Wall Street's Earnings Nonsense Continues

Wall Street has failed to grasp that consensus earnings estimates have no bearing on a company's financial health. Plus: Why mining stocks (wrongly) get the shaft.

Fairly early in the equity bubble of the late 1990s and early 2000s, I began spilling my share of online ink on the subject of the Wall Street game of beat-the-number.

Metals and mining stocks for your portfolio

The beat-the-number nonsense fit perfectly into the Bubblevision mentality and was eagerly lapped up by Wall Street. However, as the excesses of that era unwound, I was certain that superficial "analysis" would end. A return to sanity should involve a return to more-intelligent behavior, and nothing is dumber than looking at a company's earnings, "analyzing" whether it made a penny more or less than the average guess and then buying or selling the stock on that basis.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=0bcc3412-601a-454a-aac5-25c84c1ff55e,1527c86b-048d-4145-ae3c-fb134f21d888,e3b1a83c-17bf-419c-a34e-c4aa396d22bb,91260fda-1038-42c9-808d-917eeae9cc01,97b30799-900b-4936-8f24-105b31a53edb,70a73499-6099-4bcb-a015-a9afc2071633,fc0c5b0c-2eb6-42a1-9d57-fd36ab4ba1ca,1f93910d-f2f9-4cd1-9ba8-74ac3b0c2ddd,9be4c34e-d347-0287-40a1-bb139a90337d,c8c30588-7f97-46ab-87f7-66d618c4d494,c918278b-404f-4edb-be6b-a465235b6d6e,206691ca-4a43-410b-910f-b68c87a9193a,0120dd27-d4fc-4eff-bd2a-e2a17c9ee5fa", "player.fr": "iv2_en-us_money_article_16x9-Investing-ContrarianChronicles"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=0bcc3412-601a-454a-aac5-25c84c1ff55e,1527c86b-048d-4145-ae3c-fb134f21d888,e3b1a83c-17bf-419c-a34e-c4aa396d22bb,91260fda-1038-42c9-808d-917eeae9cc01,97b30799-900b-4936-8f24-105b31a53edb,70a73499-6099-4bcb-a015-a9afc2071633,fc0c5b0c-2eb6-42a1-9d57-fd36ab4ba1ca,1f93910d-f2f9-4cd1-9ba8-74ac3b0c2ddd,9be4c34e-d347-0287-40a1-bb139a90337d,c8c30588-7f97-46ab-87f7-66d618c4d494,c918278b-404f-4edb-be6b-a465235b6d6e,206691ca-4a43-410b-910f-b68c87a9193a,0120dd27-d4fc-4eff-bd2a-e2a17c9ee5fa;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');Such a simple approach leaves out a host of actually relevant factors, such as valuation, competitive position, balance sheet issues, deceleration or acceleration of growth rates . . . the list goes on.

It turns out that I was wrong. The game continued. But as the real-estate bubble grew, I became even more convinced that after that bubble burst, the days of beat-the-number would be behind us. Yet here Wall Street is to this day, still playing that same nonsensical game (along with Bubblevision). Mine over matter I don't know of an industry more than mining where it is crazier to judge a company's results by the beat-the-number yardstick.

There are so many issues and moving parts that can affect a mining company's quarterly results -- but don't tell you anything about whether the near-term or long-term prospects of the business have changed -- that a judgment based on beat-the-number considerations is almost comical. If doctors behaved as many analysts or money managers do, they would be sued for malpractice.

I make the point about mining because, after having been a director of Pan American Silver (PAAS, news, msgs) for about 14 years, I know the mining business reasonably well. But I am sure the same point can be made about other industries, from close cousins to mining, like energy extraction, to enterprises that are quite different.

In fact, as I have maintained for the past decade, companies that excel at beating their numbers probably are managing earnings -- therefore, their success at that game tells you nothing about what the businesses are actually worth. Witness the long run of wins "by a penny" of financial entities during the credit/housing bubble, many of which went bankrupt (or nearly did) in 2008-09. There's no joy in winning a loser's game Last week conveniently offered us a case study of this phenomenon with a mining company (which triggered this rant on my part).

Newmont Mining (NEM, news, msgs), which I have followed for a long time, reported earnings July 27 that were less than what Wall Street analysts had predicted, so it was deemed a loser at beat-the-number.Click graphic to see interactive chartNewmont Mining If you looked under the hood, however, you'd see that the company's production was as expected, and the company upped its dividend by 50%. Cash flow was on the order of $1.50 per share for the quarter ($6 or so for the year). All in all, after sifting through all the quarterly data, it was clear to me that the company was humming along just fine.

Newmont earned slightly less than people had forecast due to a few issues that were not earthshaking nor indicative of trouble. Yet the business headlines all focused on whether it had won or lost at the game.

Making or beating an estimate in the mining business can be particularly misleading, because inventories, to pick one line item, can change meaningfully due to short-term production and logistical issues. Newmont has more than $1 billion in that category (counting ore on leach pads). If less than 10% of that had been shipped, the company would have been deemed a winner.

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Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=8.4; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=155;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Contrarian Chronicles ArticlesDeflation 'crisis' doesn't exist 07/23/2010Chinese lesson: Better red than Fed 07/16/2010The market's best bet right now 07/09/2010More . . .Contrarian ChroniclesAbout Contrarian ChroniclesLearn the Contrarian Chronicles lingoSubscribe to Market Rap on Fleckenstein CapitalFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='4qpmawv89e9hw2xwfrhqpvfqsiub97xs';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 1 of 1PreviousNextcommon_sense. #1Sunday, August 01, 2010 5:29:24 AMI wonder how many jobs have been lost due to companies always trying to save a buck to "beat the number" and please our wall st. masters? If you do not please they will punish your stock value.  I have always said millions of jobs have been lost due to wall st.'s demand of "more profit".   Time to get a good old fashioned American made Louisville slugger and play "beat the f__ing wall streeter"! ReplyReport Abuse1 - 1 of 1PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/game-on-number-nonsense-continues.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*

It turns out that I was wrong. The game continued. But as the real-estate bubble grew, I became even more convinced that after that bubble burst, the days of beat-the-number would be behind us. Yet here Wall Street is to this day, still playing that same nonsensical game (along with Bubblevision). Mine over matter I don't know of an industry more than mining where it is crazier to judge a company's results by the beat-the-number yardstick.

There are so many issues and moving parts that can affect a mining company's quarterly results -- but don't tell you anything about whether the near-term or long-term prospects of the business have changed -- that a judgment based on beat-the-number considerations is almost comical. If doctors behaved as many analysts or money managers do, they would be sued for malpractice.

I make the point about mining because, after having been a director of Pan American Silver (PAAS, news, msgs) for about 14 years, I know the mining business reasonably well. But I am sure the same point can be made about other industries, from close cousins to mining, like energy extraction, to enterprises that are quite different.

In fact, as I have maintained for the past decade, companies that excel at beating their numbers probably are managing earnings -- therefore, their success at that game tells you nothing about what the businesses are actually worth. Witness the long run of wins "by a penny" of financial entities during the credit/housing bubble, many of which went bankrupt (or nearly did) in 2008-09. There's no joy in winning a loser's game Last week conveniently offered us a case study of this phenomenon with a mining company (which triggered this rant on my part).

Newmont Mining (NEM, news, msgs), which I have followed for a long time, reported earnings July 27 that were less than what Wall Street analysts had predicted, so it was deemed a loser at beat-the-number.Click graphic to see interactive chartNewmont Mining If you looked under the hood, however, you'd see that the company's production was as expected, and the company upped its dividend by 50%. Cash flow was on the order of $1.50 per share for the quarter ($6 or so for the year). All in all, after sifting through all the quarterly data, it was clear to me that the company was humming along just fine.

Newmont earned slightly less than people had forecast due to a few issues that were not earthshaking nor indicative of trouble. Yet the business headlines all focused on whether it had won or lost at the game.

Making or beating an estimate in the mining business can be particularly misleading, because inventories, to pick one line item, can change meaningfully due to short-term production and logistical issues. Newmont has more than $1 billion in that category (counting ore on leach pads). If less than 10% of that had been shipped, the company would have been deemed a winner.

Continued: Looking for a change of chartMore from MSN Money

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