Anatomy of HP’s Earnings Surprise

Hewlett-Packard caught Wall Street off guard by essentially giving a sneak preview into its second-quarter earnings 75 minutes before the markets opened. The announcement, the result of an errant email, caught a lot of attention. But just as interesting, I thought, was the way it all unfolded.

hwpstock.pngH-P was supposed to deliver its earnings a week from tomorrow, but an unnamed employee emailed financial information from the quarter to clients to an unnamed recipient. It must have been to someone who could easily have shared the info – a reporter, an analyst or a well-connected investor – because H-P hustled to release “guidance” before the markets formally opened.

H-P did the right thing, of course, and it’s hard to think of how a company could have reacted better. But the incident reveals two interesting aspects about how companies have come to handle financial information and how the markets are able to react immediately.

Let’s take the market’s reaction first. H-P’s announcement rolled across Business Wire’s feed at 8:45 a.m., EST (when even Om was still asleep.)

H-P said its latest quarter’s revenue would be between $25.50 billion and $25.55 billion and EPS of 69 or 70 cents a share. That’s basically revenue 3.9% above the mean forecasts of analysts, and EPS that is four or five cents higher than the 65 cent estimate – a fairly substantial surprise. It also said EPS in the current quarter would be two to four cents higher than the 61-cent estimate the Street had guessed.

The chart below, using Google Finance’s nifty pre-market charts, shows what happened next. Within a minute, there were 128,600 shares traded in pre-market trading. That is, investors who saw the release had one minute to re-value the stock based on the unexpected numbers.

By 8:46, the stock had shot up 2.7% to $44.92 a share. That’s not a huge percentage gain per se, but for a stock as large as H-P’s, it meant $3.2 billion injected into its market cap in one minute.

After the stock opened, sell orders more than made up for buying demand at first, but throughout the day, as investors had a chance to digest the new numbers, the stock recovered to $45.01, or only nine cents higher than the initial valuation accorded to H-P’s stock only moments after its announcement was revealed.

That’s a pretty nice example of quick thinking on someone’s part.

The other aspect that H-P’s action illuminates is just how ridiculous the ritual has grown surrounding the quarterly earnings report. This is hardly unique to H-P, but part of the culture of Wall Street. H-P insisted on using the term “guidance” but they have essentially announced most of the key numbers everyone was waiting for.

Couldn’t H-P have just delivered its actual announcement a week early? Maybe not, if all of the details haven’t been confirmed. Even so, it’s going to look very silly next Wednesday when H-P goes through the old sclerotic ritual – the tedious conference call and its perfunctory chants (“We are encouraged by these financials,” “Great quarter, guys,” etc.) – where executives, analysts and reporters act their parts even though they know now the play’s happy ending.

It feels a little archaic that, in an era of realtime information and ever-improving financial-management software, companies still adhere to the decades-old practice of announcing financials once a quarter. In 2007, the market can adapt to a big surprise in one minute, yet companies are disclosing financials as if it were still 1957.