Analysts' failure lead to unrealistic Wall Street expectations

I saw a headline last week that blamed the volatile protests in Egypt and Ford Motor Co.'s 2010 financial results for Wall Street's plunge.

How could two vastly different stories create such havoc?

Simple: Expectations.

Many people in Egypt want a change in their government. No one can say how this thing is going to play out. Wall Street doesn't like the unknown.

Ford reported 2010 net income of $6.56 billion. Before its report, many observers figured net income would be $8 billion or more.

So imagine Wall Street's disappointment when Ford reported the smaller number, even if it was still nearly $4 billion better than Ford earned in net income in 2009. The automaker now has more cash in its coffers than debt it owes on.

All good news.

Still, Wall Street sent Ford stock plunging. Before its announcement last Friday, shares were at $18.80. At mid-day today, shares were selling just a hair over $16.

A reporter asked CEO Alan Mulally who's to blame for analysts' ambitious expectations. Mulally refused to lay blame, saying it's an opportunity to better educate analysts about Ford's plans in the future.

What a diplomatic way to dodge a simple answer: Analysts failed. They failed to account for Ford's fourth-quarter rising structural costs to launch products and an unexpected small marketshare in Europe.



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