What are the key points from earnings that move the price?

[Tim Smith]

I am new to this business and looking for helpful guidance.

Ok, you're new to this business, so let me give you a lesson (newwurldmn has already hinted at what it's going to be) ....

People "don't do" spoon feeding in this business.

The books ain't going to give you the answers.
The papers ain't going to give you the answers.
Your colleagues, friends and acquaintances ain't going to give you the answers.
The internet and its forums ain't going to give you the answers.

See a pattern ? Want to know the reason ?

(a) Because there's no such thing as "the answer" in this business. There's an old saying, "the market will remain irrational longer than you can remain solvent". The market never does anything consistently ... otherwise there wouldn't be enough beaches in the world for all the billionaires to sit on.

(b) Because those people who have spent years working to understand the market and its irrationality and have managed to find a (hopefully) reduced-risk path through maze are not going to ....yep... those words again ... spoon feed you what they've spent years learning.

 

[killshottrader]

Another point is the key metrics or data points vary from company to company. For some it is an adjusted ebitda or gaap figure, etc. usually the analysts play along with what ever data points they are spoon fed by management.

 

[kmiklas]

Keith, you are asking very good question btw. IMO this will give you a bit more bullish momentum after earnings:

- EPS numbers actual or estimated.
- new 52 week high, or even all time high
- new recommendations from analysts (just quantity for a day for example)
- gap size + further price action.
- option volume before earnings date
+ there might be a correlation between current price action and past earnings results.

Thank you!

 

[kmiklas]

With the analyst expectations, that includes eps and revenue. One usually needs all three to see a major gyration.

Thanks... I have to better understand what "revenue" means in the context of an earnings call.

 

[kmiklas]

In theory, the value of a company is the present value of its cash flow through perpetuity. The quarter that is being reported represents only a tiny fraction of the valuation. Strong top and bottom line growth could signal strong cash flow growth going forward. However, management guidance will have the most significant impact to stock price reaction.

Thanks! I would have to question your point. There's many examples, but the one that prompted this post was nyse:GNC. Following their recent earnings announcement on 10/26, they plunged over 30%... certainly not a tiny fraction! Yes to management guidance... @killshottrader addressed this point in his post.

 

[kmiklas]

One thing to keep in mind is that for companies that issue forward guidance, it can and often does dominate the impact of the current quarter's EPS. For example you can find a company with an EPS "beat" on earnings that still gets crushed because guidance was softer than expected. This is particularly true for cyclical businesses. For example, STS "Beat" earnings on Oct 21st, but the stock was crushed due to poor guidance and expectations. A trader looking just at the quarter's EPS would miss this.

Also, keep in mind that with regards to market reaction EPS is not measured by an objective measure but vs. expectations set by analysts. The shadow world of earnings "beats" "revisions" and "misses" is how the analysts stay relevant and keep the institutional customers trading.

Excellent, thank you. As I start to listen to read the financial reports, and listen to the calls, I'm confused by how a company can beat earnings by a significant percent, yet the price takes a nose dive at market open!? I was that trader "looking just at the quarter's EPS" . That's why I posted here. I'm trying to identify the set of metrics that results in an immediate market move.

 

[kmiklas]

Guidance, if it closes outside of the expected move

Thank you.

 

[atrp2biz]

Thanks! I would have to question your point. There's many examples, but the one that prompted this post was nyse:GNC. Following their recent earnings announcement on 10/26, they plunged over 30%... certainly not a tiny fraction! Yes to management guidance... @killshottrader addressed this point in his post.

But what does the previous quarter's earnings signal about earnings going forward? If results do not meet expectations, is there a reset on future expectations? The answer to that question can explain market reaction.

 

[kmiklas]

Another point is the key metrics or data points vary from company to company. For some it is an adjusted ebitda or gaap figure, etc. usually the analysts play along with what ever data points they are spoon fed by management.

Yes, good point. I discerned this one as I listened on the Southwest Air Call (nyse:LUV), and they focussed on "Cost per Available Seat Mile" (CASM) as a metric. On the Western Digital (nasdaq:WD) call, they referred to Price Per Megabyte (PPM) for both Hard Disk Drives (HDD) and Solid State Drives (SSD).

Both of the above are examples of industry-specific metrics.

 

[kmiklas]

But what does the previous quarter's earnings signal about earnings going forward? If results do not meet expectations, is there a reset on future expectations? The answer to that question can explain market reaction.

..but it's not just earnings that drives the market reaction. I've seen some companies miss earnings by 1%, and the market responds with a sharp downspike; others post the same loss, and there's little movement at all. That's why I posted here... I'm trying to get my arms around all the factors that can drive an immediate market reaction.