Earnings Versus Projections
Earnings per share matters for company stock prices. But what is often overlooked is that earnings projections, as stated by companies in their quarterly conference calls, also significantly impacts stock prices. Projections are essentially stated expectations by company management about what the future looks like from an earnings standpoint.
Companies are often conservative to avoid underperforming expectations. In light of today’s difficult trade environment, technology companies in particular have been reducing earnings expectations on a forward-looking basis. We believe this is prudent and it has had an impact on technology company’s stock prices.
Earnings announcements and projections are two components we assess when making judgments about stock prices and valuations. Jeff Cox of CNBC wrote an article recently outlining the reduction in company earnings by technology companies. In that article he stated:
Technology companies, which face some of the biggest tariff impacts, have been slashing expectations for third-quarter earnings at a record pace.
With the kickoff to the heart of earnings season still about two weeks away, some 29 information technology sector companies have lowered their guidance, which is the biggest number since FactSet started tracking the data in 2006.
That comes as overall S&P 500 earnings, with 16 companies reporting so far, are tracking at a blended 3.8% decline from the same period a year ago and as markets are looking to gauge what impact the U.S.-China tariff war has had more than a year after it began.
“The number of companies being cautious going forward with guidance is a reflection of the tariffs. That has always been in my view what the critical factor is going to be,” said Michael Yoshikami, founder of Destination Wealth Management. “The rubber hasn’t met the road quite yet, but I think it is getting close. That is something to be concerned about.”
As a sector, technology is projected to show a 10.1% decline from the third quarter in 2018.
At the industry level, expectations have fallen most for semiconductors and equipment, an area especially hit by tariffs. Earnings for that group are now forecast to show a 30.3% decline, down sharply from the 22.1% previous estimate.
Source: October 1, 2019, CNBC.com article by Jeff Cox
The economy is slowing down; I believe there is no doubt this is the case (particularly given recent manufacturing numbers released this week). We expect more companies to be conservative in their forward-looking guidance. Some projections are to be believed; some should be received with skepticism. We assess each companies’ statements and make our own judgments of what is likely.
We have a strong stock analysis team and portfolio management group that reviews individual stock valuations and data on a regular basis. These assessments are rolled up to the Investment Committee and Investment Policy Committee of the firm as we make decisions about how to allocate portfolios. My Chief Investment Strategist, Craig Gentry, is involved in the decision-making process and I am deeply involved in judgments we make about allocations and position decisions. We are paying attention and we are completely connected to portfolio strategy as we keep a close eye on economics, trends, market psychology and current conditions.
We believe strongly that our great team in place is one of the benefits of working with DWM. Everyone is working on your behalf.
Any questions about this information, please let us know. Happy to help.