This blog post originally appeared on RealMoney Silver on Oct. 21 at 8:45 a.m. EDT.While it has been widely advertised by chest-thumping bulls in the media that at least two-thirds of the companies that have reported third-quarter earnings have beaten forecasts, there was less than meets the eye to third-quarter profits as in many cases the "beats" were on lowered estimates. What is often being ignored is how orchestrated earnings season has become, not only that the beats are from lowered and depressed guidance but that, in many cases, there have been high-profile forward-quarter guide downs. The reality is that companies almost always beat consensus earnings forecasts, even during rough economic periods. Investor relations departments and Wall Street analysts are very good at getting numbers down to the right level before reports are released. As a result, the actual results vis-a-vis expectations or consensus do not vary materially from historical experiences, in good times and even in bad times. Indeed, the concept of beating is one of the single-most overhyped statistics extant given the degree to which estimates move around prior to reports. Remember that even in the most recent downturn, there were few companies pre-announcing negatively. What should be more interesting to investors is the composition of the guidance (revenue vs. earnings, higher vs. lower). Also, by category/sector and end market, is the company benefiting from restocking, or is the company closer to consumption and end-market demand?
- Only 33% of companies beat consensus sales estimates by greater than one standard deviation vs. 40% in the last 20 quarters.
- The good news is that 10 out of 14 intermediary companies (distributors, etc.) beat sales by more than one standard deviation, showing inventory restocks continuing (stronger than expected), and stocks went up 5%.
- The bad news is that only six out of 33 end-demand companies (true picture on end demand) beat sales estimates by more than one standard deviation.
- Out of the seven companies that missed sales estimates by more than one standard deviation, 100% were end-demand companies.
- The third-quarter beats were overhyped as they are the outgrowth from lowered guidance.
- If one divides the third-quarter earnings reports by end-market categories, differentiating between the beneficiaries of restocking and those companies that are closer to the end markets and consumption, it leads to two different pictures as to the health of corporate earnings.
- If end demand doesn't pick up (and pick up quickly), the 2010 earnings outlook for many industries (such as semiconductors and other beneficiaries of restocking) will be in jeopardy, as will be the now ambitious consensus for S&P 500 earnings of over $70 a share next year.