Despite the generally ebullient financial press during the recent market rally, many stocks have had shocking shortfalls when reporting earnings relative to earnings estimates. This may indicate we are not quite clear of the recession just yet.
IN PICTURES: Eight Ways To Survive A Market Downturn

I am not a big fan of earnings guidance and estimates, as I believe that it can provide incentive for management to do the wrong thing to meet those estimates. If you examine the major cases of fraud in our generation, many of them began with a desire to meet guidance. Despite that, I felt that it might be useful to examine those stocks that had huge earnings guidance misses in the second quarter of 2009, to see if there were any unifying factors to help investors avoid stocks that may be on this list in the third quarter.

Tech Misses
Ciena Corp (Nasdaq:CIEN) had one of the largest earnings estimates misses in its last quarter, which was reported back in June. The company reported an adjusted net loss of 25 cents per share vs. an expected loss of nine cents. This sounds pretty bad, but it's even worse if you include the non-cash charge of $455.7 million for impairment of goodwill that Ciena had in the quarter. (For more on impairment, see Impairment Charges: The Good, The Bad and The Ugly.)

Another technology company reporting a large miss was Intel Corporation (Nasdaq:INTC), which reported a loss of seven cents versus the estimate of eight cents in income. The market didn't care about that, however, and drove the price up based on a positive outlook for sales.

Consumer Misses
Jumping over to the consumer for a moment, Harley Davidson (NYSE:HOG) missed its earnings by 16 cents, and Host Hotels & Resorts (NYSE:HST) by 12 cents. Despite an alleged recovery in the economy, Americans seem reluctant to spend money on discretionary consumer items and travel.

Accounting Issues
One of the first issues an investor has is determining what earnings number to use when a company reports. Accounting rules require U.S. listed companies to report its net income under generally accepted accounting principles (GAAP). However, there is no rule against reporting "adjusted earnings" or "operating earnings" as long as the company explains the measures in a footnote.

Many companies report several sets of numbers in earnings releases, and these differing numbers must be reconciled against the estimates contained in recognized financial services like First Call or Reuters. Most of the time, the estimates embedded in average earnings estimates circulating on Wall Street typically are not GAAP numbers, and exclude one time items, and the like.

The Bottom Line
Although many companies have missed earnings estimates in a big way, these stocks have also rallied with the market. as investors seem content to forgive these companies for their missteps.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Savings

    The Worst Financial Problems Ultra-High-Net-Worth-Individuals (UHNWIs) Face

    Understand how the problems of ultra-high-net-worth individuals (UHNWIs) are different from ordinary problems, and identify the unique financial challenges they face.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center