Were Insiders Prepared for Friday’s Round of Earnings Misses?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Insider trading activity is an underused and under-reported indicator of a stock’s sentiment. After all, who better to judge a company than its own team of insiders, whom in many cases, are top-level management. While it’s always important to track this information - empirical studies have proven that individual investors can beat the market by 7% a year by following the best insiders – it’s an especially useful strategy to consider during earnings season.

This week has been a wild one for financial reporting, as Google’s snafu and Microsoft’s miss are certainly fresh in readers’ minds. As is the case with every story in the market, though, these troubles are short-lived, as investors have an entirely new round of earnings to look forward to with each passing day. Without further ado, let’s take a quick look at some of the companies that released quarterly results on Friday, October 19th and determine if they’ve experienced any insider trading activity in recent weeks.

McDonald’s (NYSE: MCD)

Post-earnings return: -4.5%

Insider buys: none

Insider sales: Jackson ($460K), Armario ($1.9M), Ozan ($470K)

Despite its size, McDonald’s Corporation hasn’t had a lot of insider purchasing activity in 2012, with only one insider buying earlier this summer. In recent weeks, VP of Supply Chain Management Jose Armario and Controller Kevin Ozan have been two of the company’s most notable bears, with Armario selling over 20,000 shares worth a cool $1.9 million. Over the past month, shares of the stock have been relatively flat, but are down on Friday over 4% after it missed Q3 earnings. McDonald’s reported earnings of $1.43 a share; analyst averages were expecting EPS 4 cents higher than this mark. The primary driver of this decline was the company’s dwindling sales growth across the board. The third quarter’s sales growth of 1.9% was at its lowest level in close to ten years.

General Electric (NYSE: GE)

Post-earnings return: -3.5%

Insider buys: Brennan ($408K)

Insider sales: Krenicki ($3.8M)

General Electric has been a solid investment since the start of 2012, returning over 20% on the year, but is down on Friday after disappointing in its Q3 release, specifically on the revenue side. The company’s adjusted earnings hit the Street’s mark at 36 cents a share, but top line totaled just $36.4 billion, below the consensus of nearly $37 billion. GE has seen two insider transactions in recent weeks – on both sides of the aisle – but Vice Chairman John Krenicki’s sale was much larger, worth close to $4 million.

Schlumberger (NYSE: SLB)

Post-earnings return: -1.1%

Insider buys: none

Insider sales: Oestdahl ($1.2M)

Schlumberger, the oil well services company, is down slightly on Friday after Q3 earnings beat the Street’s expectations. Driven by quicker than expected global fossil fuel drilling activity, Schlumberger hit earnings of $1.08 a share, 2 cents above analysts estimates and close to 10% greater than the same time last year. Interestingly, primary competitor Baker Hughes whiffed its quarterly earnings on shoddy fracking prices, but more on that shortly. Over the past few weeks, there has been no insider purchasing activity at Schlumberger, and only one sale. Executive VP Kjell-Erik Oestdahl sold just over $1 million shares, leaving his holdings a fifth the size of their previous levels.

Honeywell (NYSE: HON)

Post-earnings return: 1.7%

Insider buys: none

Insider sales: Adams ($1.1M), Mikkilineni ($740K), Kramvis ($700K), Anderson ($2.1M), Fradin ($3.0M), Winters ($274K)

Of the insiders we track, Honeywell International has seen some of the most selling activity recently, with six different insiders performing transactions. CEO of ACS Roger Fradin, CFO David Anderson, and General Council Katherine Adams made the largest sales, trading a combined $6.2 million in Honeywell stock. Over the past month, shares of the company have been essentially flat, but are up close to 2% on Friday after it released solid Q3 earnings. The aerospace and defense manufacturer finished the quarter with EPS of $1.20 a share, up close to 10% from the same time last year, and 6 cents above analysts’ estimates. The beat marks the third straight for Honeywell, which is forecasted to finish 2012 with EPS of $4.50, an impressive 18.7% increase from 2011 totals.

Baker Hughes (NYSE: BHI)

Post-earnings return: -5.1%

Insider buys: none

Insider sales: Charreton ($194K)

Last but certainly not least, Baker Hughes reported disappointing Q3 earnings of 63 cents a share, a whopping 20 cents below the Street’s estimates and 60% lower than the same time last year. As mentioned above, part of this decline can be attributed to low fracking prices, but a shrinking number of globally operational rigs are also to blame. CEO Martin Craighead stated that many areas were to blame, claiming:

“The clearest example is Canada, where the seasonal return of activity was nearly 30 percent less than this time last year. Internationally, the collective rig count in Brazil, Colombia, and Norway was down 17 percent compared to the last quarter, and these are all meaningful markets for Baker Hughes.”

All in all, the large miss makes it a real possibility that Baker Hughes will fall short of its year-end guidance, which is already predicting an EPS decline of around 10% from 2011. Baker does trade at generally attractive valuation metrics, including a PEG ratio of 0.82 and a forward P/E of 11.6X, but investors have to be wary of a value-trap here.

Interested in Additional Analysis?

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This article is written by Jake Mann and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.The Motley Fool owns shares of General Electric Company and McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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