There was an article in the business section of my newspaper which read "RIM Q2 profit narrowly misses forecasts - Even with a flashy Bold product launch under its belt, Research in Motion Ltd. issued another set of disappointing results yesterday, with earnings of $495.5 million or 86 cents per share on sales of 2.58 billion in the second quarter". The article goes on to say that RIM missed "consensus targets" by .01 per share and $.01 billion in gross sales. It also includes statements by RIM management enthusing about the good year the company is having.
Now, I’m far from being a financial expert, and hopefully someone who is can explain this, but what I read into this news article is that the business world financial analysts made an over-optimistic forecast about how RIM would perform, and when the guess was slightly off, laid the blame at the door of the “poor-performing” company rather than on an inaccurately forecasting analyst community. From my layman’s viewpoint, RIM made a shitload of profit, so why is everyone disappointed? And why in hell did stock prices reportedly go down by 15% on a sales forecast discrepancy of less than 1%?
I don’t read the business news regularly, but I do skim and pick out the occasional article to read in detail, and I seem to see this sort of thing regularly, and it always puzzles me.
Anyone got an expert’s view on this and can explain it to me?
Financial analysts don’t just make blind guesses about a company. Most public companies have continuing discussions with financial analysts, reporters, etc. at least quarterly (I’ve seen giant conference calls hosted by the CEO or CFO). So the companies are giving clues throughout the year as to what they think their performance will be. The analysts then take those clues, combine it with the clues their getting from competitors and make their own projections.
What it means is that when a company misses analyst projections, it’s because the company itself was feeding over-optimistic information to the analysts. The market responds by slapping the company on the wrist in the form of lower stock prices.
I’m far from an expert, but a stock’s value is based on an educated guess about the company’s future profits and growth of future profits (and numerous other factors). If they miss a profit forecast in one quarter, that calls into question the future estimates. Lower future profits and lower future profit growth will lower the price of the stock today.
One is what kunilou and MOIDALIZE have already said; the market is wary of companies who say X, and then produce Y. It’s understandably unsettling, even if the differences are very small, as in the recent case of RIM. RIM is of course a very good company with a long and bright future ahead of it, but the market is inherently distrustful of these sorts of reports because they’ve all been stung before.
The second is that all stock prices are speculative. There’s not necessarily an exact match between the total value of RIM stock and the actual assets RIM possesses. Having been to RIM I can assure you that in terms of physical assets they don’t have as much as their stock value - they have a lot of real estate, but it’s mostly very modest. The company is not extravagant, and obviously they’re not a company with a huge amount ivested in land or capital assets; their potential is tied up in knowledge, patents, and innovative energy. Their value is in the likelihood of future profits; you pay for RIM stock on the assumption they will continue to earn large wads of money. IF they’re consistently underperforming their earnings estimates, over the long haul that dramatically changes the value of a share of RIM. One percent every quarter starts to add up. Logically, the stock price will eventually settle and start to climb again, but in the meantime it’s adjusting to new earnings levels.
The third is simple herd mentality and profit seeking. There was a selloff in part because the instant negative news hits, many people and fund managers who have held RIM stock for a long time and hold it at much higher value than where they sold it will think, “The stock may drop now; I’ll sell it and pocket my winnings.”
OK, I can see this as an issue for significant differences, but in the specific case that triggered the OP, the variance seems to well within the probable margin of error, given that this was an estimate (albeit an educated and informed estimate). Is the 15% stock drop a realistic reaction? Or is “realistic reaction” just not a valid description of anything to do with the stock market?