Funny things happen when a company issues an earnings report that is less than expected. For starters, the company might get downgraded by a big brokerage firm for underperforming earnings estimates, and its stock might then plunge. This causes some to wonder, though: If a company's financials are still solid, but it earns $87 million in a quarter instead of the expected $94 million, why should an analyst have such power to depress the stock price?
An earnings disappointment matters, to some degree, because the expectations that analysts have are often based on guidance from the company itself. Disappointments aren't the end of the world -- many great companies have had regrettable quarters -- but when they happen, it's good to seek out explanations.
Imagine that Pelczarski's Traveling Penguin Circus Inc. (ticker: FLIPR) steers analysts on Wall Street to project earnings of $52 million for its third quarter. If the company then reports only $41 million in profits, the investing community may feel they've been duped and worry that something is seriously wrong at Penguin HQ. Worse still, it might be readily apparent what the problems are, and they may be cause for concern. Because of this, analysts may downgrade their ratings, perhaps from "buy" to "hold," further inspiring investors to bail.
Don't be that hasty, though. Wall Street's research can be very sound, but acting on recommendations such as "buy" or "sell" often isn't a good idea, since analysts suffer from many conflicts of interest. Instead, pore through the earnings report, seek out further information (perhaps from our vibrant discussion board community) and, if you still think the company has solid growth ahead, keep those penguins on ice.
Some companies that have recently reported disappointing earnings include AOL Time Warner
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