Tuesday, July 21, 2009

More Evidence of Lots of Optimism Embedded in Stock Prices

Eaton Corp. is an old-line, well-regarded manufacturer of stuff for the transportation and other industries.

Last October it sold for the current share price of about $48. For most of this year it traded between $30 and $45. Now that it has lowered guidance substantially for all of 2009, the stock has surged. Consider the AP report from yesterday of ETN's quarterly earnings:

"The company beat Wall Street earnings expectations when one-time items are excluded, but it cut its full-year forecast for the third time.

Wall Street applauded the performance in a tough environment: Eaton shares rose $3.99, or 8.9 percent, to close at $48.94 Monday. . .

As we survey our end markets, the year is shaping up to be considerably weaker than we had forecast in April," said Chairman and CEO Alexander Cutler.

"We now anticipate our overall end markets will decline by between 21 and 22 percent versus our earlier forecast of a decline between 15 and 16 percent. We see our U.S. markets declining by 25 percent, while our non-U.S. markets are expected to decline by 19 percent." . . .

For the full year, Eaton lowered its earnings forecast to between $1.65 and $1.85 per share, down from a February projection of $3.60 to $4.20 per share. Before that, the company forecast 2009 income of $3.80 to $4.80 per share.

Analysts had been looking for earnings of $1.90 a share for the year, on average, according to Thomson Reuters.

Here's perhaps the scariest part of this, a link on Yahoo/Finance from this morning:

[$$] Eaton's a Sign the Bulls Are in Charge
at RealMoney by TheStreet.com (Tue 6:21am)

Also, for those who care about such things, the company has a negative net worth under generally accepted accounting principles.

When stocks go up on major earnings disappointments- and a halving of earnings projections is meaningful, even long-term investors who "believe in" the company (whatever that means) should be wary, and speculators on the long side should stay away.

Copyright (C) Long Lake LLC 2009

1 comment:

  1. These lines from a Yeats poem seems fittingto the increasingly irrational behaviour of the stock market....

    Turning and turning in the widening gyre
    The falcon cannot hear the falconer;
    Things fall apart; the centre cannot hold;
    Mere anarchy is loosed upon the world,
    The blood-dimmed tide is loosed, and everywhere
    The ceremony of innocence is drowned;
    The best lack all conviction, while the worst
    Are full of passionate intensity.