Earnings season

An exam every quarter

US companies publish an earnings report every quarter. The fiscal quarter usually ends in late March, June, September and December, and most reports arrive 2–6 weeks later. So earnings season comes four times a year: roughly mid-January–February, mid-April–May, mid-July–August and mid-October–November. In the busiest 3–4 weeks of a season hundreds of companies report every day.

Reports come at one of two times:

• Before the open (BMO) — usually 07:00–08:30 ET, roughly 16:00–17:30 in Tashkent in summer. The reaction starts in the pre-market and shows fully at the 09:30 ET open.
• After the close (AMC) — after 16:00 ET, after 01:00 in Tashkent in summer. Price jumps in after-hours trading and the main reaction comes at the next day's open.

Either way, the report lands while the regular session is closed. So price adjusts to the news by jumping (gap) rather than trading through the prices in between. The main takeaway of this lesson follows from that.

Expectations and consensus

The market reacts not to the numbers themselves but to how they differ from expectations. Analysts who cover the company publish EPS and revenue estimates in advance. Their average is the consensus estimate.

By report day the price has already "digested" that expectation. If everyone expects EPS of $1.00 and the result is $1.00 — there is no news. Sometimes the market also holds an unofficial expectation above the official consensus (the "whisper number"); it is hard to measure, but it is often the answer to "why did the stock fall on a good report?".

The consensus is not static either. If analysts raise or cut their estimates in the weeks before the report, that moves the price too.

Beats and misses

The surprise = (actual − estimate) ÷ estimate. Example:

• EPS estimate $1.00, actual $1.08 → an 8% beat.
• Revenue estimate $500m, actual $495m → a 1% miss.

That is a "mixed" result: profit is good, revenue slightly weak. Which does the market weigh more? Usually revenue for growth companies and profit and margins for mature ones. EPS can be "made" with cost cuts or buybacks; revenue is harder to fake.

Data providers commonly report that roughly three quarters of S&P 500 companies beat EPS estimates in a typical quarter. Companies try to keep expectations deliberately low. So a small beat is "normal", not news. What matters is the size of the surprise, the quality of revenue, margins and above all, guidance.

Guidance — often the most important part

Guidance is the company's own forecast for the next quarter or year. The market looks ahead: the past quarter is history, the future is what's in the price. That is why the price can fall even after a good quarter.

On the chart the price climbed from $75 to $80 into the report — the market expected good results. EPS did beat the estimate, but the company cut next quarter's guidance. Result: the price opened at $72.5 — 9% below $80, on heavy volume — and kept sliding to $68.9 in the following days.

For an investor holding the stock the right question is: "Has my thesis about the business changed?" A guidance cut can have a temporary cause (one large customer delayed an order) or a structural one (demand is falling, competition is rising). If it is the latter, that is a reason to trim or exit. For a trader, a gap down followed by falling days is a signal to avoid buying and to tighten the stop.

The conference call

About an hour after the press release, management holds a conference call with analysts (the earnings call). The structure: prepared remarks (results and strategy), then analysts' questions. The recording and transcript appear in the Investor Relations section of the company's website.