Companies benefit by barely exceeding lowered earnings expectations

Posted: Thursday, April 26, 2001

NEW YORK (AP) -- Amid the grim economic reports that sent the stock market tumbling recently, a record number of companies issued warnings that first-quarter profits would be much worse than expected.

Then something interesting happened: The bad news turned into good after many companies announced earnings that beat analysts' lowered forecasts -- barely.

Along with an interest cut by the Federal Reserve last week, the lack of disappointing earnings reports has helped boost stock prices, lifting the Dow Jones industrials 7.6 percent between April 6 and Monday.

Critics contend that some publicly traded companies lowballed earnings predictions -- making them appear more negative than needed -- to boost confidence on Wall Street and beyond. The payoff came when the companies either matched analysts' earnings predictions or beat them by a few pennies.

''They condition the street for the idea of lowered expectations. Then, if they match it, don't need to lay off 20 percent the work force and aren't going out of business, it bumps the stock up 20 percent,'' said Charles White, president of Avatar Associates, a New York money management firm.

Companies deny trying to manipulate investor reaction. They say they try to give the public their best predictions on how market forces are affecting profits.

The number of negative earnings warnings rose 25 percent in the first quarter of 2001 to a record 895, up from 711 in the fourth quarter of 2000, according to the research firm Thomson Financial/First Call.

In the second quarter, the number is expected to go even higher.

Nearly 60 percent of the companies listed on the Standard & Poor's 500 index beat earnings expectations, while nearly 30 percent matched predictions, said Thomson Financial/First Call research director Chuck Hill. Those that beat expectations did so by 3.7 percent on average.

The percentage of companies beating expectations and the amount by which they bested analysts' predictions actually was close to the average over the last seven years tracked by Thomson Financial/First Call.

The trend has gone on as long as many market watchers can remember, said Brian Belski, a market strategist for US Bancorp Piper Jaffray.

''I don't think there's a conspiracy, but a lot of this is about marketing,'' he said.

The phenomenon might be due in part to less than accurate predictions from stock analysts.

White said analysts often don't provide better forecasts after receiving earnings warnings because most work for investment firms that are in the business of selling stock -- and sometimes their firms have a large inventory of that stock. Sometimes companies are also investment firms' clients.

''There's just a general bias toward saying positive things,'' White said. ''Sometimes frankness and candor just doesn't have a place in this business.''

Companies that just managed to beat analysts' first-quarter expectations include consumer products giant Colgate-Palmolive, insurer Allstate and United Parcel Service.

UPS warned in March that its first-quarter earnings would likely fall in a range of 49 cents to 51 cents per share, down from an earlier projection of 57 cents.

Analysts surveyed by Thomson Financial/First Call responded with a prediction of 50 cents per share. After UPS announced last Thursday that earnings were 51 cents per share, the company's stock rose $2.62 that day to $57.07.

Officials at the Atlanta-based company were simply trying to give shareholders the best projections they could when they issued the lowered earnings range, said Kurt Kuehn, UPS' vice president of investor relations.

''We're trying to strike a middle view of realistic conditions,'' he said. ''We're trying to tell it as we see it.''

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