Shrug Shoulders, Sell Stock: CSX, JPMorgan, Others Beat Low-Ball Estimates

Chances are quite good now that most of the S&P 500 companies you own will, if they haven’t already, beat analyst forecasts with their first quarter earnings reports. But before ordering the celebratory drinks, it’s worth mulling how little this feat may mean for your wallet. A whole lot of companies are beating expectations these days without making their investors immediately richer.

Consider the recent fortunes of CSX Corp. (CSX) and JPMorgan Chase (JPM), both of which announced first quarter earnings per share figures about 13% higher than analyst forecasts. It took Wall Street mere days to forget that good news and lower their share prices. Advanced Micro Devices (AMD) trumped profit forecasts by more than 30%, but its shares got no glory for that, either. Note share prices in the charts after each announcement: CSX on April 17; JPMorgan on April 13; and AMD on April 19.

CSX Chart

CSX data by YCharts

Over the next couple of weeks, lots of companies will provide us with similar happy surprises and similarly mundane share price reaction. Why? Because the forecasts this time around are particularly crappy.

A couple of months ago, when CEOs and CFOs were taking their Power Point presentations up and down Wall Street, they were careful to keep expectations low. Fourth quarter 2011 wasn’t pretty for many, and no one wanted to chance disappointing again. Analysts obligingly penciled in very little growth.

More than 80% of the companies that had reported by April 21 beat the market forecasts for their companies. More upside surprises won’t be surprising at all.

But a miss against that low target could be a particular problem. So far, few S&P 500 members have reported figures below analyst estimates, but punishment has been swift for those that have. International Business Machines (IBM) shares got sold for its quarterly earnings miss announced April 18, even though it raised its full-year forecast above consensus estimates. Hasbro (HAS) shares fell after its April 23 report showed all sorts of misses, even though investors should surely be used to Hasbro missing estimates by now.

IBM Chart

IBM data by YCharts

Regardless, most companies will fill the markets with much happier news in coming weeks. And even if the rash of upside surprises doesn’t create imminent share price gains, higher profits are always something to cheer. The fact that companies as diverse as Verizon (VZ), Xerox (XRX), Chipotle (CMG), Lululemon Athletica (LULU) and Microsoft (MSFT) are making more money that most thought possible goes a long way toward allaying fears about overstretched consumers, strapped customers in Europe and slower growth in China. That in itself is a good reason to buy the next round.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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