Monday, July 20, 2009

Eaton Corp (ETN) - Another Example of Why Betting Ahead of Earnings is Dangerous

A quick glance at some of the names of interest this morning shows:
  1. Eaton (ETN) Revenue down 32%, beat EPS estimate
  2. Johnson Controls (JCI) Revenue down 29%, beat EPS estimate
  3. Halliburton (HAL) Revenue down 22%, beat EPS estimate
Main 3 names of interest this morning especially the former 2, to get a gauge for industrial markets. The market is happy again, over CIT and Goldman Sachs increasing its target on the S&P for year end by 15%. Remember, as everyone obsesses over Apple (AAPL) tomorrow as a
"tell" on the strength of the global economy, we'll see what is really is happening with the "making stuff" global economy in reports such as ETN, JCI, railroads, GE (which stunk Friday) and the like.

I want to highlight the Eaton (ETN) report as another example (which we provide countless) of why anyone making bets ahead of earnings is simply a pure speculator who has as much chance of winning or losing as the typical gambler in Las Vegas. Yes, they beat estimates this quarter but they completely obliterated their earnings guidance. Normally this would punish a stock. Instead, Eaton is up 11% as I type this. Why? I have no idea. Maybe shorts are being squeezed ....
  • Eaton Corp., which makes parts for airplanes, vehicles and electrical equipment, on Monday cut its full-year forecast for the third time on expectations of more global economic weakness.
  • Eaton said it now expects per-share net income of $1.65 and $1.85, down from a February projection of $3.60 to $4.20 per share. Before that, the company forecast 2009 income of $3.80 to $4.80 per share.
  • "As we survey our end markets, the year is shaping up to be considerably weaker than we had forecast in April," said CEO Alexander M. Cutler in a statement.
  • "We now anticipate our overall end markets will decline by between 21 and 22 percent versus our earlier forecast of a decline between 15 and 16 percent. We see our U.S. markets declining by 25 percent, while our non-U.S. markets are expected to decline by 19 percent," Cutler added.
  • The company also said its second-quarter profit tumbled 92 percent as plunging sales and a stronger dollar offset cost-cutting efforts, but results topped analyst estimates.
Now remember, back when these companies posted far too high estimates for the year we celebrated, clapped our hands and drove stocks up on "stabilization" and "durability of earnings power". In retrospect all it meant was companies were chewing green shoots in great numbers i.e. very wrong. Eaton has dropped full year estimates from $3.80 - $4.80 to $3.60 - $4.20 and now $1.65 - $1.85. But if you told me the stock would be surging off this sort of "good news", I'd be scratching my head. The only positive is Eaton slashed its earnings numbers much closer to where analysts where already sitting...

Now the good thing about slashing earnings (for the 3rd time this year) is.... wait for it.... they can "beat earnings estimates" in 90, and 180 days from now. And so the game continues.

No position

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