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 corporations 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 Alcoa’s report with the unofficial start to earnings.
There is no official start and end to earnings season, but it is generally considered to be over after six weeks, or when the vast majority of fortune 500 companies that make up the S&P 500 component report 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, and 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, plus a brief comparison to the same metrics which were recorded the previous year.
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% 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 next paragraph in the press release is likely to include a brief quote from the company’s CEO, which discusses the company’s results.
Moving on, the last few paragraphs will 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 2020 to be between 41.5 and 43.0 percent, (3) Company Z expects operating expenses to rise 10% 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 on a third quarter conference call in 2013, that the social media platform “did see a decrease in daily users among younger teens.”
This marked the first time that Facebook’s management team acknowledged that it faces headwinds among its core market. Up until Ebersman’s comments, Facebook’s stock was trading higher by around 15%. 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.
Coincidentally or not, Facebook stopped commenting on teen usage on subsequent conference calls.
After the 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.
Prior to the Groupon earnings report, its stock was trading for less than $4 a share. Shares immediately surged higher by nearly 25% 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% 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 of 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 conclusions.