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 Market Mysteries of the week

  Should I care about the “beats” and “misses” of earnings season?

Answer:

Don’t get too caught up in the “beat” or “missed” language because it’s very short-term thinking. Look out for the higher-level long-term trends of the business.

What are you talking about?

It’s

earnings season

! Isn’t that exciting? It only happens four times a year. Public companies, whose stock we can buy in the market, must

report on their financial health every quarter.

When you have thousands of investors, you need to be very transparent about your company.

Most companies provide their reports in the first 3-4 weeks after the end of the March, June, September, and December quarters. That period is called “Earnings Season,” The reports are colloquially referred to as “

Earnings Reports

.”

Earnings is another name for profits.

What are they beating or missing?

Expectations

- companies report on their performance for the quarter, and investors compare it to what Wall Street analysts expected of them.

Most of us in the financial industry spend our days analyzing data and making predictions about what will happen.

Major Wall Street analysts will evaluate a company’s performance and make projections

of how much revenue, profit, costs, users, etc., the company will have three months from now.

When you see a headline that Johnson & Johnson “

missed on revenue

,” that means that it made $23.4 billion of revenue from selling its products and services over the last three months. Still, it was less than the $23.6 billion of revenue Wall Street analysts had projected on average. There are dozens of analysts and people making projections, so the

“estimated” number is always an average of the prominent Wall Street analysts

. It's up to you to decide whether you think that $0.2B revenue underperformance for the quarter is important for the long term.

What are earnings?

Earnings are profits

. Investors look at Earnings Per Share (EPS) to quantify how much profit the company is delivering relative to its stock price. It’s literally your share of the profits as an owner of the company. It helps investors gauge whether they think the company is overvalued or not.

What else is essential in these quarterly updates?

Investors always want to hear about the company’s outlook.

When you hear “guidance was light/low/weak,” that means the company gave a pessimistic outlook for the next quarter.

Usually, as part of the earnings report and following conference call, companies will provide their own projections for sales, profits, etc. Wall Street analysts will then compare those projections for the next quarter to their own forecasts. So

they’re not just looking at whether the company’s actual performance “beat” or “missed” their expectations, but also whether the company’s projections “beat” or “missed” their forecasts

for the next quarter.

Investors buy into a company for a share of its future growth and profits, so

forward guidance is often an essential component.

After its most recent earnings report,

Netflix lost more than a third of its value in a single day

. The company actually “beat” earnings estimates, but investors cared more about its guidance. It reported its first decline in subscribers and warned that it could lose millions more in the quarter ahead.

Should I be buying or selling based on earnings reports?

Treat earnings reports like any other piece of news about a company.

Don’t place too much weight on whether a company delivers 0.1% less revenue in a given three-month period than the average of a bunch of projections. These are real companies. If you’ve worked at a big corporation, you know things don’t move or change that quickly. Three months is a blip in the lifespan of some of these companies.

Don’t pay too much attention to the direction the stock moves immediately before/after the news.

Use all of the new information to

form your own opinion

on whether you think the company is still moving in the direction you expect long term.

Please share this with anyone who might find it helpful!

💙 The Share Scoops Team

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