I’ve long considered the whole earnings vs. Street expectations thing to be one big rigged game. When writing about earnings, I try as much as possible to avoid even talking about “Street expectations,” preferring instead the more reliable comparison to the previous year’s corresponding quarter. This is the best comparison of a company’s sales and earnings; sequential comparisons are helpful but, given the seasonality with some companies, can be misleading (think about a retailer’s fourth quarter compared to their first.)
I long ago developed a mistrust of “Street expectations.” For one thing, those “expectations” are largely based on “guidance” supplied by the companies themselves. Not hard to see the ripe opportunity for gaming there. For another, it was always curious how some companies always beat expectations — GE is absolutely notorious for it — and I’ve always suspected that it was pretty easy for the accountants to come up with a number that somehow “topped” what the Street was looking for. A tax loss here, a carry-forward there, mark this one to make believe, it’s not that hard when you think about it. There are probably hundreds of ways to do it.
Now, though, we have some measure of proof that companies are “managing” earnings per share in order to beat expectations. From the Journal:
A new study provides further evidence suggesting many companies tweak quarterly earnings to meet investor expectations, and the companies that adjust most often are more likely to restate earnings or be charged with accounting violations.
The study, which examined nearly half a million earnings reports over a 27-year period, reached its conclusion by going beyond the standard per-share earnings results that are reported in pennies and analyzing the numbers down to the 10th of a cent.