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The Devil Is In The Details

Posted: Mar 23, 2009 06:57 AM by Will Ashworth

Tickers in this Article: SWY, PRGS, ORCL, NKE

As investors, we're bombarded with more information than we could ever use. If you go by the headlines, some news is helpful, but heaping portions of useless or outright confusing stories also exist. Media outlets often take differing viewpoints of the same corporate news and then attach catchy titles to the stories to get your attention. Don't let media spin alter the facts! There are two sides to every story, so you need to read the financial statements yourself.

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Example 1
On March 18, Nike (NYSE:NKE) reported its 2009 third quarter results after the close of trading. CNBC's headline read "Nike Profit Beats Street View, But Orders Shrink", while MarketWatch ran with "Nike Profit Drops 47% On Slower Demand". Both headlines are true, but obviously send completely different messages. Click on the CNBC article and you'll discover that it actually is a Thomson Reuters piece. Semantics aside, the article paints a very confusing picture. It first states that Nike easily beat analyst earnings estimates. However, it then mentions $175-225 million in restructuring charges in the fourth quarter. I thought we were dealing with the third here? The article proceeds to mention that, minus the third quarter impairment charge for its Umbro acquisition, Nike actually beat analyst earnings per share (EPS) expectations by 25%. You'd think the media company would tap into investor excitement over Nike's EPS numbers, particularly given the state of the economy. Instead, it uses the remainder of the article to highlight the footwear giant's flaws, including a 2% revenue drop to $4.44 billion, which is only slightly less than analyst expectations. As for the MarketWatch article, it is self-explanatory. They want you to believe Nike missed badly. The reality is Nike did just fine in the third quarter. (Check out Strategies For Quarterly Earnings Season for more insight.)

Example 2
The San Francisco Chronicle's headline on March 19 read: "Oracle's profits fall, but stock price rises". If you only looked at the headline, it would lead you to believe that Oracle's (Nasdaq:ORCL) stock shouldn't have increased in price after its third quarter earnings announcement. Dig deeper - right to the end of the article - and you'll see that, excluding one-time charges, EPS totaled 35 cents, or 3 cents better than analyst estimates and 9 cents better than the company's Q3 2008 performance. In other words, Oracle experienced a 35% increase in earnings. Do you still wonder if the jump was justified?

Example 3
Briefing.com ran this headline minutes after Progress Software (Nasdaq:PRGS) announced its first quarter results on March 19: "Progress Software reports EPS in-line, misses on revs; guides Q2 EPS and revs below consensus; lowers FY09 guidance". Okay, so the software company didn't turn in a championship performance, but are matters really that bad? Adding back an accounting adjustment related to its IONA Technologies acquisition, non-GAAP revenue totaled $122 million, which is a 1% increase year-over-year (YOY). Excluding the currency factor, that's a 10% YOY gain. In terms of non-GAAP earnings, Progress Software was down 15% from $18.6 million to $15.8 million. Although the company saw a decrease in this area, it met analyst expectations and remains soundly in the black. As for the company's move to lower 2009 guidance, the extremely volatile currency markets can be blamed. All global businesses face currency issues right now, so Progress Software is not unique.

Example 4
On February 26, grocery retailer Safeway (NYSE:SWY) announced fourth quarter and year-end results. Associated Press ran an article entitled: "Safeway 4Q profit climbs but misses expectations". To me, this says the Bay Area chain experienced a mediocre quarter. But this is far from the truth. Quarterly earnings totaled 79 cents per share, up 12% from 68 cents on revenues of $13.82 billion. All told, this is a 3% YOY increase. Missing Q4 analyst EPS estimates by one penny, the stock dropped more than 13%, which is hardly justifiable when you consider how imprecise analyst estimates can be. (Learn more in Do-It-Yourself Analyst Predictions.)

Bottom Line
Take your time to gather all sides of a story and don't be fooled by provocative headlines. When a business announces something newsworthy, such as quarterly earnings, it would behoove you to read the press release, as well as the 10-Q or 10-K reports filed by the company. Whatever you do, don't take the regurgitated statements of some business writer as gospel.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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