What Is an Earnings Announcement?
An earnings announcement is an official public statement of a company's profitability for a specific period, typically a quarter or a year. An earnings announcement occurs on a specific date during earnings season and is preceded by earnings estimates issued by equity analysts. If a company has been profitable leading up to the announcement, its share price will usually increase up to and slightly after the information is released. Because earnings announcements can have such a prominent effect on the market, they are often considered when predicting the next day's open.
Key Takeaways:
- An earnings announcement is an official public statement of a company's profitability, usually issued on a quarterly basis.
- Earnings accouncements have an effect on the share price, which will move up or down depending on the company's performance.
- Analysts estimate how the company will perform, but these expectations can rapidly adjust up or down in the days leading up to the announcement.
Understanding Earnings Announcements
The data in the announcements must be accurate, according to Securities and Exchange Commission regulations. Because the earnings announcement is the official statement of a company's profitability, the days leading up to the announcement are often filled with speculation among investors.
Analyst estimates can be notoriously off-the-mark and can rapidly adjust up or down in the days leading up to the announcement, artificially inflating the share price and affecting speculative trading.
Earnings Announcements and Analyst Estimates
For analysts valuing a firm's future earnings per share (EPS), estimates are arguably the most important input. Analysts use forecasting models, management guidance, and other fundamental information on a company to derive an EPS estimate. For example, they might use a discounted cash flows model or DCF.
DCF analyses use future free cash flow projections and discount them. This is done using a required annual rate to arrive at present value estimates, which, in turn, is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity could be a good one.
Calculated as:
DCF = [CF1/(1+r)1] + [CF2/(1+r)2] + ... + [CFn/(1+r)n]
CF = Cash Flow
r= discount rate (WACC)
Analysts may also rely on fundamental factors outlined in the management discussion and analysis (MD&A) section of a company’s financial reports. This section provides an overview of the previous year or quarter’s operations and how the company performed financially. It outlines the reasons behind certain aspects of growth or decline in the company’s income statement, balance sheet, and statement of cash flows. The MD&A discusses growth drivers, risks, and even pending litigation. Management also often uses this section to discuss the upcoming year by outlining future goals and approaches to new projects along with any changes in the executive suite and/or key hires.
Finally, analysts may take into account external factors, such as industry trends (e.g., large mergers, acquisitions, bankruptcies, etc.), the macroeconomic climate, pending U.S Federal Reserve meetings and potential interest rate hikes.
FAQs
An earnings announcement occurs on a specific date during earnings season and is preceded by earnings estimates issued by equity analysts. If a company has been profitable leading up to the announcement, its share price will usually increase up to and slightly after the information is released.
What happens when earnings are announced? ›
Information released during each earnings season shows an individual company's financial health and future forecasts of success, but also speaks to broader economic conditions as well. Both institutional and individual investors often react to earnings data to see if the company meets or beats market expectations.
Why are earnings announcements relevant? ›
Potential investors and Wall Street analysts use earnings reports to scrutinize company and management performance and assess their prospects. Earnings season offers investors a chance to determine how a wide range of companies performed in the recent past.
How do earnings announcements affect stock prices? ›
Beaver (1968) establishes that stock price volatility and trading volume increase significantly during the earnings announcement period. Both stock price volatility and trading volume reflect the impact of earnings announcements.
Why do stock prices fall after good earnings announcements? ›
When a company releases an earnings report, a fundamental reaction is often the most common. As such, good earnings that miss expectations can result in a downgrade of value. If a firm issues an earnings report that does not meet Street expectations, the stock's price will usually drop.
Will stock go up after earnings? ›
News related to a specific company, such as the release of a company's earnings report, can also influence the price of a stock (particularly if the company is posting after a bad quarter). In general, strong earnings generally result in the stock price moving up (and vice versa).
Why announce earnings before the market opens? ›
That's because companies reporting early in earnings season get additional media attention, a boost to volumes and, more importantly, a 50bps higher earnings announcement premium!
Why are earnings important to investors? ›
Earnings provide the basis of one of the major measures of a stock's individual value. Investors often use a statistic known as the price-to-earnings (P/E) ratio to help assess a stock's value relative to the rest of the market.
When must a company announce earnings? ›
The earnings reports are expected after the end of a company's first three quarters, and both quarterly and annual reports are due after their fiscal year (FY) ends.
How do you know if a stock will go up or down at earnings? ›
Unfortunately, there's no easy way to know how a company's stock price is going to react to an earnings release. Regardless of whether a company beats or misses its numbers, its price-earnings ratio, market expectations, management forecasts, supply and demand and other factors can drive its price up or down.
A stock price may rise, fall, or stay the same the day before earnings are announced. If the market feels a likelihood that earnings will surpass estimates then the price may rise. The opposite is true if the market sees earnings likely being down from the estimate.
Why do stocks move after earnings? ›
The short answer to this comes down to the future expectations of analysts and investors, along with supply and demand. These two factors therefore drive much of a company's stock price movement after earnings are released.
What is the best time of the day to buy stocks? ›
Timing the stock market is difficult, but understanding when to trade stocks can help your portfolio. The best time of day to buy stocks is usually in the morning, shortly after the market opens. Mondays and Fridays tend to be good days to trade stocks, while the middle of the week is less volatile.
Should you sell stock after earnings? ›
In most cases (the 8-week hold-rule being an exception), you're better off locking in at least some of your gains to avoid watching your profits disappear as the stock corrects.
How does announcement affect stock price? ›
Stock prices can quickly move up or down upon release of a positive or negative story, respectively, presenting investors with headline risk and providing day traders opportunities to make short-term profits.
What is the 3 day rule after earnings? ›
In short, the 3-day rule dictates that following a substantial drop in a stock's share price — typically high single digits or more in terms of percent change — investors should wait 3 days to buy.
What does it mean when a stock has an upcoming earnings report? ›
A company's earnings report will give a strong indication of how it has performed and its future plans. This will either attract more investors or cause current investors to sell their shares, which will impact stock prices.
Should you trade during earnings? ›
The key to trading earnings is not to make a fool's bet by taking a position into the earnings release, but to trade the reaction after the release. Price moves will be sped up dramatically especially in the after-hours. It's prudent to only consider trading during market hours when there is the most liquidity.
What does it mean when a company releases earnings early? ›
By issuing an early announcement in a press release, companies advise investors and analysts of potential surprises ahead of time. This enhances goodwill with the investment community and may protect the stock against wider swings after an earnings estimate miss.
