much money a company expects to earn in the future, not what it made last quarter. Therefore, the Street doesn't care about the actual numbers released - it knows it's all a game. The Street pays more attention to how well the company says it will do in the future, especially whether the company will maintain or increase full year guidance (i.e., whether the quarterly numbers released every three months will add up to the full year's "earnings per share" expectations).

What is an average investor to make of all this? Only that share prices are based more on future expectations of value than on past statistics. As they say in business - past performance is no guarantee of future results.

Disclosure: None

Comments

[Jared:]

So, did BAC hit its whisper numbers or not? You don't even address that in your post. You just state that their earnings were down 41% YOY.

You should also note that BAC's share price receives a lot of support from a very nice dividend yield. The stock has been excessively pummeled in recent months due to speculation of a dividend cut. CEO Ken Lewis reiterated in the conference call Monday that he would not recommend a dividend cut to the board. The stock jumped as soon as he said that.

The SEC enforcement of existing short sale rules has also likely contributed to BAC's rise the past few days. We can't overlook that little fact.

2008 Jul 23 08:17 AM

[Rob L:]

I agree with your "game" aspect but disagree with you when you state that prior earnings don't matter. Apple increased yesterday from the open 'because they beat' (personally I think it should be "because analysts missed' or something similar). Certain stockholders panicked yesterday mainly because of the low balled guidance. The only reason the stock moved up over the course of the day is because people looked at that earnings beat and remembered the similar situation from the previous qtr, realizing that what Apple says about the future really doesn't have much weight, BUT had Apple not beaten that reassurance definitely wouldn't have been there and this stock would have continued to deteriorate during the day. I think had Apple come in lower than the estimates yesterday, even a penny lower, we'd be at about 130 today, not 165. We'd have opened at about 145 and continued lower, not higher.

2008 Jul 23 09:41 AM

[Jon T:]

"Its (APPL) growth prospects are still quite good, as market penetration in China is incomplete."

I wouldn't believe one word this guy has to say so long as he can write such an inane, ridiculous comment like that one...

2008 Jul 23 10:26 AM

[Neil Anderson:]

"[P]ast performance is no guarantee of future results."

No, but it's a good starting point. Look at the products Apple has on the table. Second to none. The new iPhone is flying off the shelves. Record sales of Macs. This company has plenty of potential.

2008 Jul 23 11:06 AM

[Murphy Mac:]

Partners in Grime is right. Anyone who understands what is happening with aapl knows staying long will pay off in a big way, with very little risk. They are on the verge of a land grab at the expense of Microsoft, it hasn't even begun yet.
Think about how many times the analysts said "everyone already has an iPod" and the growth just continued. That went on for years. Maybe the iPod growth has slowed, but now there's iPhone and whatever else is in the pipeline. The Mac growth potential alone is enough to keep my faith.

2008 Jul 23 11:14 AM

[Viswakarma:]

Wall Street is "Loss" Vegas of the East!!! Only gamblers run a company focusing on Wall Street's expectations. It is amply proved by the gyrations to Apple stock value.

2008 Jul 23 11:50 AM

[kent Ramsay:]

Apple should stop giving guidance. This "dance" with the market analysts and hedge funds is getting stupid. There is no requirement for forward guidance since the future is anyone's guess. Let's let the idiot analysts provide their own insane reasons for punishing a company that routinely outperforms the market in revenue growth, profit, creativity, etc. No need to supply the stick these morons beat you with.

2008 Jul 23 12:39 PM

[X86BSD:]

***WARNING APPL SHAREHOLDER***
I know the Apple haters here will label me a fanboy of Apple. However not only was that beating down they took of 10%! totally uncalled for it makes me realize how incredibly stupid wall street is. How long has this game been going on? Seriously what years now? My dog Isis has caught on to the game for petes sake! Wall street is incapable of any kind of original thought or learning. We all KNOW Apple undercuts themselves in their guidance so they can blow the guidance away. This is not new its been going on for *years* now. Why don't all the "analysts" and "fund managers" just resign. Seriously. This is like watching a child repeatedly touching a hot burner and yet still not learn to stop touching it. "Ow!.. Ow!... Ow!..." Why does anyone listen to these clowns?

If Apple says 1.12 bank on 1.20. It's was laughable 5 years ago and now it's just boring and annoying. Go away Wall St. you are too dumb to play.
***WARNING APPL SHAREHOLDER***

2008 Jul 23 02:29 PM

[Matthew Rafat:]

Not sure what Jon T's issue is. The China comment was based on the last shareholder meeting. Steve Jobs acknowledged that the iPhone wasn't receiving all possible revenue on even current subscribers because of quasi-IP issues. In addition, the middle class in China is increasing, and they will want status symbols, which include an iPhone and other Apple products.

2008 Jul 23 03:02 PM

[KenC:]

Your comment on Apple makes no sense. It would be one thing to lowball and give guidance below reasonable expectations, but Apple gave guidance typically 25% above the previous year's sales. The analysts can wink all they want, but they are free to come up with their own estimates. Apple beats those estimates too.

2008 Jul 23 04:31 PM

[Just a Smal...:]

***Disclosure (small) Apple Shareholder***
I am a (small) investor in Apple. While not a "fan boy" I do own several of their products (ok, more than several) and find them to be of excellent quality, offering superior value.

Over the course of the past several years I have watched with dismay at the volatile ride that this stock has had. I can draw only one conclusion: The extreme price fluctuations of this stock are being drive by the big money guys (hedge funds, institutional investors and the short sellers and option traders who feast on, and are responsible for, the wide price swings.

Why else would the stock of a company that has demonstrated consistently, quarter after quarter after quarter, strong historical growth in revenue, EPS and market share, a product development cycle second to none, world class marketing and a growing and very profitable retail sales channel, experience such apparently irrational price swings and extreme trading ranges?

I'm sorry to say that the only answer that I can offer is excessive "greed" and market manipulation.

2008 Jul 23 04:51 PM

[daniel murray:]

And don't forget one other category that Apple leads the nation;that is sales per square foot of retail space. They are first by a wide margin. 50% of sales of computers in Apple's retail stores are to "switchers", those leaving Microsoft based systems behind and starting anew with Apple. Their future seems bright. I own AAPL in my IRA.

2008 Jul 23 05:06 PM

[invest-long...:]

An inane and pointless article - why is such stuff published at all?

2008 Jul 24 01:20 AM

[AdamC:]

One thing I believe is Apple is the darling of shorts and these guys have been making money shorting it normally after the quarterly financial report. They are so blatant about it they don't care and the excuse they use is lowball forecast but didn't they realise that Apple consistently met the forecast of the street quarter after quarter.

2008 Jul 24 07:44 AM