U.S. companies have been finding it much easier to deliver earnings beats, or profits that are higher than expected, as analysts on Wall Street continue to trim their forecasts for earnings growth. However, they are coming to realize that beating earnings expectations alone is not enough to help their stock prices.
Moreover, despite posting solid results for the past quarter, a company will still see its stock get slammed if it doesn't provide an upbeat outlook for future quarters.
The harsh truth is that amid heightened global economic uncertainty, investors are more nervous than ever about putting their money into risky assets. They need to see not only good performance in the past quarter, but also a visible promise of better future quarters.
Bank of America Corp (NYSE: BAC), for instance, reported better-than-expected earnings on July 18 but shares fell nearly 5 percent as investors worry that mortgage problems may continue to plague the bank in future quarters.
The Charlotte, N.C.-based bank reported it earned 19 cents in the second quarter, compared to the consensus forecast of 14 cents a share. The bank's massive loss in the year-ago period -- tied to the settlement of a mortgage-backed securities lawsuit -- also created an easy comparison for the bank in this year's second quarter, making the earnings growth rate look astonishingly high.
Despite better-than-expected results, Chief Executive Officer Brian Moynihan remained cautious when discussing the bank's outlook for earnings. There remains some uncertainty in the markets and in the minds of our customers and clients, he said. This largely revolves around the situations in Europe, the United States, around the longer-term fiscal issues that must be dealt with.
The banking industry as a whole has posted stronger quarterly results compared to the year-ago period, but shares are underperforming since earnings season began, indicating that investors are keeping close watch on the uncertainty and longer-term fiscal issues that must be dealth with that Moynihan mentioned when discussing Bank of America's second-quarter results.
Forty-six of the 64 banks tracked by the KBW Bank Index have beaten expectations on an operating-per-share basis. The 72 percent beat rate tops last quarter's 67 percent rate and the 69 percent rate in the prior year period, according to KBW's bank earnings round-up.
However, despite the improvements, shares are still lagging behind the broader market. Since the start of earnings season, the KBW Bank Index is up 0.9 percent, while the KBW Regional Bank Index is down 0.7 percent. The S&P 500 has gain 2.1 percent over the same period.
A second harsh truth -- along with the fact that positive earnings guidance has become virtually essential -- is that investors are looking not just for good news; they are looking for very good news. They will not tolerate any mixed signal, even if it's buried deep down in the earnings report.
It takes a real surprise to boost the shares. In other words, profits must be substantially higher, not just a few pennies above the consensus that analysts have spent weeks busily cutting back. Besides, everyone knows that it's fairly easy for management to find a few pennies from here and there to pad the bottom line.
Investors need to see actual growth, not just better than anticipated. They are sophisticated enough to look past the positive effects of mergers and acquisition as well as easier comparisons with the year-earlier period.
Shares of the following companies took a beating Tuesday as investors react to the mixed signals.
United Parcel Service, Inc. (NYSE: UPS), the world's largest package-delivery company, delivered earnings growth in its second-quarter report Tuesday, but a dour view on the back half of 2012 sent shares slipping 5.08 percent, to $73.99 apiece, in Tuesday's afternoon trading.
UPS posted revenue and earnings per share that rose from last year but missed estimates. Earnings per share came in at $1.15 a share against the $1.17 expected. The reported revenue of $13.34 billion was less than the $13.70 expected.
The company lowered its full-year outlook to $4.50 to $4.70 a share, from its prior earnings estimate of $4.75 to $5.00 per share, and said customers are more concerned about the economy in the second half of the year.
Increasing uncertainty in the United States, continuing weakness in Asia exports and the debt crisis in Europe are impacting projections of economic expansion, Scott Davis, UPS chief executive officer, said in a statement.
Illinois Tool Works Inc. (NYSE: ITW), the diversified manufacturer, reported higher-than-expected quarterly profit Tuesday as growth in North America markets offset sluggish demand in international markets.
The Glenview, Ill.-based company, which gets almost one-third of sales from Europe, now expects 2012 profit from continuing operations of $4.03 to $4.19 a share, lowering the midpoint of its range by 15 cents. Analysts expected 2012 profit of $4.18 a share.
Investors ignored the 77 percent jump in ITW's second-quarter earnings and rushed to sell the company's shares as soon as they learned that the company has lowered its full-year sales and earnings forecast.
Following the news, shares of ITW fell as much as 5.2 percent. It is currently down 3.15 percent, at $51.88 apiece.
Peabody Energy Corporation (NYSE: BTU), the world's biggest private-sector coal company, reported second-quarter earnings on Tuesday that beat analyst expectations. But the company forecast third-quarter profit below Wall Street expectations as its Australian operations suffered. And as a result, investors hammered the shares.
Peabody's net income totaled $204.7 million, or 75 cents per share, in the second quarter, down from $284.8 million, or $1.05 cents, a year earlier. Revenue totaled $2.0 million, on par with $1.98 billion a year earlier. Wall Street expected Peabody to earn 53 cents per share on revenue of $2.06 billion, according to FactSet.
Shares of Peabody Energy Corporation (NYSE: BTU) plunged 11.01 percent, to $20.61, in Tuesday's afternoon trading.
Texas Instruments Incorporated (Nasdaq: TXN), the largest maker of analog chips, reported second-quarter earnings that beat analysts' expectations but its projections for third-quarter profits and revenue fell short of forecast. TI shares lost 1.1 percent, to $26.21 in Tuesday's trading.
The company reported second-quarter earnings excluding items of 44 cents per share, down from 57 cents a share in the year-earlier period, but still handily topped Wall Street's expectation of 34 cents a share.
The Dallas-based company forecast fiscal third-quarter earnings of 34 cents to 42 cents a share, on revenue of $3.21 billion to $3.47 billion. Analysts on average had predicted earnings of 43 cents on sales of $3.53 billion.