With earnings season in full swing, there is one term that is being thrown about more than almost any other: “better than expected.” Looking at earnings released this morning, JP Morgan (JPM), Gannett (GCI), Harley-Davidson (HOG), Nokia (NOK) all reports met or exceeded the estimates and shares are rising because of it. After the horrid past 18 months the market has endured we are certainly not going to complain that many companies are beating analysts expectations.
As far as recessions go, the current eighteen months has been the longest in the U.S. since World War II. Analysts have been shaving estimates through the recession, and those cuts appear to have gone far enough now. Without being too general, these cuts have lowered the bar so low that many companies are able to “beat” while still claiming major erosions in fundamentals. For example, Nokia met its profit estimates and shares are trading up more than 10%, but that was with profit that is down 82% from a year ago on sales that dropped nearly 20%. Gannett, the publisher of the USA Today newspaper, shares are up 7% in morning trading, but had profit fall 60% from just last year and revenue was down 18%. Harley-Davidson has encountered a historic downturn and profits are down 37% from an already rough quarter a year ago, shares have gained 13.5% on the news that the company “beat”, if you exclude restructuring charges.
For JP Morgan, it is a little harder to know what to expect since the acquisition of Washington Mutual is still shaking out. Revenue jumped 48% with the addition of WaMu, but net income was down 10%. Shares are more subdued than the rest of the bunch only up about 2% in the morning session.
Obviously, there is a lot more going on with these earnings results than just the reported numbers. There are smaller insights in these results that can help investors better understand the stock, for example shipments were on track for HOG and they are cutting half the jobs that were expected, but the overall fundamental results are still the best overview of a company’s recent performance. Our methodology has two of these stocks rated as Undervalued and two rated with our neutral Fairly Valued.
Four companies in very different businesses all saw declines in profits that were less than feared and shares are rising from it. It is worth noting just how bearish the estimates had become to make these companies with severely degrading fundamentals do better than expected. Everyone knows that the market is a forward looking discounting instrument and the overall economy is showing signs of stabilization, but the gains that have been made are still very fragile and it may be wise to remember that a “beat” these days is not the same as it once was. The bar has been lowered so far, that seeing a marginal beat is almost, if I may, expected.