What is a surprise earnings?
What is a surprise earnings?
An earnings surprise occurs when a company’s reported quarterly or annual earnings are higher or lower than analysts’ expectations. These analysts, who work for various financial companies and news agencies, base their expectations on a variety of sources, including previous quarterly or annual reports and current market conditions, as well as earnings forecasts or “directions” for the company. business.
Key points to remember
- A earnings surprise occurs when a company releases numbers that are drastically different from Wall Street estimates.
- Companies also publish tips to help analysts make accurate estimates. However, sometimes unexpected news or product demand will alter the end result.
- A positive surprise will often cause the company’s stock price to rise sharply, while a negative surprise will cause a rapid decline.
Breakdown of profit surprise
In order to create an accurate forecast of a specific company’s stock performance, an analyst must gather information from several sources. They should speak with the management of the company, visit that company, study its products and closely monitor the industry in which it operates. Next, the analyst will create a mathematical model that incorporates what he has learned and reflects his judgment or expectations for that company’s earnings for the coming quarter. The expectations may be published by the company on its website, and will be disseminated to the analyst’s clients. A surprise occurs when a company reports numbers that deviate from these estimates.
Profit surprises can have a huge impact on a company’s stock price. Several studies suggest that positive earnings surprises lead not only to an immediate rise in a stock’s price, but also to a gradual increase over time. Therefore, it is not surprising that some companies are known to regularly beat profit projections. A negative earnings surprise will usually cause the stock price to drop.
Publicly traded companies also publish their own guidelines outlining expected future profits or losses. This forecast helps financial analysts set expectations and can be compared to get a better idea of the company’s potential performance over the next quarter.
Surprise earnings and analyst estimates
Analysts spend a huge amount of time before companies release their results, trying to predict earnings per share (EPS) and other metrics. Many analysts use forecasting models, management advice, and additional fundamental information to derive an estimate of EPS. A discounted cash flow model or DCF is a popular intrinsic valuation method.
DCF analyzes use projections of future free cash flow and discount them through a required annual rate. The result of the valuation process is an estimate of the present value. This, in turn, is used to assess the investment potential of the business. If the value achieved through DCF is greater than the current cost of the investment, the opportunity could be good.
The DCF calculation is as follows:
Analysts rely on a variety of fundamental factors in companies’ SEC records (for example, the SEC 10-Q form for a quarterly report and the SEC 10-K form for its more comprehensive annual report). In both reports, the Management Discussion and Analysis (MD&A) section provides a detailed overview of the prior period’s operations, the financial performance of the company and how management plans to move forward in the future. during the upcoming reporting period.
Management’s discussion and analysis explores the specific reasons behind certain aspects of the growth or decline of the business in the income statement, balance sheet, and statement of cash flows. The section details the drivers of growth, risks, or even pending litigation (often also in the footnotes section). Management also frequently uses the MD&A section to announce upcoming goals and approaches for new projects, as well as any changes in leadership suite and / or key hires.