Once again, earnings season is upon us and the one aspect that rubs me the wrong way is the inevitable comparison of expectations to actuals. This, for the most part, is a grade on how well an analyst anticipated the twists and turns of a particular quarter to provide a gradable prediction. Fortune telling at its finest! For its’ part, Zacks Investment Research has created a business out of the compilation and distribution of this data. But to what end?
Let’s review one example of this season, DGI darling Caterpillar (CAT). The release by Zacks was:
Deere & Company (DE – Free Report) reported second-quarter fiscal 2019 (ended Apr 28, 2019) adjusted earnings of $3.52 per share, missing the Zacks Consensus Estimate of $3.58 by a margin of 2%. However, the reported figure recorded an improvement of 12% from the prior-year quarter’s adjusted earnings per share of $3.14.
Ongoing concerns over the impact of the escalating trade war between the United States and China on U.S. exports of key commodities, weakening agricultural market and delayed planting season in much of North America are resulted in farmer’s getting cautious about their equipment purchases. Deere has this trimmed fiscal 2019 guidance. The company’s shares fell 5% in pre-market trading.
The key here is the Consensus Estimate. Subsequent events are that CAT is one of the companies in the cross hairs of the escalating trade spat. Contrast this with the headlines from the company’s earnings call:
Caterpillar ups dividend by 20%, raises guidance
May 2, 2019 7:48 AM ET
Caterpillar (NYSE:CAT) has authorized an increase to its quarterly cash dividend of 20% to $1.03 per share of common stock, payable August 20, 2019, to shareholders of record at the close of business on July 22, 2019.
“Caterpillar expects to increase the dividend in each of the following four years by at least a high single-digit percentage. With its remaining free cash flow, the company intends to repurchase shares on a more consistent basis, with the goal of at least offsetting dilution in market downturns,” according to a press release.
Later today, Caterpillar’s executive leadership team will describe its plans to grow services. It intends to double Machine, Energy & Transportation services sales to about $28B by 2026, from a 2016 baseline of about $14B.
Updated outlook for 2019: EPS of $12.06-$13.06 (vs. previous guidance of $11.75-$12.75). Other 2019 assumptions include: Restructuring costs of about $100M-$200M and capex of $1.3B-$1.5B.
CAT +0.8% premarket
Personally, I’ve never owned CAT primarily due the the volatility of their underlying customer base, i.e., agriculture and construction being in traditional feast or famine business cycles. But if I were an owner, unless there’s any indication of trouble brewing, I would probably place my faith in management over the talking heads. Otherwise, how can one rationalize their investment decision.
It’s not only Zacks. Larry Swedroe wrote an article in 2013 on this issue as well, proving the old adage, “the more things change, the more they stay the same”.
I guess the real question is in regard to the average investor and their ability to perform adequate due diligence as opposed to blindly following the ravings of the charlatan du jour. If the will – or ability – is lacking, an ETF is probably a better alternative to the whims of most ‘professionals’.
Thoughts and comments are always welcome!