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IBM Lowers Forecast, Stock Tanks

“IBM forecast earnings for 2015 of $15.75 to $16.50 per share, below the $16.51 per share average estimate on Wall Street.  The company’s stock fell 2% in after-hours trading.”

–“At IBM, a Weak Streak Persists”; The WSJ (1/21/15)

At first blush, it seems like a classic overreaction:  a storied company — in this case, IBM — nudges its earnings guidance down a tad . . . and the stock gets whacked.

What gives?

Expectations Game

Here’s how it was explained it me, back in my CPA days (once upon a time):

Publicly traded companies of all stripes today are acutely aware of Wall Street’s earnings forecasts.

Meanwhile, accounting rules (starting with GAAP, or “Generally Accepted Accounting Principles”) are hardly black-and-white; on the contrary, companies have a great deal of discretion in how they account for many line items.

To name just a few examples:   companies can tweak short-term earnings by changing their assumptions about future expected (accrued) revenues or expenses; altering the estimated useful life of assets like capital equipment and intellectual property; recognizing (or deferring) capital gains or losses; or even just re-categorizing investments from short-term to long-term (or vice versa).

Ergo, if companies know Wall Street’s earning target and can’t manage to meet it by scrounging a few extra pennies out of the couch cushions (so to speak) . . . things are likely more dire than the company is letting on.

Makes sense (cents?) to me.  😉 

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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