Updated: Apr 10, 2019
Earnings Season: What You Need to Know as a Trader
By: Russell Barbour
Investors and traders either love or hate earnings season as the four-times a year event is associated with large price swings in either direction for a plethora of stocks.
When Is Earnings Season?
Earnings season refers to the period in which publicly traded corporation release their financial results along with a business update as well as their future outlook. Typically speaking, earnings season begins a few weeks after the last month of each quarter - March, June, September, December. Companies typically issue a press release a few weeks ahead of earnings season which communicates with investors the time and date of their release.
Alcoa, the major metals engineering and manufacturing company, is among the first major corporations to report its earnings and many among the investment community associate its report with the unofficial start to earnings.
There is no official start and end to earnings season but it is generally considered over after six weeks or when the vast majority of 500 companies that make up the S&P 500 component reported their earnings.
What Does Earnings Season Involve?
An earnings report includes exactly what it sounds like - the dollar amount of earnings (or losses) a company realized in the most recent quarter. Companies also provide their earnings per share which is the portion of their profit divided by each outstanding share of the common stock. The earnings report also contains financial metrics including revenue, gross margins among many more. Prior to an earnings release many Wall Street analysts offer estimates on what they expect the company to report.
The earnings report itself follows the format of a press release. The opening paragraph typically contains the company’s actual earnings, revenue and gross margins and a brief comparison to the same metrics which were recorded a year ago.
The first paragraph may also include a metric that is important to investors or to the company’s story. For example, Apple said in its most recent earnings release that international sales represented 67 percent of total revenue in the quarter.
Growth in Apple’s international markets, particularly China and India is considered to be the company’s next leg of growth and for some investors it is more important than domestic sales.
The following paragraph is likely to include a brief quote from the company’s CEO which discusses the company’s results. Moving on, the next few paragraphs likely include any new development that investors should be aware of, including any changes to dividend payments, stock buybacks or acquisitions. More important to many investors is the company’s guidance or outlook for the coming quarter, full year or even several years down the road. This provides a better snapshot picture of the company’s health and sets up a standard for the company to live up to. Examples of guidance include: 1) Company X expects revenue for the full fiscal year to be between $250 and $260 million, 2) Company Y expects gross margin for fiscal 2018 to be between 41.5 and 43.0 percent, 3) Company Z expects operating expenses to rise 10 percent next quarter compared to the same quarter a year ago. Finally, the company will include its consolidated statements of operations, balance sheet, cash flow statement, and any other accounting information it deems necessary.
Post Earnings Report Conference Call
After a company releases their financial results, management holds a conference call that is open to investors and non-investors. A link to a live stream of the conference call is also communicated to the investment community through the company’s investor relations website.
The call will include additional commentary and analysis on the reported results as well as a general business overview and updates on new developments, markets, products or acquisitions. Ignoring the conference call and merely focusing on the financial metrics could prove to be a big mistake for investors.
For example, Facebook’s Chief Financial Officer David Ebersman said during his prepared remarks during the third quarter conference call in 2013 that the social media platform "did see a decrease in daily users specifically among younger teens." This marked the first time that Facebook’s management team acknowledged it faces headwinds among its core market. Up until Ebersman’s comments, Facebook’s stock was trading higher by around 15 percent. However, the executive’s one sentence alone was responsible for wiping out all of the stock’s gain and it then dipped into negative territory.
Coincidently or not, Facebook stopped commenting on teen usage on subsequent conference calls. After management’s prepared comments, the call is open to Wall Street analysts to ask questions on any aspect of the company’s business, including clarification on any of the quarterly results metrics.
The Power Of Earnings Season
Consider the case of Groupon, the ecommerce merchant that connects consumers with merchants by offering discounted products or coupons. The company’s relevancy in the online space has been questioned by investors amid a heightened competitive environment and the possibility that a substantially larger internet peer, such as Facebook or Google, could easily enter the space. Groupon reported its second quarter results on Wednesday July 27.
Prior to the earnings print its stock was trading for less than $4 a share. Shares immediately surged higher by nearly 25 percent following the earnings result which reaffirmed the company’s relevancy in the online market place and a bright outlook. Groupon said in its earnings report that it lost just one cent per share in the quarter while its revenue rose 2.4 percent from the same quarter a year ago to $756 million. The company also provided guidance and said it expects its full year revenue to be $3 billion to $3.1 billion - an impressive figure compared to many analysts expectations.
On the non-financial metric side of the story, Groupon said that it added more than one million new customers in the quarter, marking its highest level of growth in more than two years. Following a smashing earnings report the stock continued to rise in the subsequent trading sessions and within a few weeks the stock gained nearly $2 per share and traded at its highest level in more than a year at $5.94.
Bottom Line: Be Aware Of This
Earnings season is the ideal opportunity for investors to check on their investment, hear from management and re-evaluate their view on the company. There is one aspect of earning season that could provide a deceptive view of the company that often goes ignored by investors.
Recall that a company’s earnings per share is simply the company’s total earnings divided by the total number of common stock outstanding. Also keep in mind that many companies implement a stock buyback program whereby they purchase their own stock in the open market to "retire" the shares.
For example, suppose a company has one million shares outstanding and earns $1 million. Each stock represents $1 of earnings. Suppose the company purchased 100,000 shares of its own stock and a year later the company’s earnings remained unchanged at $1 million.
What happened to its new earnings per share? At first glance it improved because each share now constitutes a higher share of total earnings. In reality, the earnings per share metric improved merely on paper and may have provided a false sense that the business itself is improving when as a matter of fact it hasn’t improved (or declined) over the year.
Investors who simply take a look at the reported earnings per share without factoring in stock buybacks may be making a mistake in their conclusion.