Three of the many things that traders and investors get caught up in within the equity markets are Wall Street estimates, Wall Street consensus, and whether or not a company has beat, met, or came in below what a group of research analysts expected.
It is, of course, one big game. In a sense, it is helpful, as published sales and earnings estimates for different periods are useful guides for investors. But I do believe it’s also the case that if a business doesn’t meet the hype, it does not mean that the sky is falling for that enterprise. There are countless good businesses out there that often don’t beat the Street on any given period.
Some companies are better than others at providing guidance to investors. No doubt, earnings are managed and quite often, management will deliberately underplay its expectations for a given period in the hopes of making it easier to beat consensus.
You have to be careful with immediate comparable growth. Periods like 2009–2011 made comparable results look great, but many businesses were actually generating fewer sales and earnings than they were in the periods leading up to the financial crisis.
Sherwin-Williams: Barely Beat the Street but Business Is Booming
One company that just slightly beat the Street on earnings but not on sales is The Sherwin-Williams Company (SHW). The paint and coatings manufacturer has been an excellent wealth creator over the last several years. When I look at this mature company’s financial performance for the last four years, I’d say that business for Sherwin-Williams is almost booming.
In all of 2014, the company’s sales improved 9.3% over 2013 to a record $11.1 billion. They were $8.7 billion in all of 2011.
Earnings for all of 2014 were $866 million for a 15% gain (21% on a diluted earnings-per-share basis). Back in 2011, that year’s bottom line came to $442 million.
Unfavorable currency translation hurt last year’s sales results by 1.4%. The company continues to experience higher paint sales volumes, it’s making acquisitions, and in 2014, it increased its annual dividend by 10%.
So while the headlines continue to suggest that the sky is indeed falling, not all businesses are going down the tubes just yet. (See “Flat-Lining Revenues the Big Problem This Earnings Season.”)
What Individual Companies Are Saying About the Stock Market
Big-name, highflying stocks attract volatility and naturally, they trade off of Wall Street expectations. But there are a lot of companies out there with proven track records of operational success and wealth creation on the stock market. Sherwin-Williams doesn’t make the headlines, but it is one of them.
If you are more of an investor than a trader, it’s easier to take a step back from all the noise surrounding the equity market and focus on owning good businesses.
Regardless of expectations or consensus, if a mature enterprise is producing close to double-digit sales and earnings growth in a slow global economy, that’s an achievement that’s worthy of attention.
Currency translation is going to be a big problem this year. But as I keep saying (and it’s worth repeating again), individual stock selection and what companies say about their own 2015 earnings outlooks is key. For many companies recently reporting, 2015 earnings outlooks remain solid.