Understanding the importance of market expectations is essential to investment success. This year’s Q2 results allow us to look at those companies that managed to exceed analyst expectations. These companies did so in one of the most challenging markets in recent memory. 2022 has been a terrible year for markets. With the United States unofficially entering a recession, inflation at 40-year highs, interest rates on the rise, a global supply chain problem, staff shortages amidst a Great Resignation, and a Russo-Ukrainian war that has sent European gas prices soaring, it has been hard to find any good news in the markets. Instead, we have come to expect nothing but bad news. Yet, amidst all this, five companies surprised us with good news.
Market Winners
1. Ford (NYSE: F)
When analysts have waxed lyrical about Tesla, Ford has quietly developed into a challenger for the world’s best automaker. The company’s Q2 results trounced analyst estimates. Consensus estimates for Ford were for $34.78 billion in revenue and $0.45 in adjusted earnings per share (EPS). Instead, Ford delivered $40.2 billion in revenue and $0.68 in adjusted EPS.
The company also reaffirmed its target full-year earnings before interest and taxes (EBIT) of $12.5 billion, from $11.5 billion, an increase to 25% of 2021 EBIT.
2. Apple (NASDAQ: AAPL)
Apple once again proved its endurance and resilience with its Q2 results. The company had a strong Q1, and analysts estimated revenues of $95.51 billion compared to $89.58 billion for the same period in 2021 and earnings per share of $1.53. However, analysts also expected growth for the iPhone, Mac, Wearables, and Services and a decline in iPad revenue.
Apple delivered $97.3 billion in revenue, up 9% year-over-year, and EPS of $1.52. EPS was under analyst expectations, given supply chain constraints, but revenue growth beat estimates. The company also saw growth in iPhone, Mac, Wearables, and Services categories. And a decline in iPad revenue.
3. Restaurant Brands (NYSE: QSR)
Restaurant Brands International beat Q2 earnings and revenue estimates, thanks to international revenue growth from Burger King and Tim Hortons and improvements in Tim Horton’s Canadian stores. According to the company’s Q2 earnings report, global same-store sales were up 9% year-over-year. In addition, restaurant Brands reported flat same-store revenue growth in its U.S. Burger King and Popeyes operations.
Analysts expected $1.57 billion, but the company delivered revenue of $1.64 billion, up 14% year-over-year. The company was expected to earn $0.73 in EPS but delivered $0.82 in adjusted EPS.
The company was able to raise prices in response to rising costs, passing on those costs to consumers. Doing so and still beating analyst estimates is a sign of the competitive advantages that the company enjoys.
4. American Axle & Manufacturing (NYSE:AXL)
American Axle & Manufacturing beat analyst estimates with its Q2 financial results. The company reported $0.22 in adjusted EPS, compared to analyst estimates of $0.12. This is down from the $0.29 in adjusted EPS the company earned in the same period last year. This is the fourth quarter in which the company has beat analyst EPS estimates. The company posted revenues of $1.44 billion, beating analyst estimates by 4.72%. Q2 revenue was up from $1.28 billion for the same period in 2021. The company has beaten consensus revenue estimates thrice in the last four quarters.
5. Monster Beverages
Monster Beverages beat revenue estimates but missed earnings estimates. The company’s Q2 earnings report shows that Monster Beverages earned $0.51 in adjusted EPS for Q2, compared to estimates of $0.68. This was a fall of 32.2% compared to last year’s results.
The company suffered from supply chain problems and inflationary conditions that impacted aluminum prices, logistics, and other costs. Nevertheless, the company earned nearly $1.7 billion in revenues, up 13.2% compared to the same period last year and better than analyst estimates of just over $1.6 billion.
Why This Matters
The secret to success in investing is buying low expectations and selling high expectations. So long as the market has accurately gauged a company’s earnings potential, earnings results will not move the needle regarding the share price. This is why you’ll see companies releasing record earnings that the market answers with the declining share prices. This is because the market expects those results, no matter how big they are. The market is responding to something else in the report. If nothing surprises the results, the market will respond to even the highest results in a company’s history with silence.
Investment guru, Michael Mauboussin, refers to this as “expectations investing”, setting forth a three-step path to determining if you should invest in a stock:
- Determining price-implied expectations
- Assessing if there is an opportunity to exploit
- Determining whether you should buy, hold or sell the stock
Understanding expectations is crucial to finding stock market winners, avoiding losers, and knowing whether to hold onto a stock or not.
