Earnings projections

In every industry, whether times are good or bad, some companies do better than others. The reason for this is most often better management although at times other factor play a part.

When one company in an industry reports results, and they are unfavorable, often they claim the problems are beyond their control and attribute them to a poor economy. When the companies that have done better report, they may also cite economic conditions and generally, try to be conservative in making predictions as to future results.

While human nature has a certain boastfulness to it, in business, the surest way to fail is to fail to produce the promised results. For a fair number of years I used to review bonus plans for companies. No employee likes to sign up to a performance objective that they don't feel confident about. At times management tries to impose stretch goals but these are resisted. So, when you are preparing projections, and put together estimates based upon inputs from various districts, regions, stores or whatever corporate structure you have, it is going to be understated since any manager knows that he better not promise more than he can deliver.

Clearly, there may be events that cause even fairly conservative estimates to fall short but in an economy that is reasonably stable or growing, most companies will exceed their estimates.

We saw that during the recent earnings season. Earnings generally exceeded projections despite the decrease in year over year revenue. Most companies were quite conservative in giving guidance about the rest of the year citing difficult economic conditions. However, the fact that they exceeded estimates for the most part is a tremendous indicator that conditions have achieved a reasonable level of predictability. This occurs when the economy is stable or growing, not when it is contracting.

The one lesson I believe you can take away from earning season is that the economy has clearly stabilized and is probably starting to grow slowly.