To the shock of almost no one, companies prefer earnings “surprises” on the plus side more than “misses.” According to Expedia Inc. EXPE chairman, Barry Diller and reported by The Wall Street Journal, investor-relations executives and analysts work together to keep estimates low.
“It is a rigged race,” Diller says. In fact, analysis by the WSJ found that earnings estimates often decline between the end of the quarter and the actual earnings report.
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Regulations Are Clear
Securities and Exchange Commission rules say companies are allowed to privately comment on analysts’ financial models as long as it’s to correct historical facts in the public domain. Problems develop when nonpublic information is communicated either expressly or in code.
Even when the information being shared meets SEC guidelines, it can still be used to “nudge” analysts in a direction that will ultimately be favorable to the company.
Reality Versus Estimates
Beating quarterly earnings estimates has become so important analysts are often accused of ignoring other important factors such as sales growth. MarketWatch reported that despite the fact we’re in the middle of a bad earnings season, many companies are beating estimates – mostly because the estimates were deflated to begin with.
Examples include Apple Inc. (NASDAQ:AAPLB) which posted EPS of $1.42, beating analysts’ estimates of $1.39 by $0.03. Revenue was $42.4 billion which beat the consensus estimate of $42.2 billion. Unfortunately, the company suffered a 14.6% quarterly sales decline from a year earlier.
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Sales Per Share
Investors should take myriad factors into account when evaluating a company. Earnings are obviously important and so are comparisons of actual EPS with estimates. Another factor is sales per share versus sales per share a year earlier.
Biotech firm, Vertex Pharmaceuticals Inc. (NASDAQ:VRTXC), for example, showed 156% growth in sales per share from its last earnings report and a year earlier. Sales per share reported recently were $1.77 versus sales per share of $0.69 from a year earlier.
But Wait, There’s More
It’s important to look at earnings in addition to sales per share. Taking the example of Vertex and its 156% growth in sales per share, the company also posted a net loss of $64.5 million, or $0.26 per share, for the second quarter.
That loss was an improvement from $188.8 million, or $0.78 cents per share a year earlier. Vertex has an Outperform rating from WooTrader and Buy ratings from both Zacks and TipRanks.
The more factors you look at as an investor including the more screeners you utilize to perform your analysis of a company, the more complete the picture you see will be. One of the unique features of a platform like WooTrader is the ability to use specific screeners and groups of screeners (Woos) to conduct analysis.
Overcoming the influence of purposely deflated EPS estimates simply involves taking in more information before making an investment decision.