Missing earnings estimates hurts in the short run, but it
doesn't mean much if there is no indication that the overall
earnings trend has changed. If the overall trend in earnings has
turned down watch out. Prices can fall as for Zynga (
) and Facebook (
Then you have something like Reinsurance Group of America (
). It recently missed earnings by 12 cents,
$1.77 expected, $1.65 actual
. You should want your companies to miss estimates every now and
then. It raises the probability that the accounting is honest. With
a company like RGA, earnings comes down to how many/few large value
life insurance policy deaths they have in a quarter. You are
subject to the "law of small numbers" even with the second largest
life reinsurance block in the world, because it is the big policies
Even this does not qualify as a bad quarter for RGA. Can't
remember a time when they lost money, but they have missed by far
more. Often I have bought shares on such a day; I did not get any
on the brief lousy open after the earnings announcement.
With RGA, I hope the price goes down. I will buy more. Why?
- It rarely misses earnings. The company is conservative with
guidance, and usually beats. Cumulatively, over 2 years it always
- Life Reinsurance is an oligopoly. It is one of the less
competitive areas of the insurance industry.
- It is valued at less than 8x current earnings, which are
expected to grow, and less than book value, and even book value
- You have actuaries running the place. Actuaries have an
ethics code. I've met the management; talked with them on the
phone. Occasionally been on their conference calls. They seem
honest and competent. I have worked for dishonest and/or
incompetent insurance management teams occasionally. I know what
they feel like. One thing dishonest insurers do is always make
earnings by shorting reserves, and then, when the reserving
imbalance is too great, deliver a lollapalooza of a bad quarter
which more than erases the seeming excess earnings.
That RGA would deliver a slight miss is encouraging to me. The
accounting is honest. RGA is the #2 or #1 firm globally in what it
does. Unlike the deceased Scottish Re, it was conservative in
M&A. It let Scottish Re overpay for deals, while it sat back
and saw an undercapitalized competitor cobble together a life
reinsurance block nearly as large, but one that was unprofitable,
because of the high prices paid to get it, and the opaque holding
company structure (worthy of [[AIG]] in miniature).
More generally, when a company misses earnings:
- Does it revise current guidance? If it doesn't it may be
temporary, and a fluke of accounting rules. Look at the accruals
to give you a clue.
- How are industry dynamics? If everyone is missing estimates,
there is a reason to mark future prospects down.
- Analyze where companies in similar industries have been taken
private. That serves as a ground floor for where valuations could
And with that, I leave you with RGA. I have argued for years
that Buffett should buy it. Excellent company, does not need
guidance. Could take over his inferior #5 position in life
reinsurance which has lost money and become #1 … and then the life
reinsurance industry will have no more pure plays. Kind of sad, but
logical, because larger P&C reinsurers benefit from the
So RGA missed earnings. Who cares? A little lower and I load the
No Bernanke Or Draghi Put? No Problem