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This is not how things used to work.
Royal Dutch Shell and BP both delivered earnings last week that missed consensus forecasts by more than 20 per cent. Oilfield maintenance costs, weakening profitability from refineries, tax and currency effects were all culpable as the oil giants both posted quarterly profits that fell short of expectations by the widest degrees in at least a decade. Analysts had failed abjectly to anticipate any of it.
Their failure had repercussions. BP shares dropped 3.4 per cent on results day while Shell was down 4.4 per cent. Given the pair account for 13 per cent of the FTSE 100, these were costly moves.
Contrast that to the 2011 earnings season. Analysts were exactly right with their predictions for Shell’s second-quarter profits and only 5 per cent out for BP, even though its visibility had been clouded by a production shutdown in the Gulf of Mexico. The share price moves on those days were barely worth noting.
So what has changed? Have companies suddenly become harder to analyse? Or have analysts become worse at their jobs?
The analysts themselves will tend to offer a different excuse: the companies they cover have become a lot less helpful.
A year or two ago, it was not uncommon for certain earnings releases to be preceded by a quiet conversation with the investor relations department, outlining where market expectations centred and which factors could have been overlooked.
Legally, such conversations could only ever bring in publicly available news and data – though when an analyst was trying to distil a sprawling multinational into one spreadsheet, these nudges in the significant directions could still prove valuable.
But now, analysts say, such helpful conversations rarely happen. Regulatory pressure and fears about selective disclosure have all but silenced the dark art of corporate expectation management, they complain.
“It had reached the point where some companies had been sailing too close to the wind,” says a leading oil analyst who asked not to be named. “Now, everything has swung in the other direction. Companies will now refuse to say a single word for the entire month before the results. Sometimes they won’t even tell you where the consensus stands.”
Such tempering of informed guidance may go some way to explain why the second-quarter reporting season has been poor, at least when measured against expectations. Out of 222 European large-cap companies to report earnings so far, just 32 have matched consensus forecasts and 101 have fallen short, according to Barclays data. In terms of beats to misses it has been the worst season since the first quarter of 2009, the broker says.
Companies will now refuse to say a single word for the entire month before the results
- A leading oil analyst
And, perhaps understandably, the nastiest surprises have been delivered by the companies operating well outside the City’s usual sightlines. Morgan Stanley notes that while companies reliant on Europe have tended to meet or beat market expectations, those exposed to emerging markets have been more likely to disappoint.
So it seems the analysts have been getting worse at their jobs, though they have an excuse. Should investors care? Maybe not.
While the one-day ructions in BP and Shell were dramatic, they would seem exceptional. In times when the forecasts have been only moderately wrong, the market’s reaction has been much more sanguine.
Morgan Stanley analysis shows that shares in European companies that have missed expectations by 5 per cent or less for the current earnings season have still managed to outperform the wider market in the following three days.
It also goes without saying that analysts’ misplaced optimism has long been a useless barometer of stock market confidence. Two straight years of consensus downgrades have done little to hold back the FTSE 100, which has climbed nearly 12 per cent since the start of 2011.
Over the past month alone the index has climbed 2 per cent in spite of forward earnings among its members falling by more than 4 per cent, Bloomberg data show.
Analysts can complain that a stemming of their private guidance not only makes their lives more difficult, it makes for a more volatile market. They may have a case. But any investor who has found themselves blindsided by some pre-results expectation management will surely find their sympathies are limited.
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