Negative Earnings Surprises

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Negative Earnings Surprises

Wall Street is full of professionals whose job is to analyze companies and provide opinions about them and estimates about their future financial results. While most of them are very intelligent individuals who have a wealth of information and experience, they tend to be much too shortsighted. These analysts typically will come up with "earnings estimates" for the upcoming three-month period. If a company’s actual results fall short of analysts’ expectations, this is known as a "negative earnings surprise." On such disappointing news, the company’s stock price may fall. (Conversely, if a company performs better than what analysts expect, it will have a "positive earnings surprise," which may cause the stock price to increase.)

For some perspective ...

Let’s pretend that Wal-Mart (WMT) announced earnings that fell short of analysts’ estimates by a measly two cents a share because it didn’t sell as many widgets during the holiday season as people expected. Let’s also assume that the stock fell on the disappointment. Does this disappointing shopping season mean that Wal-Mart’s long-term competitive advantages have been eroded? Probably not. Wal-Mart remains among the largest retailers in the world, with great economies of scale and a remarkable distribution network, which allows the company to pass huge cost savings on to customers, which, in turn, keeps customers coming back. So it fell slightly below analysts’ estimates in one particular quarter—big deal!