Earning Seasons

Earnings Season…What is It? How do we Analyse It? Why is the Next Season More Important than the Current?

Quarterly Reports

It’s the time of year again where we start hearing about earnings season, and some of you may not be sure about what it is. Earnings season refers to the select months of the year, where we see quarterly reports on earnings for the majority of companies and businesses across the globe. The reports start to come out usually in the month to just after the fiscal quarter.

Typically, this means that we will usually see these reports in January, April, July, and October, this is mostly due to the time required to reconcile the accounting methods and data from the end of the quarter. Some companies may release them earlier or later, but it’s generally accepted that these are the months known as earnings season. The generally accepted start of earnings season usually comes from the routinely early release by Alcoa NYSE: AA, who produce aluminium for manufacturing. There is no real start and end date for earnings season, as the compiling of reports tends to be a variable in the time it takes to collect, but it’s usually about six weeks.

It’s an important time of year, especially for investors, as the results can affect the intrinsic value of a stock for better or for worse. Sometimes they are the difference between a good year and a bad year for the underlying company. We find that the earlier estimates tend to influence stock prices, and if the actual result reported varies from this, we could see some larger moves occur.

Analysts are usually quite mathematical when it comes to these reports, so they look for particular numbers EBT, EBIT, and EBITDA are usually incorporated in one version or another. Regardless all three tend to show what the profitability before tax might look like for a particular company. This won’t be all that we look for, we will also gauge whether the company’s stock is under or over-valued (EPS) and if the risk is worth the investment, by using DCF and WACC models. Sometimes we will conduct a ratio analysis to see if there are any areas of weakness within the company.

We will also look at the company within their sector and ask a variety of questions such as:

  • Is the business model completive?
  • Who is the major competition?
  • How do they compare?
  • What industry or environmental factors might affect the future?
  • Who is running the show?

These are not all the questions you may ask, and in some instances, you may not ask them at all as you may already have formed a picture of the Macro-Economy in your mind.

As a rule of thumb for earnings season, we look for deviations from the estimated reports too the actual reports. We consider the market leaders to gauge the βeta risk and the overall health of the general stock market, looking for opportunities or reasons to bail out of positions.

This earnings season is to be an interesting one, and we already have an inkling due to the COVID-19 pandemic that earnings are not going to be spectacular. Some larger firms will have reduced expectations already for the earnings in the last quarter, so nothing to surprise us there. No, this earnings season is only interesting to me, for the ‘how bad did it get’ factor. My real interest is in the next quarter… Will we see recovery starting to shape, or will we enter an earnings recession, built upon an economic recession built on a pandemic.

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