MorningWord 12/13/13: Yesterday in this space we highlighted a report from Thomson Reuters (Company Issued Guidance At Its Most Negative Level On Record), which for the most part sounds fairly self explanatory. But looking at things anecdotally, with the SPX about 2% from the all time highs made last month, the increased frequency of companies talking down consensus estimates has to be getting antennae up on at least some investors out there?
Looking at the issue of earnings visibility as seen by companies with a view of the next 2-3 months, Ed Yardeni research posted a chart on their Blog (here) yesterday of the descent of “consensus quarterly estimates” going back a year. What is fairly obvious is that the combination of overly optimistic annual guidance and then the repeated ratcheting down of quarterly guidance thereafter has caused what we in the investment world generally don’t like to see in charts of stuff that we own, charts that start high in the upper left and end low in the lower right.
Last night ADBE reported their fiscal fiscal Q4 earnings that beat estimates but lowered Q1 guidance for both earnings and sales. Initially the stock sold off a couple bucks but quickly rallied back and now is up 5% after the company signed up more than expected users to their Creative Cloud platform.
As Enis succinctly laid out in his ADBE earnings preview the other day, the company is sacrificing profits in order to be able to survive as they quickly move away from the desktop licensing model to the Software as a Service model that had been eroding their competitive position by smaller upstarts. In fact, the company’s year over year earnings decline of 43% is the largest decline in the company’s history, basically bringing their annual earnings back to the stone ages (or slightly above where it was in 2006) despite sales being 60% greater than fiscal year 2006 (guidance for fiscal 2014 was well below consensus and back to a level not seen since 2005).
As we say around here at RiskReversal, ADBE has officially entered the AMZN Zone, meaning they are now selling a promise. So far in 2013, investors have gobbled up that promise and then some, with the obvious hope/expectation that ADBE’s strong subscriber growth is going to translate into gangbuster earnings growth 2, 3, and 4 years out.
As we’ve seen with AMZN, certain companies are able to push that promise continually further out, like a carrot that’s always just out of reach of the mule. ADBE has started to behave in that manner, where optimistic psychology trumps any near-term fundamental concerns. In the near term though, last night’s lowered fiscal Q1 & 2014 guidance is likely to result in a Q1 beat at least, which bulls will point to as a catalyst, despite the stock now being just a couple % from the prior all time highs. In that case, technicals are going to be even more important, as the psychology surrounding the price action will often be more important than news about the company itself.