Lets take for example Microsoft's reported quarterly earnings for the 3rd quarter of 2009. The headlines read "Microsoft's Profit and Sales Fall, but beat expectations". What does that actually mean? Their business revenue and profits were lower than last year, but because a group of analyst thought they were going to be worse, investor celebrate and buy the stock aggressively.
First, 2008 was one of the worst years on record for corporate profits and revenue, which in fact was reflected in the crash of the stock market through March of 2009. If I were to tell you that one of the most successful corporations in the world was going to report worse results than in 2008 would be excited to buy that company's stock?
Microsoft reported an 18% decline in profits from the 3rd quarter, and a 14% decline in top line revenue. The company has been cutting costs for the better part of a year and still posted lower results. The most telling aspect of Microsoft's results are the huge declines in the consumer division of the company. Operating system sales fell 38%, and profits declined 52%. This is the first time the company has post multi-quarterly declines in profits and sales.
But, the analyst thought it would be worse, so the stock is trading up 8.5%. Frankly, I do not care what the consensus expectations were. Microsoft performed badly again, in what many are touting as a recovery period.
Lastly, According to Morningstar, Microsoft is trading at a forward PE of 17.34 (before the nearly 9% run-up in the stock price today) which is hardly a bargain. My point is simple, "What if analyst expectations were higher than what Microsoft reported? Would the stock be trading up today?
by David A. Mascio
