Surfing through the earnings surprise page at Nasdaq.com is one of my favorite pastimes. Believe me what I see saddens me sometimes.
Seeing companies beat or failing to meet market estimates is common. An informed investor knows that when the share price of a stock increases just before it is time for declaring results it is often due to expectations of good results. The stock price in such cases often declines post results because the effect of the results has already been factored in. What saddens me is the plight of the uninformed lay investor who does not have access to market news and/or does not know that there exists a thing called disclosures (as I discussed in a previous article) while reading what an analyst has to say about a stock.
Generalities apart, the real surprise is when a top performing stock and a market leader surprises with results below expectations of analysts who publish estimates after extensive research.
When a company reports revenue or EPS that is significantly higher or lower than what the analysts had forecast, the stock prices usually react strongly and move up or down as the case may be. Most companies release their results before or after trading hours. The key, thus, is the timing, especially for investors and traders who have access to post and pre-market trading data.
Investors should however be careful because there are also instances where the price of the stock moves up or down simply on the basis of high or low market expectations. The upward or downward price movement in such cases can be extremely sharp in case of an earnings surprise.
Today we will look at four popular technology stocks in the context of earnings surprise to understand whether it a conclusive indicator for the sector. The reasons why I have chosen these four is that all are from the same sector but have differing historical earnings surprises.
Google, Inc. (GOOG)
You will note from the above graph that the third-quarter earnings surprise was a negative (-17.23%). The forecast of earnings per share was 8.88 whereas the company posted an EPS of 7.35. However, in the previous two quarters, Google came up with positive surprises, albeit pretty small for a company as big as this; 6.19% and 0.69% in the first and second quarter respectively. The last quarter of the previous year was also a significant negative earnings surprise of -9.27% in EPS.
Microsoft Corporation (MSFT)
The earnings surprises for MSFT in the last four quarters:
After a significant and impressive positive earnings surprise in the second quarter by 15.87%, MSFT failed to meet market consensus EPS forecast by 7.02%. As against the market expectation of 0.57, it showed an EPS of 0.53. Although it also beat market forecast in first quarter and the last quarter of last year the figures were not impressive enough; 5.26% and 2.63% respectively.
Intel Corporation (INTC)
The third quarter ending September 2012 was however the biggest positive surprise in the last four quarters as is evident from the chart below.
Quarterly Earnings Surprise History
Yahoo, Inc. (YHOO)
The Yahoo story of earnings surprises is even more overwhelming than that of Google. Whereas, just like Intel, it has beaten market forecasts consistently for the last four quarters, the percentages have been much more impressive.
The EPS of Yahoo for the third quarter this year beat market expectations by an astounding 45.83%. It reported an EPS of 0.35 as against the market forecast of 0.24 per share. The first and second quarter surprises were equally impressive, beating forecasts by 41.18 percent and 35 percent.
The Bottom Line
What we see from the earnings surprises of these four biggies of the technology sector is that two of them (INTC and YHOO) have been consistently springing positive earnings surprises, whereas the other two (GOOG and MSFT) have shown mixed figures.
While this goes on to show that earnings surprises signal is inconclusive at least inasmuch as the technology sector is concerned, much depends upon the type of earnings forecast you are looking at. A consensus EPS forecast is usually reliable. If you are reading reports of individual analysts, it must be from a reputed source. Also make sure that you read the disclosure statement.
At the same, it must also be taken into account that although the four companies are part of the technology sector, each one of them derives revenue from different sources. Google focuses on connecting people and derives most of its revenue from online advertisement. Yahoo provides online properties and services along with a range of marketing services. Microsoft Corporation develops and licenses and supports a variety of software and services, whereas Intel Corporation is a manufacturer of integrated digital technology platforms comprising of microprocessors and chipsets.
Bottom line therefore is, consistently creating a surprise is more important for investor decision-making than the particular surprise itself. So, since INTC and YHOO have consistently surprised us, we can expect them to surprise again - which is not really a surprise in that case. However, we can't bet like that on MSFT and GOOG because they may surprise us by not producing a large earnings surprise, or going negative when we bet on positive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.