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Technology Stocks : C-Cube -- Ignore unavailable to you. Want to Upgrade?

To: David E. Railsback who wrote (28540)	1/23/1998 8:49:00 AM
From: BillyG	Read Replies (1) \| Respond to of 50808

CNBC mentioned this Q's earnings and noted that they were above expectations but below 4Q96 earnings. That's all. Not too impressive of a plug. Unless you're already following the CUBE, it would be hard to understand the significance.

To: David E. Railsback who wrote (28540)	1/23/1998 1:53:00 PM
From: Ed's Head	Read Replies (2) \| Respond to of 50808

David E. Railsback: They indeed did beat the street by 2-3 cents. I'm somewhat befuddled by the lackluster price performance today. Anyone have a clue as to why? good luck c-ya!

To: David E. Railsback who wrote (28540)	1/23/1998 3:30:00 PM
From: Cameron Lang	Respond to of 50808

The problem with consensus estimates (from Briefing) ------------------------------------------------------------- Consensus Estimates go Awry Daily commentary updated for January 23, 1998 Investors are accustomed to judging earnings reports by how they compare to "expectations," as defined by the average of surveys of Wall Street analysts. There are some problems this quarter. The Problem with Earnings Surveys Briefing has often written about the weaknesses in taking consensus estimates as a true reflection of what is built into the market price structure. These averages can be distorted by outlying numbers, can be derived from a limited number of analysts, give equal weighting to an analyst from Merrill as to much smaller firms (though the market may not), and sometimes reflect an analyst's published opinion rather than his real opinion. Nevertheless, the market often takes these numbers as gospel: beat the numbers by a penny and a stock is a buy. Now comes another problem: both First Call and Zacks say that the current numbers may not be accurate because the surveys may include both basic and diluted numbers from analysts. Recent Reporting Changes The story starts with a recent change in reporting requirements. Previously, there were three ways to report earnings - simple, primary, and fully diluted. Simple meant earnings divided by average shares outstanding. Primary counted "in the money" options, but excluded convertible debt and some other instruments. Fully diluted counted everything as converted into shares. Now, there are two ways to report earnings - basic (essentially the old simple), and diluted (the old fully diluted). Mixing Apples with Oranges The problem arises from the fact that Zacks and First Call have both indicated that some analysts submitted basic numbers, and some diluted, for fourth quarter numbers. This is surprising, because First Call numbers have always been reported as fully diluted estimates. It would therefore seem logical that they would continue to collect the diluted numbers. Unfortunately, this does not appear to be the case. What Went Wrong Apparently, some analysts were previously submitting primary numbers to First Call for some companies where the difference between that and fully diluted was not great, or where companies were not reporting all three forms of earnings. They must then have submitted basic numbers to First Call this quarter, which moved them away from the middle ground of primary numbers towards the old simple calculation, instead of towards the new diluted figure. This would raise the consensus numbers because presumably their diluted estimates would be lower. Therefore, some surveys may have had a consensus number that was too high compared to actual expectations for diluted estimates. Wall Street Must not be Efficient Natural born skeptics, we find this a bit hard to accept. First of all, for companies such as IBM and GE, where the problem is reported to have occurred, there are a large number of analysts surveyed. There would have to be many analysts submitting wrong data to move the averages high enough to cause a problem. Secondly, it is unclear why these high paid analysts wouldn't be able to figure out that First Call was expecting the diluted numbers. First Call estimates have always been compared when possible to fully diluted numbers. Is it possible that the analysts were simply making percentage change forecasts from previous primary estimates, and didn't understand what the reporting changes were about, and therefore didn't realize they were forecasting the new basic numbers? Regardless, Briefing has to accept the reality that the data is corrupted. Both Zacks and First Call have said that their surveys apparently include both basic and diluted numbers for some companies. To what degree this has occurred is uncertain, although some reports have improbably simply assumed that all the GE survey data, for example, must have been for basic numbers. Next Quarter Should be Better Zacks has said that any further problems this quarter should be minimal. And, given the current furor, all estimates should cleanly reflect diluted numbers starting next quarter. Perhaps this is for the better. The market for too long has had knee-jerk reactions to earnings numbers and whether they are a penny above or below estimates. Maybe investors will now take these surveys less seriously, and take a longer look and the real fundamentals for a company such as year over year growth, what the prospects for revenue growth are, what valuation is valid, etc. However, there will continue to be some doubt as to the validity of the consensus estimates for selected companies the next couple of weeks. We will do the best we can to point out when these problems might arise. ---------------------------------------------------------------------- Zacks used to survey primary estimates, but shifted to diluted recently with the new reporting rules.