Quarterly Earnings

Quarterly Earnings

When reported quarterly earnings miss the quarterly earnings estimate by only 1%, have you ever wondered why a company's share price drops 30%? Well, here's some dark truth about quarterly earnings and quarterly earnings estimates.

Quarterly earnings are what a company earned in a quarter. At least that's what they are supposed to be. In reality, they are what the company management wants you to believe it earned during that quarter. CEOs are under intense pressure to meet or exceed not just the consensus earnings estimates, which is the average of the various analysts' estimates, but also the whisper numbers. What are "whisper numbers"?

Whisper numbers are the earnings estimates that supposedly are being whispered among those in the know on Wall Street. It's often based on past precedents. For example, if a company typically beats the earnings estimates by 5%, the whisper numbers will be about 5% above the consensus quarterly earnings estimates.

How do companies meet such expectations and do it quarter after quarter? In a nutshell, they cook their book. Pull up the chart of companies whose stocks enjoyed a multi-year run before crashing, and you will see quarterly earnings that rose with almost robotic consistency, punctuated by sporadic "one off, extraordinary charges" related to corporate merger and other hard-to-quantify events, which is when the dirt under the rug gets thrown out so that the game can begin afresh.

So back to our question. Why does a company's share price crash when it misses its earnings by 1%? It's because an earnings miss of any amount is an admission that the company management has used up all of the financial gimmickry in its arsenal. Its books can't be cooked any further without someone going to jail, which means the end of its earnings run.

Now back to our question: are you sure there is no God? If not, take a tour through these photos.