The Stockpicker’s Guide to Earnings Season

Here’s your guide to earnings season! 

Earnings season is when companies get their quarterly report card. Generally, it starts ten days after the completion of the calendar quarter and runs for four weeks.

Earnings data is the single biggest valuation metric that analysts use to evaluate companies, but companies also report revenue, cash flow, and other financials. Therefore, an earnings release could have a major impact on a company’s stock price.

Given the importance of earnings, it is worth spending some time to learn the vocabulary around earnings season.

Let these terms & definitions be your guide to earnings season:

Estimates are the yardstick by which earnings are measured. Analysts use it as guide to earnings season. Estimates are compiled from the leading brokerage research departments. The firms that provide estimate data ensure that all of the estimates are on the same basis (pulling out extraordinary items, etc.), and then they create an average or mean of these estimates. They also will provide estimates of revenues, cash flow, and other corporate metrics.

Extraordinary Items are one-time events that generally do not repeat. When analysts look at a company, and they want to look into the future, it is easier and more reliable to pull out extraordinary items. These could be writeoffs for unusual events, or a one-time charge against earnings to pay for a workforce reduction. The net result is that when these extraordinary items are removed from earnings data, it increases the earnings data.

GAAP Earnings: GAAP stands for Generally Accepted Accounting Principles. When earnings are referred to as GAAP earnings, this is the amount that they actually earned before any massaging of the numbers using extraordinary items.

Operating Earnings are basically GAAP earnings with any one-time charges (extraordinary items) removed. This usually boosts the earnings. Estimates are made against Operating Earnings because they are more consistent and should represent the health of a company going forward.

An Earnings Call is the conference call that company management holds after earnings are released. Typically it starts with company management discussing the state of the business, and then they take questions from the research analysts that cover the company.

Transcripts are the transcripts of the earnings call, and are great reading if you are investing in a company, or thinking about making an investment.

Price Impact is the change in price of a stock. Often, it is calculated by measuring the price change from one day before the earnings release, and two days after the release. Many times that price impact is compared to a benchmark like the S&P 500, to measure the relative price impact.

Guidance is the company providing some forward looking statements to the analyst community. Companies must provide guidance in a setting that will promote wide dissemination of this information.