“For Q2 2013, 87 companies have issued negative EPS guidance while 21 companies have issued positive EPS guidance. If 87 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006. The current record is 86, which was recorded in Q1 2013. If 21 is the final number of companies issuing positive EPS guidance, it will mark the lowest number of companies issuing negative EPS guidance for a quarter. The current record is 25, which was also recorded in Q1 2013.”
“Although the number of negative preannouncements is running at an all-time high, the market is not punishing the performance of these stocks in the short term. For the 87 companies that have issued negative EPS guidance for Q2 2013 to date, the average price change (2 days before the guidance was issued through 2 days after the guidance was issued) was +0.1 %. This percentage is well above the average of -1.2 % over the past five years.” (FactSet)
The overall feeling is that profits have been subordinate to the search for yield, market liquidity, and the last years investment theme (front run the Fed). But sooner or later reality arrives. Normally the analysts adjust their expectations downwards somewhat weeks or the week before reporting season kicks off. Many companies also choose to leave rather cautious guidance to market analysts. They rather report better than worse results, for obvious reasons. When companies report actual earnings and sales, their numbers often beat analysts’ expectations. Market reaction, positive. On average roughly 70 % of the reporting companies beat market expectations.
The last line, bottom line, is often exposed to a certain degree of “manipulation”. When looking at sales, it is often a better indicator of the state of how things are going ie the development and/or change in company development. There is a number of reasons why a company would use earnings to misrepresent economic performance. Why do I mention this, to emphasize that many companies try to avoid, or at least try to postpone bad news for as long as possible.
Previously, Citigroup and Reuters have reported the following on earnings guidance:
“Since earnings matter the most for equities, in our opinion, and there is relatively robust statistical evidence to back up that contention. In this respect, we have been a tad shocked by the surge in negative-to-positive preannouncement trends that make 2009’s surge appear less worrisome in retrospect. Upward earnings guidance has dipped as well and there has been little consternation or discussion about it.” (Citi)
Negative to Positive Pre-announcement Ratio.
“Of the 116 second-quarter earnings preannouncements given by S&P 500 companies, 93 of them have been negative, while only 14 have been positive. The resulting 6.6 negative to positive guidance ratio is the most negative since the first quarter of 2001.” (Thomson/Reuters)
Negative to Positive Guidance Ratio.