Are Numbers All That Matter In Earnings Season?

Bill Poulos is an American investor, retired automotive executive, and financial educator. He spent more than 30 years of his life working for General Motors. He started analyzing and trading in the stock market in the early 70s. After years of studying, trading, winning, losing, Poulos developed a great understanding of the markets and learned to navigate trades while applying proper risk management. He now applies his knowledge to Profits Run, the company he co-founded with his son Gregory Poulos. Through Profits Run, Bill and Greg teach individuals how to navigate the market and made simpler trades while applying risk management. Poulos recently founded the website fightforhope.com. He is a published author. Bill Poulos regularly shares his views on finance, economics, and politics.

Four times a year publicly traded companies will announce their earnings on a quarterly and on an annualized basis. As each quarter is about to end, analysts will predict what the earnings report will state for each of those companies with the actual results being presented a few weeks later. The market will initially react to the analysts’ predictions baking that information into the price of the stock. When the actual results are published, the price of the stock will correct itself to reflect the new information which is the difference between the analyst’s prediction and the actual results, so essentially the reaction will be partially based upon how wrong the analysts are. If the prediction was very far off the correction or the reaction in the stock price can be quite severe, we can see this through price gaps and general volatility around the time of the announcement. If the predictions were right on, or at least very close, there may not be any reaction at all so you won’t even know there was an earnings announcement that was made when looking at the stock chart.

The other factor that needs to be taken into account is the investor sentiment or basically how traders and investors feel about the stock and the company. One could make an argument that the sentiment around a given stock is just as important as and possibly even more important than what the numbers actually state when they are published. I believe that this is a concept that isn’t considered by allot of investors because you have to do allot more research to determine how people feel about something, the numbers are readily available but an emotional thermometer is not. We can see exactly how important this concept is by looking at a few announcements and the results that those announcements had on the given company’s stock price from the first quarter of 2018.

The first quarter results of 2018 for AT&T (T) presented a good example of how a seemingly relatively small miss in expected earnings can punish the stock price of the company. The expected earnings per share for the first quarter was .87 with the actual report being .85, the actual reported revenue was less than 3.5% lower than what was expected. The closing price of the stock the day before the announcement was made was $35.20 with the next opening price after the announcement being $33.47 which is just under a 5% drop based upon a small miss in expectations. Though the numbers were not far off investors really didn’t like the .02 miss so many of them sold off their holdings in the stock. The consensus of the 2nd quarter 2018 earnings is .85, it will be interesting to see if the company is forgiven if they meet or exceed expectations.

The consensus for Lockheed Martin (LMT) for the first quarter of 2018 earnings was 3.35 with the actual earnings being reported as 4.02 with a 3% increase in actual revenue over the estimated revenue. On the day of the announcement the stock opened at $360.02 and it closed at $336.49 for a 6.5% drop with all good news being reported. The stock price has languished in a narrow range since that time and is currently trading in the $320 range; the estimate for the second quarter earnings per share is $3.89. LMT is considered to be a strong buy with predictions of a nice upward move so it should be interesting to see how big of a surprise to the upside the company needs to report in order for investors to love the stock again and to begin to buy it.

The first quarter per share earnings estimate for Sherwin-Williams Co. (SHW) was 3.14 with the actual being 3.57 for a positive surprise of almost 14%, the reported revenue estimates were almost right on. The price of the stock fell leading up to the announcement with the day of the announcement seeing a 3.6% drop followed by a week of a sideways to down move before taking off on a nice long uptrend where it currently trades in the $420 range. This is almost a 14% gain since the daily close of the last earnings announcement. The expected 2nd quarter earnings per share is 5.59 with the general consensus being that it is a strong buy to minimally a hold if you already own it.

Verizon’s (VZ) first quarter earnings were .06 higher than the estimate or 5.4% higher so fairly close, the stock jumped by 2.65% on the announcement day followed by another 3.82% rise over the next few days before dropping like a rock from that point by 10.32%. It moved sideways for a time but it has since recouped almost the entire 10.32% drop. The consensus earnings per share forecast for the 2nd quarter is 1.14 which is slightly above what the first quarter forecast was.

Another one similar to LMT was General Dynamics (GD) which saw a 4.7% good surprise in first quarter earnings per share with the stock immediately falling on the announcement day and continuing down for the next two weeks dropping to a low of 14.47% off the open of the announcement day. The stock has rolled up and down a little since the initial drop but it still has not recovered and is currently down about the same amount. The consensus for the 2nd quarter earnings per share is 2.49 which is .03 less than the consensus for the 1st quarter. It seems unlikely that the stock will recover if the actual results are anywhere close to the estimate. Based upon the first quarter results is appears as though it would take a huge positive surprise to greatly impact the stock price to the up side.

Orielly Automotive, Inc (ORLY) had almost the exact opposite response, the earnings per share was .02 lower than the estimate with actual revenue being exactly what the estimates were. The result was a gap up in the stock price of 13.05% on the day of the announcement followed by a continuing rise in the stock price. It currently sits 27.38% higher right now than where it was on the day before the announcement was made.

McDonald’s Corp (MCD) beat the first quarter 2018 earnings per share estimate by .12 or 2.9% resulting in just over a 4% gap up on the day of the announcement. The share price rose and then fell rather dramatically two times this quarter currently trading at approximately where it was before the first quarter earnings announcement was made. The 2nd quarter estimate is 15.56% higher than the first quarter estimate so it should be interesting to see if the stock begins to trade in calmer fashion or if it continues to be very volatile.

These recent examples show that though the numbers are very important around earnings announcements, they clearly are not the only factors that are involved. It is not as simple as stating that if there is a good surprise in earnings the stock will rise and a bad surprise will make it fall. Investors and traders are very emotional and it appears evident that those emotions are one of the “X” factors or the intangible factors around what drives the price of a stock.