Earnings Season Cheat Sheet

The second quarterly earnings season is upon us, and we thought it would be handy to have a cheat sheet with tips to help you navigate the maze of data releases during the 7-weeks or so of peak earnings season.

The second quarterly earnings season is upon us, and we thought it would be handy to have a cheat sheet with tips to help you navigate the maze of data releases during the 7-weeks or so of peak earnings season.

Why does earnings season matter?

  • Earnings season creates short term volatility for individual stocks, as a stock price usually reacts, either positively or negatively, to earnings data.
  • Earnings can also shift the dial on the long-term outlook for a company. For example very weak earnings can limit corporate activity in the future, which can limit further upside for the share price.
  • Earnings data are a critical component of a company’s future outlook, as they determine the potential for growth for a company. Good earnings data tends to lead to growth and vice versa.

Overall, earnings season helps to generate volatility, which can offer trading opportunities.

Always looks at a company’s earnings data before you make a trade on a single equity, as it can give you important information about the potential future direction of a stock price.

Earnings season dynamics:

There are some complications with earnings season that traders should be aware of including:

  • Some companies use differing financial years to report their results.
  • Quarterly earnings are mandatory in the US, but not in the UK.
  • However, most UK multinationals report earnings quarterly.
  • Some UK companies only report sales each quarter, and they report profits half-yearly.
  • Most of the largest UK and US firms release their earnings within a month of the quarter ending.
  • Overall, it can be difficult to get a bird’s eye view of earnings season.

 

City Index’s top 3 tips on how to navigate earnings season:

1, Refine, Refine, Refine

Thousands of companies report earnings every quarter. It would be inefficient to try to cover all of them. Instead, at City Index we have picked the most important earnings releases for the UK, US and Europe and included them on our earnings season calendar for Q2 2017, you can find it here: https://www.cityindex.co.uk/earnings-release/

An earnings calendar should contain critical information including the time of the release, date, estimated earnings figures and actual figures.

Estimated vs. actual figures: this is how we gauge a company’s earnings performance, how have they done relative to expectations. A company’s stock price can move on the back of how much the earnings missed or beat earnings expectations. Due to this, acquainting yourself with a company’s earnings estimates prior to an earnings release is critical.

NB: estimated earnings figures are usually gathered by data providers such Bloomberg and Reuters. They ask investment bank analysts to give their predications and then usually use the average prediction for the estimate. It is worth noting that estimates can differ according to data provider, and they can also be updated throughout earnings season, as some analysts change their estimates, sometimes up to a week before a scheduled earnings release. Due to this it is best to refresh your estimates a day or two before the release so that you are getting the most up-to-date data available.

2, Earnings history

It’s also important to acquaint yourself with a company’s earnings performance over recent quarters. This information is not easy to find if you are a retail trader without access to a data terminal such as Bloomberg or Reuters. However, searching through a few old news articles or reading our research here at City Index, especially for the major companies such as global banks, retail and tech firms, should give you a fair idea of what a specific company’s earnings history looks like.

Historical earnings data can tell us information such as whether a company consistently beats or misses analyst estimates. This can help to identify if a company is perceived to have strong or weak financial fundamentals. For example, if a company has consistently surpassed earnings estimates for the last three quarters, could they do the same this time?

NB: The headline earnings figure to watch for is Earnings per Share, or EPS, this is the portion of a company’s profit that is allocated to each outstanding share of common stock, and is a global standard for corporate profitability. It is usually quoted in $ for US companies, and £ for UK companies.

Example: The chart below shows Apple’s quarterly EPS figures ($) plus EPS growth, since Q1 2015. 

Source: City Index and Bloomberg

3, How does earnings season cause a stock’s share price to move?

As important as making sure you are aware of the latest EPS estimates is how the stock actually performed before and after the earnings report. By analysing how a stock has performed after a recent earnings report, it can give you important information about how it may react this time around.

For example, if a stock price experiences high levels of volatility after an earnings release then it suggests that the market puts a lot of emphasis on earnings, so they are definitely worth watching. Alternatively, some stocks can ignore earnings reports completely suggesting that they are moved by other factors.

Let’s look at another example, this time how Apple’s share price performed leading up to its earnings report on 2nd May 2017. The market was excepting its Q2 2017 EPS to come in at $2.02, the actual figure was $2.09, which was 3.9% higher than consensus. At this stage we want to look at two things: 1, how did this earnings report compare with Apple’s past performance. As you can see in the chart below, the quarterly earnings had been higher in the previous quarter, but over the past year Apple has tended to report results in line with estimates.

Example: Apple earnings trends 


Source: City Index and Bloomberg

Specific details about Apple’s share price in the immediate aftermath of the May 2nd 2017 earnings release are below:

  • In the year leading up to the May 2nd data release the share price had appreciated by a whopping 62%.
  • On the day of the release the share price sold off by -0.66%.
  • 3 days after the release the share price started to move higher, and by May 15th it had risen more than 6.5% to $156.65, which was a record high.

However, to get a clearer picture of how Apple reacts to earnings releases it’s also worth looking at how it reacted to the prior set of earnings results released on 31st January:

  • Back then Apple released record breaking earnings figures. Although this was roughly expected by the market, as you can see in the earnings trends chart above, it still caused the stock price to move by 6%.
  • Apple’s share price continued to move higher for the month of February, rising by another 9%.

Analysing the stock price performance from the last two earnings releases we can deduce the following:

  • Investors’ reacted well to record-breaking earnings released in January, even though they were mostly in line with analyst estimates.
  • The reaction was muted in May, mostly because earnings and sales figures were lower than the previous release, even though this was expected.
  • Also worth noting, Apple’s stock price valuation was at a high level in May, which could have curbed investor enthusiasm, after all investors prefer to buy low and can avoid buying stocks when they are approaching record highs.

What can we learn about how the stock price may react when Apple releases its next batch of results on 25th July?

  • If Apple misses earnings estimates then we could see a sharp sell-off in the stock, as the market may have become accustomed to Apple at least meeting analyst expectations.
  • After a torrid June for the Apple share price, a rip-raring earnings report could see the share price rebound substantially.
  • One of the largest weaknesses of the tech sector right now is the high equity valuations and the stock price strength of the past year. Thus, if earnings are in line with expectations we would expect to see a fairly muted response to the earnings data. 


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