What happened

Shares of used- and salvaged-car auction operator KAR Auction Services (NYSE:KAR) plunged 19.5% in early Wednesday trading, following a disappointing earnings report Tuesday evening. That's the bad news. The good news is that as of 2 p.m. EST, KAR shares had recovered at least some of their losses and were down "only" 11.2%.

KAR reported a pro forma profit of $0.62 per share for its fourth and final quarter of fiscal 2018, $0.02 better than expected. Sales, however, came up short at just $929 million ($936 million had been expected), despite growing 4% year over year.

Cartoon characters appear puzzled by stock chart with arrow falling through the floor.

KAR beat earnings in Q4 -- so why are investors selling? Image source: Getty Images.

So what

Of course, even with the sales miss, KAR's earnings estimate beat in Q4 2018 seems unlikely to have produced a near-20% sell-off in the stock this morning. So what accounts for that?

In a word: guidance. After giving its numbers for last year, KAR proceeded to tell investors what to expect this year, 2019.

Now what

The good news here is that profits appear likely to grow from the $328 million that KAR earned in 2018. New guidance for the new year is that net income should range from $330 million to $355.5 million. Per share, that will work out to between $2.46 and $2.65 in GAAP net income and between $2.90 and $3.09 in "operating adjusted net income per share."

Problem is, Wall Street has been telling investors that KAR would earn $3.16 per share in 2019. IF KAR beat earnings by a bit in 2018, it now looks like the company will miss earnings by much more in 2019. Hence, the sell-off.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.