Tuesday, July 22, 2008

Apple v. Bank of America: Whisper Numbers Come Home to Roost

Some of you who have been following earnings releases will be forgiven for not understanding why the market punished Apple (AAPL) after it released better-than-expected earnings (19%+ EPS surprise), while Bank of America (BAC) increased from $20/share to $32/share after showing its net income decreased by 41%. AAPL's stock was down at one point by 10%. Its growth prospects are still quite good, especially because market penetration in China is incomplete (Steve Jobs indicated that iPhones were being used in China without providing revenue back to Apple due to hacking and IP issues). BAC, on the other hand, will have major problems with its acquisition of Countrywide as more and more notices of defaults (NODs) occur. In fact, in recession-resistant Santa Clara County, NODs recently spiked.

The market makes no sense sometimes, except when it does. Earnings guidance is a game played between companies and analysts. When Apple (AAPL) tells Wall Street it expects 10% increase in sales, it does so with a wink. Apple gives the Street lower numbers so it can beat those numbers come earnings time. The Street, of course, is a formidable player. It accepts Apple's lowered expectations with a wan smile and then dumps it if the numbers aren't dramatically higher. The real numbers required to maintain or increase share price are sometimes referred to as "whisper numbers." Wall Street accepts the lower numbers on paper but demands that the company meet its whisper number later on. It's a strange song and dance that serves no one well.

AAPL went down while BAC went up because shares prices are based on how much money a company expects to earn in the future, not what it made last quarter. So the Street doesn't care about the actual numbers released--it knows it's all a game. The Street pays more attention to how well the company says it will do in the future, especially whether the company will maintain or increase full year guidance (i.e., whether the quarterly numbers released every three months will add up to the full year's "earnings per share" expectations).

What is an average investor to make of all this? Only that share prices are based more on future expectations of value than on past statistics. As they say in business, past performance is no guarantee of future results.

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