Garrison Keillor's "A Prairie Home Companion" radio show famously includes news from Lake Wobegon, an idyllic small town where “all the women are strong, all the men are good looking, and all the children are above average.”
The corporate-earnings reporting season reveals which companies would feel at home in Lake Wobegon because their results are always above the average of analysts' estimates.
Take, for example, Cisco Systems Inc., which has NEVER trailed the average adjusted earnings-per-share estimate compiled by Bloomberg in data going back 44 quarters. The closest it came was the second quarter of 2005, when it met the average estimate of 22 cents per share on the nose.
Is Cisco an anomaly? Not really. While its track record is impressive, there are some other notable tendencies for Lake Wobegon-style earnings among the biggest companies in the U.S. stock market.
Apple Inc. has beaten EPS estimates for 10 straight quarters and has failed to exceed the average only three times, according to data stretching back through the past 44 quarters. It beat the consensus for 29 straight quarters from 2004-2011. Johnson & Johnson has topped estimates for 18 straight quarters and only missed twice in 44 reports. Facebook Inc. has beaten estimates for eight quarters in a row, and has only missed once in 12 quarters as a public company. Pfizer Inc. has exceeded estimates for eight straight quarters and only trailed five times in 44 reports.
"Beats, of course, are pretty commonplace these days, and don’t on themselves generally get the overall market excited," Michael Purves, chief global strategist at Weeden & Co., wrote in an e-mail today. "At this point the market is, understandably, pretty jaded about beats."
How could this be? Shouldn't analysts be doing a better job, especially when it comes to huge companies like this? The real answer may only be known by the analysts and their priests, rabbis or mullahs -- or maybe the managing director who sets their bonus. One popular and plausible theory is that companies give low-ball guidance and analysts dutifully set their estimates accordingly. Cisco's guidance for adjusted earnings per share in the current quarter is a range of 55 cents to 57 cents and (voila!) the average analyst estimate is 56 cents. Cisco's EPS usually only beats by a few pennies, or about 5.9 percent on average. Apple, on the other hand, has a "surprise" rate that is much higher: it's beaten estimates by an average of more 16 percent.
The positive "surprises" don't always goose the stock price since, you know, they're not really much of a surprise and there are often numbers in releases that are more important than last quarter's EPS. The correlation of surprises to share-price movement in the session after the release is only 0.05 for Cisco. (A correlation of 1 would indicate the stock always rises after a earnings beat and always falls after a miss, whereas a correlation of -1 would mean it reliably does the opposite of what you'd expect.) It's much higher for other companies such as Apple (0.37), Exxon Mobil Corp. (0.41) and Wal-Mart Stores Inc. (0.42). In fact, it's very low and even negative for banks like JPMorgan Chase & Co. (-0.03) and Wells Fargo & Co. (-0.11) and Bank of America Corp. (0.04).
Interestingly, if companies don't release EPS guidance and analysts are left to their own devices, they sometimes appear to get over-optimistic, at least when it comes to the handful of huge companies that don't issue guidance. Berkshire Hathaway Inc., for example, has trailed the average analyst estimate 15 times in the past 41 quarters. Google Inc. has missed for six straight quarters and 16 of the past 44.
So, anyway, don't look for Warren and Larry and Sergey to be paddling a canoe around Lake Wobegon anytime soon.