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. 😉