Learn to Play the Earnings Game
Learn to Play the Earnings Game (and Wall Street Will Love You) The pressure to report smooth, ever higher earnings has never been fiercer. You don't want to miss the consensus estimate by a penny--and you don't have to. By Justin Fox
In January, for the 41st time in the 42 quarters since it went public, Microsoft reported earnings that met or beat Wall Street estimates The 36 brokerage analysts who make the estimates were, as a group, quite happy about this - the 57 cents per share announced by the software giant was above their consensus of 51 cents, but not so far above as to make them look stupid. Investors were happy too, bidding the already high-priced shares of the company up 4% the first trading day after the announcement. In short, for yet another quarter, Microsoft had kept its comfortable spot in the innermost sphere of corporate paradise. This is what chief executives and chief financial officers dream of: quarter after - quarter after blessed quarter of not disappointing Wall Street. Sure, they dream about other things too-- mega-mergers, blockbuster new products, global domination. But the simplest, most visible, most merciless measure of corporate success in the 1990s has become this one: did you make your earnings last quarter? This is new. Executives of public companies have always strived to live up to investors' expectations, and keeping earnings rising smoothly and predictably has long been seen as the surest way to do that. But it's only in the past decade, with the rise to prominence of the consensus earnings estimates compiled first in the early 1970s by I/B/E/S (it stands for Institutional Brokers Estimate System) and now also by competitors Zacks, First Call and Nelson's, that those expectations have become so explicit. Possibly as a result, companies are doing a better job of hitting their targets: for an unprecedented 16 consecutive quarters, more S&P 500 companies have beat the consensus earnings estimates than missed them.
In January, for the 41st time in the 42 quarters since it went public, Microsoft reported earnings that met or beat Wall Street estimates The 36 brokerage analysts who make the estimates were, as a group, quite happy about this - the 57 cents per share announced by the software giant was above their consensus of 51 cents, but not so far above as to make them look stupid. Investors were happy too, bidding the already high-priced shares of the company up 4% the first trading day after the announcement. In short, for yet another quarter, Microsoft had kept its comfortable spot in the innermost sphere of corporate paradise. This is what chief executives and chief financial officers dream of: quarter after - quarter after blessed quarter of not disappointing Wall Street. Sure, they dream about other things too-- mega-mergers, blockbuster new products, global domination. But the simplest, most visible, most merciless measure of corporate success in the 1990s has become this one: did you make your earnings last quarter? This is new. Executives of public companies have always strived to live up to investors' expectations, and keeping earnings rising smoothly and predictably has long been seen as the surest way to do that. But it's only in the past decade, with the rise to prominence of the consensus earnings estimates compiled first in the early 1970s by I/B/E/S (it stands for Institutional Brokers Estimate System) and now also by competitors Zacks, First Call and Nelson's, that those expectations have become so explicit. Possibly as a result, companies are doing a better job of hitting their targets: for an unprecedented 16 consecutive quarters, more S&P 500 companies have beat the consensus earnings estimates than missed them.