Why do companies manage earnings expectations?

Managing earnings expectations on Wall Street has become a well learned art in recent years by executives of any publicly traded company. Disappoint and your stock price could be decimated. Surprise on the upside and your stock may start running up. Indeed, some companies have been able to manage these expectations so well that they've met or exceeded earnings expectations for years now or even more uncannily, beat EPS expectations by exactly a penny for several years.

Earnings Expectations

There are two types of expectations that companies try to meet each quarter. The first is the so called consensus expectation number that is an average of all the EPS estimates by brokers covering a stock. This is usually compiled by a company called First Call and is the most often quoted estimate number that you see on TV or on the Internet. Because analysts have allowed their earnings numbers to be manipulated or managed by company executives, a separate estimate known as the whisper number is sometimes quoted. This supposedly comes from industry or company executives that either have more inside knowledge and are not subject to the ratings game on Wall Street.

What does earningswhispers.com provide?

Earningswhispers.com is fairly unique in that it tries to provide information about BOTH the consensus number (ie what analysts expect) as well as the whisper number (ie what the insiders expect).

How useful are whisper numbers?

Whisper numbers are difficult to gather for obvious reasons. Executives or other employees could face serious disciplinary action for selective disclosure of sensitive information. As a result, these whisper numbers often come out in the form of rumors. The problem is that it is difficult to verify the trustworthiness of these rumors and their respective sources.

Indeed, the way that Earningswhispers.com compiles its whisper numbers is by using two sources:

1) Estimates provided by users of the site. The theory behind this is that company executives can use the site to disseminate information if they choose to. However, I think the number of common users that provide estimates greatly outnumbers the number of insiders that use the site for this purpose. Indeed, the quality of the estimates provided by common investors can be likened to asking sports fans what the spread of a football or basketball game will be after providing them with the Las Vegas spread. In short, I don't think it's very valuable.

2) Estimates and rumors found on other stock message boards. Like the estimates provided by users of the site, this is really no better. They're just taking users from other sites instead.

What else is there on the site?

There are links to company information and official analyst information on each company. However, none of this information is actually on the Earningswhispers.com. You're taken to links on sites such as Stockselector.com. One of the quirks that I don't like about the site is that you search for companies by entering the company name. I think most people would prefer to use stock symbols with an option to look up the stock symbol if you only know the company name. It's a lot quicker and more intuitive. Presumably, if you're interested in a company's whisper number, you either already own the stock or are taking a close look at it.

There are message boards for each for each of the stocks - another source for more rumors or inside numbers if you haven't had enough yet. Finally, like most other sites, you can customize the site and sign up for email updates.

Summary

I personally don't find much use for this site since its proprietary information isn't really that useful or reliable. It is sometimes interesting to see what the numbers are and how far off the supposedly more accurate whisper numbers are from the reported numbers. On the relatively rare occasions when they are in agreement, I dismiss that as no more than coincidence or luck. After all, a clock that doesn't work still tells the time correctly twice a day.

Recommended: No