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Investors show no mercy for modest earnings

When Honeywell International Inc. conducted its earnings conference call earlier this week, the company's executives were brimming with confidence about results that exceeded analysts' expectations.
/ Source: Reuters

When Honeywell International Inc. conducted its earnings conference call earlier this week, the company's executives were brimming with confidence about results that exceeded analysts' expectations.

By the open of trade, spooked investors — concerned by a soft revenue number and a conservative fourth-quarter estimate — sent Honeywell shares down, leaving Chief Financial Officer Dave Anderson stunned.

"Oh my gosh," Anderson said in an interview when told of the market's reaction. "Really? Four and a half percent?"

Companies like Honeywell are discovering that investors have little patience with earnings numbers that don't easily eclipse expectations set by Wall Street.

Conglomerate United Technologies Corp. and online auction site eBay Inc. also felt the market's wrath this week, its share prices sliding despite results in line with consensus estimates and raised full-year targets.

The 'shoot first, ask questions later' mind-set comes as investors consider the outlook for U.S. company earnings against a backdrop of steadily rising interest rates, a series of powerful hurricanes and high commodity prices.

"People are a little bit trigger happy in the short run," said Richard Steinberg, president of Steinberg Global Asset Management, a Florida asset management firm.

"People need to sift through the noise in short-term issues versus long-term issues," he said, adding that some mutual fund managers are probably locking in gains ahead of the year end.

Investors are demonstrating little patience in spite of an overall improvement by companies in meeting expectations.

Nearly 72 percent of the 185 S&P 500 companies to have reported third-quarter earnings were above consensus estimates versus 61 percent for the entire S&P 500 a year ago, according to the Reuters S&P scorecard.

For firms that come up short in the quarter or with their outlooks, the market can be brutal.

Caterpillar Inc. shares plunged 9 percent on Friday after the company posted disappointing quarterly results and warned that higher raw material costs and production bottlenecks would crimp profits.

Heating and cooling system maker American Standard Cos Inc. lost one-sixth of its market value, or $1.6 billion, on Tuesday when its earnings missed consensus estimates by 3 cents and it cut its full-year outlook.

Momentum traders — moving "hot" money in and out of sectors — often head for the exits at the first sign of weakness, said Joseph Battipaglia, chief investment officer for brokerage and research firm Ryan, Beck & Co.

"As soon as the earnings in the forward look start to slip is when they want to exit these stocks, so they move out of them very quickly," he said.

The level of tolerance with a company's results hinges on where the investor believes the U.S. economy stands in its recent positive cycle.

"That's where people are going to disagree," said Tom Mahowald, director of equity research for U.S. Bancorp Asset Management. "Are we in the eighth inning of the industrial recovery or the fourth or fifth?"