There have been many earnings announcements lately that have surprised investors and analysts. And this has resulted in some significant gains in stock prices.
But don’t take these quarterly results at face value.
Earnings and guidance are very conservative this year, so it shouldn’t come as a shock when a company beats its projections. Just because a company like Caterpillar (NYSE: ) crushes its estimates, it doesn’t mean the business is humming along. It just means they beat the estimate.
That said, at a time like this, it’s important to figure out why the earnings come in better than expected. Were sales higher than forecasted? Did margins improve? Was it due to a lower tax rate? Lower general and administrative costs (layoffs)?
There are a number of reasons why a company might spring a surprise. Let’s take a look at a few that recently reported earnings surprises to see the real reasons why it happened…
Three Reasons Why Company Earnings Can Surprise
On Tuesday, Yahoo! (Nasdaq: ) doubled up on analysts’ estimates, notching earnings per share of 16 cents, versus expectations of eight cents. That was on a non-GAAP (Generally Accepted Accounting Practices) basis, though. Using GAAP, the company earned 10 cents per share - a penny more than in the same period last year.
Behind the flashy headline numbers, Yahoo! actually experienced a 13% decline in sales. It offset that with a $120 million decrease in sales and marketing expenses and $50 million less in general and administrative expenses (most likely due to layoffs).
In addition, the company’s gross and operating margins were both lower than the corresponding earnings period in 2008. So while Yahoo! did beat its estimates - and even earned more per share than it did last year - it was all due to cost-cutting and firing employees.
Despite a revenue decline of 6.6% during its fiscal third quarter, as all-important same store sales dropped by 5%, Starbucks (Nasdaq: ) was still able to post a profit of $151 million (20 cents per share).
