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What's Behind All the Surprises in Corporate Earnings

Friday, 27 Apr 2007 | 3:11 PM ET

Can earnings guidance be trusted? Firms as disparate as Caterpillar, Cummins, Yahoo! and Research in Motion all beat first-quarter earnings expectations.

David Dropsey, equity research analyst at Thomson Financial, and Dirk van Dijk, director of research at Zacks Investment Research, gave "Power Lunch" viewers their perspectives on the apparent data gap.

Guidance Garbage?
Debating whether companies have learned to game guidance to a point where it's of little value, with Dirk van Dijk, Zacks Investment Research director of research; David Dropsey, Thomson Financial equity research analyst and CNBC's Bill Griffeth

Van Dijk told CNBC's Bill Griffeth that analysts should have expected the quarterly outcomes: "It's the same situation over and over again," he declared.

The research director pointed out that in 2006, each quarter had "far more positive surprises than disappointments," beating views by 3% to 3.5%.

"Lo and behold, it's almost identical this time," Van Dijk said: Excluding tech firms, the median of all who reported came in at 2.9% over expectations. He believes that "companies have discovered it's better to under-promise and over-deliver."

Dropsey said that earnings "stats are accurate," especially for the first quarter. He explained the surprises as "a lack of positive guidance" -- due to "analyst and executives alike" who "didn't want to get caught up in a slowdown."

He believes that "analysts were playing into fear and keeping their numbers down" to avoid looking "foolish."

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