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News < Back Sarbanes Oxley : Finance Percentage of Firms Missing EPS Forecast by 10% Hits 18-Month Low Parson Consulting Study Suggests Sarbanes-Oxley Improving Projections
The decline in the wide-margin misses suggests that the Securities and Exchange Commission?s (SEC) accelerated reporting deadlines and federal Sarbanes-Oxley Act is having a beneficial effect. These regulations shortened the timeframe in which companies must report their quarterly and annual earnings to the SEC, while demanding transparency and accuracy of financial information. This need to report more quickly to the SEC is leading companies to streamline their processes and employ more sophisticated financial systems that improve accuracy of forecasts, Parson experts say. ?One reason a sizable number of earnings ?misses? occur is because companies? finance functions are saddled with outdated or non-comprehensive financial-management infrastructures and cannot provide accurate information in a timely manner,? notes Toni Hicks, senior vice president, Practices, at Parson Consulting. ?With more streamlined processes and integrated systems, Wall Street will get better data and that should contribute to more ?hits? and fewer ?misses? during earnings season. Still, the percentage of companies that fell short of their earnings-per-share projections hit an 18-month high, rising to 22.5 percent in the latest period from 16.4 percent in this year?s second quarter. It was the highest percentage of negative misses since Parson began its survey. The percentage of wide-margin underperformers rose to 9.1 percent in the third quarter, the highest percentage since 9.2 percent in the first quarter of 2003. Parson experts cited higher-than-expected energy and raw material costs as a principal cause for missed earnings estimates during the first quarter. ?Stock-market activity may also have been a factor as the S&P500 index hit a high point in early March and then failed to continue its robust growth in the next two quarters,? adds Hicks. ?Based on a strong first quarter, analysts may have had unrealistic earnings expectations.? The percentage of companies reporting much higher-than-expected earnings per share, of at least 10 percent above projections, fell to 20.6 percent, down from 23.5 percent in the previous quarter and the lowest percentage recorded since the surveys began. The high-tech sector continues to stand out as the industry with the greatest percentage of wide-margin misses. In the 2004 third quarter, 39.6 percent of high-tech companies missed analyst forecasts by at least 10 percent. Of these misses, 7.7 percent were on the downside, while 31.9 percent beat expectations on the upside. The materials/energy sector followed closely with 39.4 percent of firms reporting wide-margin inaccuracies, with 12.4 percent underperforming. Based on the latest quarterly results, industrial companies are most likely to outperform expectations, with two-thirds of them beating expectations. Health care and high-tech remain as sectors likely to outperform while materials/energy is the sector most likely to underperform. Only 16.1 percent of companies met their earnings expectations, the second-lowest percentage since the surveys began and the lowest since 12.8 percent in the first quarter of 2004. Other industry-specific findings include: High-tech companies were most consistently right on the mark as 23.1 percent met their EPS expectations, followed by health-care firms at 19.2 percent and financial firms, at 18.7. However, only 8.8 percent of industrial firms met their expectations. Overall, the sector gaps in wide-margin misses are closing, although the health-care and financial sectors ? once the best-performing sectors for forecasts ? have seen increases in wide-margin misses. Materials/Energy and high-tech remain the two sectors that recorded notably higher wide-margin misses in beating or falling short of expectations, at 39.3 percent and 39.6 percent, respectively. However, across sectors, companies seem to be working to address the need to report performance faster and more accurately. 
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