Investors following the earnings season press coverage may wonder why certain companies decline in value after delivering an upside surprise. But that’s because merely beating expectations isn’t enough – it’s how a company does it.
There are two kinds of earnings beats, Cramer told viewers today, one legitimate and the other not. The first is delivered by increased sales, which could mean the industry is improving, the company is taking market share or a new product or division is driving growth. Regardless of the reason, though, more sales mean more earnings, and that will send the stock higher. Case in point: Apple delivered upside surprises throughout the entire depression/recession of the past two years or so, and the Street continued to bid up the share price.
The other kind of beat is one manufactured by management. Whether through cost cuts, aggressive accounting or stock buybacks, a company was able to boost its earnings per share. There was no true growth in business, but the number crunching made the quarter look much better than expected. Almost any company can pull this sleight of hand, Cramer said, which means the “upside” isn’t much of a surprise.
Investors should keep this in mind when reviewing a company’s performance. Instead of looking only at EPS, check the sales figures. They tell a much more accurate story.
When this story published, Cramer’s charitable trust owned Apple.
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