The 3 Biggest Disappointments This Earnings Season

With earnings season coming to a close, it's a good time to look back at how the companies we're watching performed over the most recent quarter -- and, in many cases, throughout the entire 2014 fiscal year. While some companies posted excellent numbers, some reports were quite disappointing.

We asked three of our analysts which companies disappointed them the most over the final three months of last year, as well as what investors should watch going forward. Here's what they had to say:

Dan Caplinger: I found the news from Microsoft to be particularly disappointing, given the momentum the stock had developed throughout 2014. After years of seeing declines in the PC market, Microsoft benefited last year from its decision to stop supporting the old Windows XT operating system, which spurred many of its corporate clients to replace their old hardware and upgrade to more recent operating systems. Yet in its fiscal second-quarter earnings report late last month, Microsoft reported that demand for Windows weakened substantially, with Windows OEM revenue falling 13%. Moreover, with Microsoft providing heavily discounted versions of Windows for many devices, it's uncertain whether the company will make more money from Windows in the future even if it sees unit growth improve.

Admittedly, Microsoft had several high points, with its cloud-related revenue more than doubling. Yet with hardware sales still not making up a huge portion of Microsoft's overall revenue and with its search-engine share still well behind the industry leader, the Redmond-based tech giant has a long way to go before it can demonstrate that it has turned the corner. Despite CEO Satya Nadella's impressive efforts so far, Microsoft needs to up its game another notch in order to justify the confidence that investors had in the stock throughout much of last year.

Cheryl Swanson: On the healthcare front, the company that disappointed me the most was Swiss-based Roche Holdings Ltd. . The world's largest maker of cancer drugs has been going through a rough patch recently, and with the latest earnings report, the drumbeat of bad news continued. For the first time in three years, Roche's earnings failed to grow, despite a big jump in sales of its flu drug, Tamiflu, thanks to this year's gonzo flu epidemic. Shareholders have been souring on Roche, and shares fell 2% when the fiscal year earnings didn't meet forecasts. The company also reported a 16% drop in annual profit.

Switzerland's stunning move to unpeg its currency from the euro is part of the problem. Roche's management warned that if current foreign exchange rates continue through 2015, operating profit growth could sink 9 percentage points. But even if you strip out the impact of currency fluctuations, management said they only expect 2015 sales to grow in the low- to mid-single-digit range -- anything but inspiring.

The devil is in the details, and the pharma giant's pipeline has been bedeviled with problems recently. An experimental medicine for Alzheimer's failed mid-trial. Two early-stage Parkinson's disease candidates ran into toxicity issues. Roche's new breast cancer drug Kadcyla performed no better than its older drug, Herceptin, in a late-stage trial. Going forward, Roche's most exciting oncology drug, PD-L1, won't report pivotal trial data until later this year. Assuming it gets the FDA nod, it will be third in a market Merck & Co. and Bristol-Myers Squibb are already divvying up with competing drugs.

Roche has been attempting to shore up its pipeline by acquiring companies with promising drugs, such as InterMune. But I agree with Sean Williams' take on the $8.3 billion deal that Roche probably grossly overpaid. Roche used to merit a premium, but right now it's trading roughly in line with the global pharmaceutical sector on a price-to-earnings basis. With currency headwinds, a faltering pipeline, and a management so hungry for growth they're forsaking their famous Swiss financial prudence, that's about where it should be.

Matt Frankel: One company that disappointed during this past earnings season is Caterpillar . However, sometimes an earnings disappointment can be an opportunity in disguise.

Because of relatively weak economic growth in most of the world, as well as low commodities prices, Caterpillar's mining and construction divisions posted results that were well below expectations. The company's earnings per share fell nearly 14% short of estimates, and the 2015 outlook was also disappointing.

However, CEO Doug Oberhelman confirmed during the company's conference call that the biggest reason for the year-over-year decline in the sales and revenue outlook is the massive drop in oil prices, since the oil and gas industry makes up a substantial part of Caterpillar's customers.

I believe that the crash in oil was a bit overdone, and the 30% surge in the price of oil since Caterpillar's earnings announcement is a good indicator that this might be the case. As a long-term investor, I look at temporary weakness (such as the current oil prices) as a buying opportunity, and that's exactly how I see Caterpillar. If you have the timeframe needed to ride out the storm in oil, this one could be a long-term winner in your portfolio.

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Cheryl Swanson has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Matthew Frankel owns shares of Caterpillar,. The Motley Fool has no position in any of the stocks mentioned. 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.

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