Earnings season investing can create both opportunities and uncertainty for investors. In this guide we deep dive into the concepts investors need to know to master earnings season investing.
Keep reading to discover more or jump ahead to the section that interests you the most:
What is earnings season?
Earnings season refers to the period in which public companies – from BHP to Tesla – release their earnings reports.
Whether this means boasting about record quarterly profits, new customer acquisition milestones, or gently informing investors of a costly mistake or an investment gone sour – earnings season is generally a period marked by volatility.
While this volatility can create opportunities for investors, it can also be a catalyst of uncertainty for those who’d just rather take a more passive approach to investing (like ETFs).
Read more: ETF Investing Australia: Ultimate Guide 2023
Whatever approach an individual takes, understanding the basics of earnings season – from the what to the why – can help you become a better, smarter, and more informed investor.
What’s in an earnings report?
Beyond being highly watched and scrutinised, earnings reports can be separated into quarterly, half yearly, or full year reports.
These reports provide investors, analysts, and the media insights into a company’s operational performance over a given period of time. How much revenue they made. How much they spent to generate that revenue. And how much earnings they brought in or losses they incurred.
Questions like these – and more – are generally answered in an earnings report.
But while companies are required to spell out certain figures in these reports – like revenue and earnings – there is a lot of flexibility beyond that.
The Twiggy Forrest backed Fortescue Metals Group provides investors a view on how much iron ore it’s mined and shipped in a given quarter or year. Zuckerberg’s Meta dives into how many users were active on the platform in a given day or month.
Metrics like these give investors greater insight into the health of a company. Many also use them to get a better understanding of a country’s entire economy or even make inferences about the earnings results of other companies.
As with all things investing, reading into earnings reports is both an art and science. Objectivity is important, but not always possible.
When earnings season occurs
Australian companies tend to hand down interim and full-year earnings reports in February and August.
Although this doesn’t apply to all companies – many of Australia’s largest companies, including CBA, CSL and BHP all report full-year earnings in August and their half-year or interim earnings in February.
In the states things are a little different, with US corporates generally handing down quarterly earnings reports in January, April, July, and October. Full-year results that incorporate fourth quarter earnings generally coincide with the January period.
How to locate earnings season information
Overall, there is generally more visibility on US company earnings and earnings dates than ASX-listed company earnings. For those looking to stay up to date with US company corporate earnings – Business Insider’s earnings calendar is a good resource.
By comparison to US corporates, getting data on Australian earnings dates and data is a bit more of a challenge. Searching individual company investor relations pages is likely your best bet.
Whether you’re a shareholder or just curious, if you want to look for information on when a company is expected to report its earnings in Australia – for example, the Commonwealth Bank of Australia – go to Google and type in ‘CBA IR Financial Calendar’.
On the other hand, if you’re looking for the company’s earnings reports, presentations, and other data points – go to Google and type in ‘CBA IR Results’. This should give you access to everything from earnings presentations, media releases, and full-scale earnings reports.
What to look out for in an earnings report
For most investors, and as is common for ASX-listed companies, the earnings results or profit ‘announcement’ should provide the key pieces of insight for investors. These reports and announcements can be found on the investor relations or IR pages of ASX-listed companies or on the individual company profile pages on the ASX website.
Once you’ve got a hold of a company’s earnings report, announcement or presentation, here are some of the key things you should look out for:
1. Revenue & earnings
The bread & butter of any company earnings report – revenue represents how much company makes while earnings represents how much it keeps.
Two things to keep in mind here. When it comes to revenue and earnings, what primarily matters is the growth percentage, not the absolute number. Is revenue and earnings up, down, or flat?
But maybe more importantly is understanding how those revenue and / or earnings figures stack up against what the company said it would achieve or what investors were expecting it to achieve.
If investors were expecting a company’s quarterly revenue to decline 10% but it only declines 5% during the quarter this would likely be considered positively. This is what we mean when we say expectations matter.
Focus on the commentary from the company’s key leaders, whether that’s the Chief Executive Officer or the Chief Financial Officer.
When we say executive commentary we mean what is both said and what is not said. Is the company trying to hide or obscure something? One particular ASX 200 company was notorious for describing its earnings in eight slightly different ways. Be on the lookout for behaviour like this – as it likely signals poor accounting or poor communication.
Why it matters... Remember, while companies are legally required to produce earnings reports and updates - always be on the lookout for marketing spin and obfuscation when reading earnings reports. While data never lies, how it is presented to you can be misleading.
3. Outlook & Guidance
While it’s much more common for US-listed companies to provide earnings and revenue guidance than ASX-listed companies, it’s still one of those most important things for investors to look out for when reviewing an earnings report.
Ultimately, if a company doesn’t provide guidance, investors will be left to fill in the dots and make their own assumptions.
Why earnings seasons matter
So why does earnings season really matter? When it comes to Australian and US company earnings, it all comes down to expectations.
If you’ve ever picked up the AFR or tuned into Bloomberg, you’ve likely seen phrases like ‘Apple missed expectations’ or ‘Apple beat expectations’.
This is really what earnings season is all about. And here’s what that means and why it matters.
One of the key – or maybe only – factors that drives a company’s value is what the market expects of the company. Everything from what the company has done in the past, said it will do in the future, and what investors think will happen in the future – all form part of those expectations.
When we say expectations – in the context of corporate earnings – we mainly mean analyst expectations.
Large companies like Apple or Microsoft tend to have many analysts making forecasts on things like revenue and earnings, among other metrics. All of those forecasts, from all of the analysts covering a stock form what is known as a ‘consensus estimate’ or ‘consensus expectation’.
For example, the consensus quarterly earnings estimate for Apple is a figure made up of all the estimates of all the analysts currently covering the stock.
Miss, Meet, or Beat?
Whether you have a lot of analyst coverage or a little, when it comes to earnings what really matters is whether a company misses, meets, or beats expectations.
The general formula looks something like this.
If the consensus is for Apple to report Q4 earnings of US$2 per share and Apple reports earnings of US$2 per share the stock might rise a little or it might stay flat. If Apple reports earnings of just US$1 per share it might fall a little or a lot. And if Apple reports earnings of US$3 per share, don’t be surprised if the stock rises.
Here’s one significant ‘but’ to the above formula. What analysts and investors are really looking out for in earnings reports it’s what’s coming next or how current results might impact that ‘what’s coming next’.
This also explains why something that might look like a weird outcome, isn’t actually that strange at all.
Apple might report US$3 per share in earnings – well above what analysts were expecting – but even then, the stock might fall. What does that mean?
In cases like these, it’s worth examining the outlook: Did the company say it would earn less in the coming quarters, that costs would be higher, or competition more intense? All of those factors are arguably more important when it comes to future expectations and future value of a business.
Top ‘earnings season’ strategies for investors
Beyond the earnings season basics – including what to look out for and where to source information from, here are some high level strategies to think about if you’re interested in investing in or around earnings season.
1. Invest before earnings results
If you think a stock is undervalued or think its upcoming earnings report will be better than the market expects – buying its stock could be an option worth considering. Here’s some examples:
Snap share price tumbles on Q4 earnings
Social media company Snap has struggled over the last year in the face of privacy changes from Apple. For companies highly dependent on Apple – as Snapchat and others like Meta are – those changes from Apple have made ads less effective and hurt revenue generation in the process.
Despite already seeing its stock sold down heavily in 2022, Snap would see its stock decline a further 10% in the wake of a Q4 result that revealed revenue growth that was below analyst expectations.
The Snap example highlights two important lessons for investors. Picking winners during earnings season is undoubtedly difficult and just because a stock has declined a lot, doesn’t mean it can’t decline more.
Meta shares surge post Q4 earnings
Meta – the company behind Facebook, WhatsApp and Instagram saw its stock go in an entirely differentiation direction to Snap following the release of its Q4 results.
Despite Zuckergberg’s continued commitment to building out the metaverse, social media giant Meta has seen its shares rally firmly in 2023 – with the stock up 51% from January 1 to February 2.
That stock run includes a 23% rally off the back of the Q4 release, which saw Meta report revenue above analyst expectations, while also revealing a US$40 billion buyback program.
As both those examples illustrate – the nature of earnings season means heightened volatility – both up and down.
2. Invest after earnings results
For investors who would rather avoid earnings reports volatility, investing after a company has released its operating results may be a suitable option.
This will give you time to assess many of the factors we discussed above, including revenue and earnings growth, the positioning of an earnings report, and future guidance.
3. Ignore earnings results
The other option is to simply ignore earnings season entirely and invest with a long-term view regardless of how a company has performed in one quarter or another.
Whether this means investing in companies which you think have long term potential or taking a more passive approach and investing in an exchange traded fund (ETF) – the choice will ultimately come down to personal preference and circumstances.
This is ultimately the view held by many great investors, including Warren Buffett, who believes that both institutional and everyday investors have a tendency to focus too much on the short term prospects of a company. Yet it is the long term view, that people like Buffett will argue, is where real wealth can be made.
Read more: 10 investment tips for 2023
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