Apple analysts: Stupid or lazy?

Did Wall Street bother to look at the calendar?

FORTUNE — One of the mysteries that lingers from Apple’s (AAPL) most recent quarterly report — when the company failed to meet Wall Street’s expectations and its stock suffered its worst one-day loss in four years — was whether the analysts who set those expectations were aware that the quarter was one week shorter than the same quarter a year earlier.

As my regular readers know, Apple, like many retail firms affected by weekend sales, defines its fiscal quarters not as three months, but as 13-week periods. To compensate for the resulting shortfall of one or two days a year, the company adds an extra week every fifth or sixth year (depending on the number of leap years in between) — giving it 7.7% more selling days in the long quarters and 7.1% fewer in the short.

Seems pretty straightforward. Yet of the three dozen Wall Street analysts we polled in advance of last month’s earnings report, only a handful mentioned the short quarter. Those who failed to take it into account, of course, would tend to underestimate revenues in the long quarter (i.e. fiscal Q1 2012) and overestimate them in the short (Q1 2013).

Is it possible that professional analysts paid to study the world’s most valuable company were unaware of something so material to their forecasts?

As it happens, this is a familiar issue in academic circles. Just last year the Journal of Accounting and Economics published an article on the phenomenon by four business school professors (“14-Week Quarters,” Johnston et. al, JAE, Feb-Apr 2012).

The professors studied analysts’ forecasts for 658 firms with 14-week quarters and discovered that over a 12-year period the magnitude of error in the estimates of analysts who failed to mention the extra week was 4.2% higher on earnings and 4.8% on revenue. (See Table 5 below).

“These results are quite surprising in light of the ease with which this information can be obtained and incorporated into expectations,” the authors conclude. “The simplicity of making an adjustment for the extra week suggests a lack of effort rather than ability.”

That’s putting it politely. The article’s epigraph, taken from a Fortune article by my former colleague Jim Ledbetter, is more blunt:

“Evidently sellers are claiming that the numbers are inflated because there was an extra reporting week in November this year. To which I say: any analyst who didn’t look at the calendar and factor that into earnings projections isn’t worth the price of the spreadsheet software.” — James Ledbetter (Fortune, Dec. 18, 2007)

In other words: Not stupid, just lazy.

Below: Table 5.

From “14-Week Quarters” Johnston et. al
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