So far this earnings season, 77% of companies have posted EPS numbers in excess of their estimates. This is extremely high from a historical perspective, and shows just how much the street analysts have underestimated the recovery in the market.
As we have said before, however, this earnings season is all about revenue. It is much easier for a company to post good EPS numbers as they slash costs by cutting staff and capital expenditure. Much harder to manufacture is revenue numbers, and this earnings season is separating the former from the latter. This helps explain why, despite the high percentage of EPS beats, the average stock has actually declined 0.72% on its reporting day (Source: The Bespoke Investment Group, found here).
I noticed this trend during last quarters reporting season. The companies that reported first all benefited from EPS expectations that had not been adjusted up enough to match the cost cutting that was being implemented. During first few weeks, the majority of companies beat expectations, and their stocks took large leaps on those days that they posted. The euphoria spread to their respective industry peers, and by the midway point the market was feeling pretty good. However, while formal expectations didn’t increase drastically, whisper numbers for the later-reporting companies did until finally they were too high. So when those companies actually reported, they fell short and the stock dropped.
I have no insight as to whether this will happen this earnings season, but I would say it is a definite possibility, especially in industries like health care and technology where the vast majority of companies have seen large jumps in share price as they handily beat expectations.
Disclosure: Long T and MSFT.
They say that good investing shouldn’t feel good when you do it….
By that logic, Andrew and myself must have made an absolutely amazing investing decision when we wrote our post last week explaining our reasoning behind him selling all of his Apple and me selling 66% of my position. Not only did we get contacted by Apple’s lawyers about that story, but they decided to rub it in by posting record profitability and having their stock rocket up in after-hours.
Analysts were expecting EPS of $1.42 on average with the whisper number closer to $1.70. Apple destroyed both numbers with earnings of $1.82. They also trounced the sales numbers across the board; beating on Mac’s, iPhones and even the iPod. Their gross margins actually expanded during the quarter thanks to people upgrading to Leopard (Microsoft might be able to surprise next quarter for similar reasons related to Windows 7).
The one caveat to Apple’s earnings is that their guidance for next quarter was below consensus estimates, however, Apple is known for sandbagging.
This amazing quarter was in line with our thinking that Apple is an exceptional company with impeccable execution. However, I still feel that there is very little or no negativity priced in to the stock and it is reminiscent of Akamai (AKAM) a couple years ago when everyone “knew” how great of an investment it was (it fell ~30% following an earnings report was only “very good”).
I think 2010 earnings will be between $6-8 and the stock should be fetching a P/E of 20-30. These estimates would imply a price of $120 to $240 with the average being $175. I’d love to make another 20% on Apple but even my average estimate would put me at a 12.5% loss while the low end would represent a 40% drop. The risk/reward ratio is nowhere near as appealing as when Apple was trading below $100 where I was buying and I still feel there are other investments with better ROI at current levels.
I will add to my position if we get to ~$180 and I will be selling the rest of my shares if we approach $225.
Disclosure: Long AAPL, RIMM, MSFT
They said never to try and catch a falling knife, but I just tried. Outcome TBD.
RIMM dropped 15% post-earnings, after missing revenue by 2% and beating EPS expectations (before one-time items) by .03 (Barrons).
I see the revenue miss, and my interpretation of it is as the product of a few items, chief among which is the iPhone. In this quarter, AAPL released the iPhone 3GS, and of course there was a lot of hype. People shopping for a new smartphone were probably overwhelming drawn to it being a new product, taking them away from RIMM. Not helping the case for the BlackBerry, they had no new compelling products. The tour was released, but it was essentially a Wi-Fi-less Bold warmed over for Verizon, nothing too compelling there.
I see a few catalysts for revenue growth in the future, that will help alleviate the symptoms from this quarter. First, new products, including the Storm 2, which is supposed to have a vastly improved screen over the older, much maligned version. Secondly, the next quarter will start to see the ramp up in Christmas sales, the strongest time for most retailers with RIMM being no exception, yet they are guiding for flat earnings! My read on that is they are trying to be conservative, taking a page out of AAPL’s book. Finally, the push for more presence in the consumer market will undoubtedly hurt their margins slightly. But in the market for smartphones that have a physical keyboard, RIMM is still the only big player. The rumor that came out yesterday that Verizon was no longer interested in carrying the Palm Pre further solidifies RIMM’s position in this sector.
Position Disclosure: Long RIMM at this price. Long AAPL over mid-to-long term, would not recommend a buy at this price. No position in PALM, but my opinion suggests a short.
I wasn’t even going to post on the RIMM earnings but Andrew’s has given me food for thought that I hope readers may enjoy. I have been long RIMM for months and believe strongly in it’s longer term prospects due to the secular growth trend in mobile computing and smart phones.
That being said, I sold 30% of my shares ahead of earning because I felt that expectations had exceeded reality. Andrew points out that revenue missed (consensus) estimates by only 2%. However, whisper numbers were above the high end of the spectrum closer to $5.75B which would imply a miss of closer to 8%.
I’m maintaining my $100 price target but I will be taking some profits at earlier levels. I now consider my self under invested in RIMM and I will be buying around $66-69.
Disclosure: I am long much of the mobile wireless market with positions in RIMM, AAPL, QCOM, TEF, T, TSM (and I was stopped out of my NVTL position today).