This was a strange earnings season.
But it has been a remarkably strange economy.
But when you look at the big names in tech, including Intel, IBM, Apple, Google, Yahoo, eBay, Microsoft, and the big names on Wall Street, there was a bizarre disconnect over what was expected, and what was realized.
Why? What happened?
I get it when companies beat by a penny, or two, or three, but IBM, Apple and Google beat, and big. And Microsoft missed on the top line. Badly. How did Wall Street get it so wrong, so often, and what responsibility do companies have to make sure that doesn't happen?
Before you think this is a tirade against analysts, it's not. And before you think this is a swipe at the companies themselves, it's not. It more a cautionary tale for investors who rely on both to gauge whether these companies are worth their hard earned dollars.
I'm not sure what happened this time around, but the misses to the upside were biggees. IBM scorched through expectations on the bottom line and raised full year guidance noticeably. Apple destroyed estimates. Again. And for a company like Apple, that usually sandbags estimates anyway, Wall Street constantly adjusts and accommodates for that, and still got it way, way wrong.
All of this was good for longs, lousy for shorts. Which begs the question: What is a company's responsibility to warn the Street on the up side, just as many of them used to warn on the downside? It would seem Wall Street wandered along on its merry way, content that the economic climate was dismal -- and would continue to be.
All the while, it would seem companies were executing key strategic steps in order to translate disappointing top line performance into something more palatable to the bottom line. In other words, companies were able to meet or miss on the top line, but still managed to beat on the bottom line. And they beat. And none of them thought to "warn" the Street that particularly good news was coming.
And don't think this is limited to merely a handful of top names in tech. Something like 80 percent of the S&P beat earnings estimates this quarter, and in almost every case, the discrepancy between expectations and the actual result came as a complete and total shock.
In some situations, I get it: Google doesn't offer any formal guidance so analysts are expected to read the tea leaves and guesstimate based on third party research and market trends. Other companies, like Intel and Microsoft, have offered such wide ranges of revenue and/or earnings estimates that you just gotta wonder why they bothered in the first place. But eBay, as an example, is one of the most transparent companies out there and consensus was still wrong.
And yet we all all eat this stuff up. We hang on every word. Every number and nuance. Making it more difficult, some companies have abandoned their mid-quarter update. Why bother if it changes in a month, or a week, or a day. I wonder why the game is even played at all. Make no mistake, it is a game: A financial cat-and-mouse between the longs and shorts, the Street and the companies it covers. Companies can't talk to analysts and media during so-called "quite periods" or the nebulous days and weeks before an earnings report is scheduled for release, but the actual duration of the quiet period varies from company to company, with some not having one at all.
It used to be that companies pre-announced bad news: an earnings miss, a lost contract, something material that would dramatically affect the upcoming earnings release in a bad way. But few companies pre-announced good news. And there seemed to be no rhyme or reason as to who would, or should, do what and when.
I get the concept of protecting the long investor in a company by getting bad news out there as quickly as possible, but don't short sellers deserve the same kind of treatment when particularly good news is coming? Love 'em or hate 'em, short sellers ought to be protected by the same rules.
But that all leads me back to the original reason for this post: earnings, estimates, consensus, and the game we all play, and how badly and how regularly Wall Street missed this time around. It's a two-way Street, sure, but analysts are only as good as the info and data they collect.
Just like those of us in the media. Which means the responsibility falls squarely on the shoulders of these companies and their investor relations departments to do a better job guiding analysts on how the quarter is going. Estimates aren't going away any time soon, nor are Wall Street analysts. Investors deserve quality, accurate guidance and there's only one place to get it: From the companies themselves. And this quarter proved that it simply isn't happening.
It seems everyone got a free pass this past year because business was falling off a cliff at a rate no one has experienced and no one had expected. But business is coming back, and investors should demand a far more accurate, and far more regular updates on how the quarter is going. And analysts who make calls based on that accurate and regular data should be held accountable for the numbers they share, and the errors that they make.
I wonder about the recovery when this kind of thing happens.
I doubt there was some massive conspiracy by big groups of analysts to take estimates down so low, across so many different companies, so that we get the impression that everyone is beating, and therefore Wall Street should be in rally mode.
But this earnings season, more than any other in recent memory, shines a bright light on the estimates game, the value we place on it, and how dangerous it can be for investors who rely on it, and how frustrating it can be.
Before we jump for joy that Wall Street is recovering, and how great it was that companies like Apple and IBM "beat," and how awfully shocking it was that Microsoft "missed," consider the estimates to begin with, and how much emphasis we place on them. And how much better a job these public companies need to do in keeping the public who owns them informed on their progress and performance during the quarter. You'll get a better picture of the Street, as well as the companies inside your portfolio.
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