Analysts Vs. Media: Who's Dumber?

Gap (NYSE:GPS) announced killer first-quarter earnings May 20. The headline read something like "Gap profit jumps but raised outlook falls short." Falls short of what? The quarter was a resounding success and so too it appears is its future. Yet the headline leads investors to believe Gap has failed somehow. This is making something out of nothing and we in the media are constantly guilty of this practice. Read on and I'll discuss who's dumber, those of us in the media or the analysts we constantly speak of.

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Analyst Estimates Be Gone
I've never understood the need for estimates because they are usually wrong. In the case of the Gap, it appears analysts believe it has higher potential 2010 earnings than the company does. Why don't analysts come right out and say so? Anyone who follows the company knows the 2% Gap same-store sales increase in Q1 is great news, especially since all three brands had positive comps. Further, the company increased gross margins by 250 basis points. This was clearly a home run quarter for the company, yet some of us in the media presented it otherwise. It's shoddy reporting and we all suffer when we do this.

Something's Amiss
Tiffany & Co. (NYSE:TIF) reported fourth-quarter earnings March 22 and there were headlines that read something like: "Tiffany quadruples profits but misses analyst estimates." Earnings per share were $1.10, 3% less than analyst expectations. Yet anyone reading this will conclude there's a problem. If a company delivers four times the earnings year-over-year, why does it matter if it missed analyst estimates? It's irrelevant.

Analyst Brain Cramp
Deere (NYSE:DE) had a good second quarter easily beating analyst expectations. News outlets and articles discussed how the tractor company destroyed analyst estimates; it's a very accurate description of the quarter's results. What's mind boggling about this situation is that Deere shouldn't have been in a position to beat the street so easily. In its first quarter conference call, the company predicted sales would grow by 4-6% in the second quarter, and it actually hit the high end of the range. More importantly, Deere predicted sales for all of 2010 would grow by 6-8% and net income would be $1.3 billion, $400 million higher than previously forecasted. Yet analysts held firm to a $1.09 estimate, one that makes no sense given the positive guidance from Deere management after Q1 and that it made $1.11 a share in the second quarter of 2009. I surely hope institutional money managers aren't relying on this information.

Why Bother?
Apple (Nasdaq:AAPL) is the classic example demonstrating the useless nature of estimates. In the company's first-quarter earnings release it projected earnings per share in Q2 of at least $2.06 on revenues of $11 billion. Taking their lead from the company, analysts' second-quarter estimates ranged from $2.39 to $2.65 a share. Apple delivered $3.33. Looking ahead to the third quarter, Apple sees at least $2.28 a share on $13 billion in revenue. Analysts, not wanting to be burned a second time, have an estimate of $2.85 a share. You kind of get the feeling neither Apple or Wall Street has a clue what the actual number will be. It's a complete waste of time yet The Street will continue to provide meaningless numbers and we'll continue to write about them. That's the definition of insanity.

Bottom Line
Situations like these happen all the time. When it comes to the media and Wall Street, it's like the blind leading the blind. Who's dumber? It's a toss-up. (For more, check out Analyst Forecasts Spell Disaster For Some Stocks.)

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