3RD-QUARTER EARNINGS REPORTS DON'T DISAPPOINT.
More companies are meeting or beating analysts' projections for third-quarter earnings.
With reports in from more than a quarter of the 4,000 corporations tracked by the research firm First Call Inc., 75 percent have met or exceeded analysts' estimates. In addition, upside surprises where earnings surpassed the mean estimate by more than 5 percent have outnumbered negative surprises nearly 2-to-1.
Since the start of 1994, 68 percent of all quarterly reports have met or beaten projections, according to First Call.
The stock market continues to charge ahead, propelled by such performances.
A perfect example is Chrysler Corp. A week ago, the automaker reported third-quarter earnings of 93 cents a share, above Wall Street's mean estimate of 71 cents, and the stock rose 3 percent.
But Chrysler's stock was also lifted by optimism regarding its potential to grow. Thus the company demonstrated two trends running through this earnings period: Investors are rewarding companies that report upside surprises, but they reserve their greatest cheers for those that also hold the promise for sustained profit growth.
Stan Shipley, a senior economist at Lehman Brothers, said he estimates operating earnings for the quarter will come in 10 percent higher than last year's third quarter, which would be 2.5 percent higher than Wall Street expected.
Earnings are typically more positive than negative because of the constant revisions of estimates. ``Analysts keep bringing estimates down as we get closer to the reporting period, and many overshoot on the down side,'' said Chuck Hill, director of research at First Call.
As a result, the market has visibly applauded upside surprises in key companies. Shares of Sears Roebuck & Co., for example, added 4 percent, and Merck & Co.'s stock gained 1 percent, after their quarters beat forecasts.
But with upside earnings surprises becoming more common, investors have become more savvy about them. In many cases, companies' stocks will rise in the days before an upside earnings surprise is expected, then drop on the news.
As a result, Compaq Computer Corp.'s stock fell 1.5 percent Wednesday after the computer maker reported profits of $1.25 a diluted share, beating analysts' estimate of $1.07.
``In that situation, it's buy on the rumor and sell on the fact,'' said Peter Cardillo, chief investment strategist at Westfalia Investments.
Observers said that with market valuations running on the high side, companies have to show evidence of current growth and what will support future growth. That's why Chrysler, with the rosiest growth expectations of the Big Three automakers, saw its stock rise on its third-quarter earnings surprise.
On the other hand, rival Ford Motor Co. reported operating earnings of 53 cents a share on Wednesday, a penny above estimates, but its stock fell 2.6 percent because its report didn't point the way for future automotive growth.
In becoming more savvy about earnings surprises, the market has gotten better at digesting both good and bad news. In the second quarter, Motorola Inc.'s earnings fell short of projections and the stock plummeted 13 percent, creating jitters about earnings throughout the market.
For the third quarter, investors braced themselves for disappointment. Motorola earlier this month reported a 58 percent drop in profits to 34 cents a share, below Wall Street's estimate of 35 cents, and the next day, the stock fell just 2 percent.
A big difference from the previous quarter has been the reaction to disappointments. In the second quarter, early disappointments from Motorola and warnings from other big names set a negative tone for the earnings period and sent the entire market down. Afterward, it took a few weeks for even positive surprises to lift stock prices.
But that hasn't happened in the third quarter. The market merely blinked at early disappointments, chalking them up to problems at individual companies, said Lehman's Shipley. ``I think the market is getting better at handling preannouncements,'' he said.
Shipley and other analysts believe the plethora of upside surprises in recent quarters may have finally overcome investors' caution about how much profit growth the economy can sustain, and they are more willing to accept good news.
``I think we're in a new environment,'' Shipley said. ``I think we're at a stage where there's no top of how high the market can go.''